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A federal bankruptcy court in Alabama ordered arbitration of a debtor’s claim that one of his creditors violated the Truth in Lending Act (TILA). In its ruling, the Court rejected the notion that a bankruptcy court may refuse to enforce an arbitration agreement simply because the underlying dispute is a core bankruptcy proceeding.
In Rozell v. CitiFinancial Auto Corp., No. 06-81483 JAC13, 2006 WL 3531284 (Bankr. N.D. Ala. Dec. 7, 2006), Rozell and CitiFinancial entered into an arbitration agreement in connection with the financing and sale of a pickup truck.
Three years later, Rozell filed for bankruptcy. As part of the bankruptcy proceeding, CitiFinancial filed a claim for the unpaid balance on the pickup truck. Rozell then filed a complaint against CitiFinancial, seeking monetary damages under TILA.
CitiFinancial filed a motion to compel arbitration of Rozell’s TILA claim. The Court’s ruling on that motion depended on whether Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue, which in turn depended on whether there was an “inherent conflict” between the Federal Arbitration Act (FAA) and the Bankruptcy Code.
As the Court explained, the “inherent conflict” analysis has generally focused on “whether an action constitutes a core or non-core proceeding with some courts refusing to compel arbitration of core proceedings, but generally finding that non-core proceedings are subject to arbitration.”
After discussing a split of authority on whether TILA claims constitute a core proceeding, the Court concluded that Rozell’s TILA claim was not a core proceeding because “TILA actions do not depend on the bankruptcy laws for their existence and can proceed in another court absent the bankruptcy filing.”
The Court further concluded that it would order arbitration even if the TILA were a core proceeding because as the Third Circuit explained in In re Mintze, 434 F.3d 222 (3d Cir. 2006), “finding that a proceeding is a core proceeding does not automatically give a bankruptcy court the discretion to deny arbitration.”
Another bankruptcy court recently cited Mintze for the principle that a “core” designation, standing alone, is not sufficient to demonstrate an “inherent conflict” between the Bankruptcy Code and the FAA. See In re Merrill, 343 B.R. 1 (Bankr. D. Me. 2006). However, in a subsequent decision, a federal district court within that circuit embraced the core/non-core approach, despite its overbreadth, because the approach supplies a bright line rule. See In re Brown, No. CA 05-5238, 2006 WL 3373333 (D.R.I. Nov. 20, 2006).
This decision represents another example of a federal court enforcing the original agreement of the parties to arbitrate their potential TILA disputes as well as other disputes that are not essential to the core bankruptcy proceedings. Arbitration is an effective and affordable way to resolve these issues whether or not a claim is part of a bankruptcy proceeding, and the strong federal policy supporting arbitration provides ample support for the holding of this and similar cases.
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