Bankruptcy Court has Discretion to Refuse to Enforce Compelled Arbitration Provision in Proceedings Seeking Enforcement of Discharge Injunction
In Matter of Henry, 944 F.3d 587 (5th Cir. 2019), the 5th Circuit Court of Appeals was called upon to determine whether the bankruptcy court erred in refusing to enforce an arbitration agreement and to compel arbitration in a proceeding seeking to enforce a discharge injunction. In 2002, S. Henry (“Henry”) borrowed a student loan from Wachovia Bank of Delaware, N.A., the predecessor in interest to Educational Financial Services, a Division of Wells Fargo Bank, N.A. (“Wells Fargo”). The loan documents contained a mandatory arbitration provision with respect to any controversy or claim related to the loan.
Henry declared bankruptcy, and the bankruptcy court confirmed Henry’s Chapter 13 plan in April of 2013. After Henry completed her Chapter 13 plan, the bankruptcy court entered a discharge order in May of 2018. Henry’s attorney sent a notice of discharge to Wells Fargo, and Wells Fargo responded with a letter acknowledging the communication but stating, among other things, “The laws of some states require us to inform you that this communication is an attempt to collect a debt…” Henry initiated an adversary proceeding in the bankruptcy court on her own behalf and on behalf of a putative class of similarly situated individuals, alleging that Wells Fargo violated the bankruptcy court’s order by attempting to collect a discharged debt. Wells Fargo requested that the bankruptcy court compel arbitration, asserting that the claim fell within the scope of the arbitration provision in Henry’s loan documents.
The bankruptcy court denied Wells Fargo’s motion, stating that Henry’s claims did not “arise under the loan agreement between the parties” because Wells Fargo’s obligation to comply with the discharge order is not part of a contractual negotiation between the parties and Henry’s claim did not arise out of an arbitrable contract between the parties. In reaching its conclusion, the bankruptcy court reasoned that a debtor’s right to be free of collection efforts for discharged debts is a creature of the Bankruptcy Code, and therefore an action to enforce such a right implicates important bankruptcy policy. It noted that requiring arbitration would be inconsistent with the Bankruptcy Code. On appeal, the Court affirmed the bankruptcy court’s position, noting that prior case law supported the conclusion that bankruptcy courts have discretion to refuse to compel arbitration in proceedings seeking enforcement of a discharge injunction.
Article courtesy of Andrew Thomison (Baker Botts L.L.P.)