Fifth Circuit Pumps The Brakes On Arbitration

In a recent appeal directly to the Fifth Circuit from a Southern District of Texas Bankruptcy Court, the court affirmed the bankruptcy court’s denial of a motion to compel arbitration. In Henry v. Educational Financial Service, the Chapter 13 debtor initiated an adversary proceeding against her creditor asserting the creditor violated the discharge injunction by attempting to collect a discharged debt.  Relying upon an arbitration provision in the underlying credit application that stated that “[a]ny controversy or claim arising out of or related to this Note or an alleged breach of this Note, shall be settled by arbitration,” the creditor moved to compel arbitration,  The bankruptcy court denied the motion and certified its order for an interlocutory appeal directly to the Fifth Circuit in light of the US Supreme Court’s recent ruling in Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018).


While the Federal Arbitration Act (the “FAA”) requires courts to enforce arbitration provisions in accordance with their terms, the Court addressed the question of what happens when there are two competing federal statutes – in this case, the FAA and the Bankruptcy Code. In those instances, where the statutes cannot be harmonized and one must displace the other, the court looks to congressional intent.  Relying upon its prior decisions in the context of discharge injunctions, the Court noted that bankruptcy courts have discretion to decline to enforce arbitration agreements when: (a) the proceeding adjudicates statutory rights provided by the Bankruptcy Code; and (b) if requiring arbitration would conflict with the purposes of the Bankruptcy Code.  Because a debtor’s right to be free from collection efforts after discharge is a creature of the Bankruptcy Code and an action to enforce that right implicates an important bankruptcy policy - specifically, the ability of the bankruptcy court to enforce its own orders, the Court concluded that based upon its prior precedent, the bankruptcy court had discretion to deny the motion to compel arbitration.  


The Court further looked at what impact, if any, the Supreme Court’s 2018 decision in Epic Systems v. Lewis, 138 S. Ct. 1612 (2018) might cast upon the existing Fifth Circuit precedent and determined that in this instance, there was none.  In Epic Systems, the Court stated that

When confronted with two Acts of Congress allegedly touching on the same topic, this Court is not at liberty to pick and choose among congressional enactments and must instead strive to give effect to both.  A party seeking to suggest that two statutes cannot be harmonized, and that one displaces the other, bears the heavy burden of showing a clearly expressed congressional intention that such a result should follow.  The intention must be clear and manifest.

Epic Sys., 138 S. Ct. at 1623-24.   The Fifth Circuit determined that Epic did not change the existing Fifth Circuit precedent and affirmed the bankruptcy court’s denial of the motion to compel.  The case serves as a reminder for creditors attorneys that at least in the bankruptcy setting, arbitration provisions are not necessarily a trump card.