The Debtor filed a class action against a credit card issuer, alleging a
violation of the automatic stay. In response, the creditor moved to stay or
dismiss the class action so that the matter could be arbitrated, pursuant to
the binding arbitration clause found in the credit card account agreement. The
bankruptcy court denied the creditor's motion, holding that the "core" nature
of an automatic stay violation more appropriately placed it before the
bankruptcy court rather than an arbitrator. Upon appeal, the district court
agreed. The Court of Appeals for the Second Circuit reversed the district
While agreeing that the Debtor's claim was a "core" bankruptcy matter, the
Second Circuit found no inherent conflict between the Bankruptcy Code and the
Federal Arbitration Act, whose upholding of contractual arbitration provisions
posed no jeopardy to the objectives of bankruptcy. Previous appellate reviews
by district courts had often found no conflict between the Code's stay
provisions and compulsory arbitration, especially when the issues were not
central to the Code's purposes and policies, and/or to the distribution of an
estate in bankruptcy. The Court pointed out that the Debtor's estate had
already been fully administered and her debts discharged. Second, thanks to her
decision to proceed in a class action, she distanced her stay violation claim,
diluting its relevance to her individual bankruptcy. Third, the Court disagreed
that a stay was so closely related to an injunctive order that a bankruptcy
court was uniquely and exclusively able to interpret and enforce it.
In sum, the Court acknowledged the importance of the automatic stay, but found
no grounds in statute to exempt, categorically, any automatic stay related
dispute from resolution by arbitration.
Creditors may now be able to compel a debtor to arbitrate stay violations and
possibly other matters rather than allow the debtor to file suit in local
bankruptcy courts across the country. Instead of contending with the vastly
different results that occur, and the high costs of defending actions in
bankruptcy courts, creditors in automatic stay disputes may now be able to take
advantage of the predictability and reduced costs arbitration can provide.
MBNA America Bank, N.A. vs Hill, No. 04-2086-BK, 2006 U.S. App. LEXIS
1786 (2d Cir. Jan. 25, 2006).
Bankruptcy Report is produced by Becket & Lee LLP, Attorneys at Law,
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