Bankruptcy – Arbitration of bankruptcy-related claims is denied

Where two credit card holders alleged a bank violated the automatic stay by attempting to collect debt during bankruptcy proceedings, and the bank sought to compel arbitration of the claims and to stay the adversary proceeding, its motion was denied.  Arbitration here would conflict with the underlying purposes of the Bankruptcy
Code.

Background

Two debtors in bankruptcy commenced this adversary proceeding in the bankruptcy court under 11 U.S.C. § 362(k) against Goldman Sachs Bank USA, alleging that it continued to collect credit card debt after the debtors had filed for bankruptcy, in violation of the automatic stay imposed by § 362(a). Goldman Sachs, invoking the arbitration clause in the credit card agreements with the debtors, filed a motion in the bankruptcy court to compel arbitration of the debtors’ claim and to stay the adversary proceeding. The bankruptcy court denied the motion, and the district court affirmed this ruling on appeal.

Analysis

While arbitration was earlier treated with hostility by the courts as an unwise bypass around the role of courts, Congress reversed that hostility as a matter of public policy with its enactment of the FAA. While arbitration is thus favored as a matter of public policy, so too is the process and relief afforded by the Bankruptcy Code. The parties’ competing claims in this case create a tension between the pursuit of these two well established and important public policies.

To resolve this tension, the court begins by applying the test set forth in Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220 (1987). Under McMahon, courts must enforce the arbitration of statutory claims unless the statute precludes waiver of judicial remedies, as evidenced by (1) its text, (2) its legislative history or (3) an “inherent conflict between arbitration and the statute’s underlying purposes.” If a court concludes, after applying McMahon, that arbitration is not mandated, it may then exercise discretion in resolving the conflict between the forums.

There are in this case several inherent conflicts between arbitration and adjudication of the § 362(k) claim in bankruptcy — the degradation of the bankruptcy court’s core purpose of conducting comprehensive bankruptcy proceedings, the lack of centrality for dispositions, the erosion of the bankruptcy shield, the lack of uniformity, the lack of bankruptcy expertise and the deterrent purposes of punitive damages — that, together with the legislative history, amply demonstrate that arbitration here would conflict with the underlying purposes of the Bankruptcy Code. They also amply support the district court’s discretion in retaining the plaintiffs’ adversary proceeding in the bankruptcy court.

Goldman Sachs nonetheless argues that arbitration of the plaintiffs’ § 362(k) claim would have no impact on the administration and settlement of Maze’s estate, since his bankruptcy is closed, and that it would have only an ancillary effect on Brown’s ongoing bankruptcy, since her securing a damages award would only increase the value of her estate and the assets available to creditors. But the cases it cites are inapposite.

Finally, Goldman Sachs argues that this court’s conclusion runs contrary to the recent trend in which the Supreme Court has consistently declined to hold that federal statutory claims are unsuited for arbitration. Despite its reference to those statutes, however, the Bankruptcy Code presents a unique statutory context, especially where, as here, the claim is both statutorily and constitutionally grounded. And the Supreme Court has not addressed whether arbitration of bankruptcy claims is in conflict with the Bankruptcy Code, although it has twice in recent years denied petitions for certiorari of circuit court decisions that found no abuse of discretion where bankruptcy courts denied motions to compel arbitration of claims stemming from the Bankruptcy Code.

Affirmed.

Dissenting opinion

King, J., dissenting:

In these circumstances, arbitrating the plaintiffs’ § 362 automatic bankruptcy stay claims — which, as the majority has recognized, are indubitably subject to the binding arbitration agreements between the plaintiffs and Goldman Sachs — does not create an “inherent [i.e., ‘irreconcilable’] “conflict” with the Bankruptcy Code.

In fact, there is no conflict at all in arbitrating the plaintiffs’ § 362 automatic bankruptcy stay claims because the success (or failure) thereof would neither add nor subtract a new creditor to these bankruptcies, nor would it serve to “frustrate creditor distribution.” On that basis, I would send the plaintiffs’ § 362 automatic stay claims to arbitration, despite the majority’s unpersuasive musings about why an “inherent conflict” exists here.

Goldman Sachs Bank USA v. Brown, Case No. 25-1439, March 18, 2026. 4th Cir. (Niemeyer), from WDVA at Roanoke (Ballou). Roman Martinez for Appellant. Theodore Ohmstede Bartholow III for Appellees. VLW 026-2-096. 25 pp.

Full-Text Opinion

VLW 026-2-096
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