U.S. Court of Appeals for the Second Circuit. Photo: ALM

The U.S. Court of Appeals for the Second Circuit on Tuesday refused to send a contempt dispute over a bankruptcy court's discharge orders to arbitration, reiterating its holding from two years ago that an "inherent conflict" between the U.S. bankruptcy code and the Federal Arbitration Act had rendered mandatory arbitration clauses unenforceable.

A three-judge panel of the Manhattan-based appeals court, led by Judge Richard J. Sullivan, said that its "hands seem to be bound" by a 2018 panel ruling that arbitration over a debt that had been discharged in a Chapter 7 proceeding would be at odds with bankruptcy's goal of providing debtors with a fresh start. And it exposed an ongoing tension between the provisions of the federal bankruptcy code and the FAA, which requires courts to strictly enforce arbitration agreements.

In 2018, the Second Circuit ruled in a "nearly identical" case, Anderson v. Credit One Bank, that Congress had not intended for disputes stemming from an alleged violation of a bankruptcy court's discharge orders to be arbitrable.

In that case, Judge Rosemary S. Pooler wrote that discharge injunctions were an integral part of the bankruptcy process that require continuing court supervision, and the "inherent conflict" between the two statutes was enough to displace the FAA in limited contexts.

Like in Anderson, plaintiffs in the more recent case had filed a Chapter 7 bankruptcy petition and were ultimately released from all dischargeable debts. According to the opinion, GE Capital Retail Bank and Citigroup Inc. had already sold the plaintiffs' debt to a third-party buyer, but continued to list the plaintiffs' debt as "charged off" on their credit reports, a designation that indicates the debt was severely delinquent but still outstanding.

The plaintiffs, Nyree Belton and Kimberly Bruce, alleged that the move was no simple mistake, but rather was an attempt by the banks to force them into repaying their debt in violation of the bankruptcy court's order. They reopened their bankruptcy cases and brought an adversarial proceeding against the banks, claiming to represent a nationwide class of similarly situated debtors and seeking a contempt citation and damages against the banks.

GE Capital and Citigroup responded that the U.S. Supreme Court's decision in Epic Systems v. Lewis, which permitted the use of arbitration clauses by employers to block class action lawsuits, had rejected the idea of an inherent conflict, and instead favored a text-first approach that does not displace the FAA.

The Second Circuit panel, however, rejected those arguments Tuesday, finding that the bankruptcy code's text "offers little guidance on Congress's intentions in the context of contempt proceedings like those at issue here."

Had the court been working from a "blank slate," Sullivan wrote in a 14-page opinion, "perhaps our conclusion would be different." But given the "overwhelming similarities" with Anderson, the court's earlier ruling still would stand.

"We are therefore left with Anderson's conclusion that the code is in 'inherent conflict' with arbitration. And under this circuit's precedent, that is enough to displace the Arbitration Act," Sullivan said.

"Accordingly, we are bound to affirm the district court's judgment," he wrote.

The ruling did, however, cast doubt on the notion that a nationwide class action would be a "permissible vehicle for adjudicating thousands of contempt proceedings." The issue was not before the court, and Sullivan address it further on appeal.

Sullivan was joined in the decision by Judges Ralph K. Winter Jr. and Richard C. Wesley.

George Carpinello, a Boies Schiller Flexner partner who represents the plaintiffs, said Tuesday that he was "gratified that we've gotten the court again to confirm that when you're talking about contempt of a court order … it's not appropriate to go to arbitration."

"The court should not be divested of its authority to enforce its orders," he said.

Attorneys for the banks did not immediately respond Tuesday afternoon to requests for comment.

The plaintiffs are represented by Carpinello, Adam Shaw and Anne Nardacci of Boies Schiller and Charles Juntikka of Charles Juntikka & Associates.

GE Capital is represented by Joseph L. Noga and Matthew S. Hellman of Jenner & Block. Citigroup is represented by Benjamin Nagin, Eamon Joyce, Jonathan Muenz and Qais Ghafary of Sidley Austin.

The case is captioned Belton v. GE Capital Bank.

 

Read More:

2nd Circuit Upholds Win for Bed Bath & Beyond in Workers' Overtime Appeal

2nd Circuit Clips Sovereign Immunity in Copyright Lawsuit Against Government of Wales

2nd Circuit Nixes Subpoenas of Attorney Who Filed Sealed Info of Felix Sater as Criminal Investigation Still Looms