Bankruptcy Court Sends Most Claims to Arbitration, Except for Claim That Creditor Violated Automatic Stay

The United States Bankruptcy Court for the District of Maine did not compel arbitration of a debtor’s claim that a creditor violated the bankruptcy automatic stay. However, the Court ordered arbitration of the debtor’s five other claims.

In In re Merrill, No. 05-22818, 2006 WL 1669758 (Bankr. D. Me. June 16, 2006), MBNA issued a credit card to Merrill. According to Merrill, MBNA charged her for unauthorized use of the card. Merrill later filed for bankruptcy. As part of the bankruptcy proceeding, Merrill filed a complaint against MBNA alleging violations of the automatic stay (“Count I”), violations of consumer protection statutes, and common law torts.

MBNA moved to compel arbitration. In opposing the motion, Merrill argued that Congress intended her claims to be tried in the bankruptcy courts. As the Court noted, this argument required Merrill to show an “inherent conflict” between the Bankruptcy Code and the Federal Arbitration Act (“FAA”).

The parties agreed that Count I was a “core” matter, which meant the Court would have jurisdiction to enter final judgment on it. However, the “core” designation was not alone sufficient to demonstrate an “inherent conflict” between the Bankruptcy Code and the FAA. Instead, Merrill had to show that enforcing the arbitration agreement would violate the text or purpose of the Bankruptcy Code so significantly “that Congress would not have intended those provisions or purposes to be overridden by the [FAA].”

In applying that standard, the Court observed that the automatic stay plays a “central role” in bankruptcy matters. The Court thus refused to compel arbitration of Count I on the ground that it “would conflict with the Court’s duty to safeguard the automatic stay’s fundamental protection for debtors.”

Merrill argued that the Court should retain jurisdiction of all six counts in order to avoid “burdensome piecemeal litigation.” The Court noted that the avoidance of piecemeal litigation was not sufficient justification for retaining jurisdiction of the entire matter.

Lastly, Merrill argued that all of her claims were derivative of Count I and should thus be decided by the Court. In rejecting this argument, the Court noted that the determination of “inherent conflict” turns on “whether the proceeding derives exclusively from the provisions of the Bankruptcy Code.”