Can a Creditor Force Me Into Arbitration During Bankruptcy?

31 Jul Can a Creditor Force Me Into Arbitration During Bankruptcy?

Creditors love arbitration. Arbitration is the place where consumer rights go to die. But once you file bankruptcy, your creditor-debtor issues go to the judge to decide, normally. Can the creditor force you to arbitrate a claim you have against them, rather than have the bankruptcy judge rule on it? In 2007, the Eighth Circuit Court of Appeals said maybe not.

In this case, the consumers had filed a Chapter 13 case. During their case a dispute with their mortgage servicer developed. The debtor objected to the claim, the handling of the account, failure to comply with federal RESPA law and various other issues. In court she wanted to also pursue further claims and the creditor demanded an Adversary Proceeding — which the debtor duly filed.

For awhile the servicer played along. It filed documents in the case, it responded to requests for information (“discovery”) but eventually it concluded it did not want to play in court anymore. So it filed a motion to dismiss or compel arbitration. It seems that the form contract the debtor had signed included a requirement of arbitration of disputes between the parties. The bankruptcy and district courts overruled the creditor’s motions concluding that their participation in the lawsuit before the court waived any claim it had for enforcement of the arbitration clause.

The circuit court agreed. The appeals court did not endorse a broad rule that any issues which are core to the bankruptcy process — to resolving matters between debtors and creditors — ought to always be heard before bankruptcy judges. The court felt this was unnecessary because Green Tree had elected to participate in the judicial process already. So it agreed with the lower courts that Green Tree had waived its option to request arbitration by not acting at the earliest opportunity.

The court went a little further than the lower courts, however. It reasoned that a party (read: creditor) could seek to force arbitration after participating in a case, as long as it is not prejudicial to the other party (meaning you). In this case, the court agreed it was unfair because the consumer would be forced to incur duplicative expenses to start the process all over again in arbitration, as well as suffer another delay in her search for a ruling on the merits of her case.

So what’s the lesson? The lesson is that creditors should not be allowed to play along with a bankruptcy until they don’t like their chances and then try to move the game to their home “court” of arbitration. If they try this, the court should force them to stay and play the game to the finish. Will the courts require that all creditor-debtor issues arising in bankruptcy court be heard in bankruptcy court? That remains to be seen.

Case: Lewallen v. Green Tree Servicing, LLC, 06-1925 (8th Cir. 6/4/07)

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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