Courts Split on Arbitration over Dischargeability of Student Loans

June 15, 2017

Bankruptcy Judge Christopher M. Altson of Seattle disagreed with Bankruptcy Judge Erik P. Kimball of West Palm Beach, Fla., about the enforcement of an arbitration agreement to resolve a dispute over the dischargeability of so-called bar study loans.

Judge Alston exercised his discretion to deny the lender’s motion to compel arbitration, in part because the case before him was not a purported class action like Judge Kimball’s.

In mid-June the Second Circuit will hear oral argument in Credit One Financial v. Anderson (In re Anderson), 16-2496 (2d Cir.), a case to resolve a split among the district courts in the Southern District of New York and decide whether an arbitration agreement is enforceable when a bankrupt mounts a class action claiming that a creditor violated the discharge injunction. To read ABI’s discussion of the two district court opinions in New York, click here and here.

The Washington and Florida Cases

The cases in Florida and Washington both involved debtors who had obtained chapter 7 discharges and then commenced adversary proceedings to declare that their bar study loans were dischargeable because they were not “qualified education loans” under Section 523(a)(8)(B).

A bar study loan is a loan that a student obtains to provide support while studying for the bar exam after receiving a legal degree. In Judge Alston’s case, the loan was about $20,000. Unsecured creditors were receiving no distributions.

The lender, who was the same in both Florida and Washington, made several arguments, all overruled by Judge Alston, who was guided by three Ninth Circuit cases that did not compel arbitration of “core” issues related to bankruptcy cases. In the Ninth Circuit, Judge Alston said, courts will not enforce arbitration agreements if an “inherent conflict exists between arbitration and the underlying purposes of” of the Bankruptcy Code.

Under Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1129 (9th Cir. 2012), the Ninth Circuit gave bankruptcy courts discretion to deny arbitration of core disputes. Since dischargeability is core, Judge Alston said he had discretion to deny arbitration.

Judge Alston exercised his discretion in favor of the debtor because dischargeability entailed a “‘core matter which bankruptcy courts have special expertise to decide,’” citing Eber.

In addition, the case raised “only questions of law that a bankruptcy court should decide,” such as the meaning of the term “education loan.” Were there arbitration, Judge Alston said the arbitrator would be “interpreting the Bankruptcy Code” when there was no “binding authority directly on point.”

For several reasons, Judge Alston declined to follow Judge Kimball’s decision, In re Williams, 564 B.R. 770 (Bankr. S.D. Fla. 2017). To read ABI’s discussion of Williams, click here.

Principally, Judge Alston did not follow Williams because that case “sought to adjudicate the issues on behalf of numerous other persons.” In addition, Judge Alston did not place so much emphasis on the “notion that bankruptcy courts have only concurrent jurisdiction over Section 523(a)(8) claims.”

Again citing Eber, Judge Alston said that requiring arbitration would “‘jeopardize a core bankruptcy proceeding” and “would inherently conflict with the underlying purposes of Section 523(a)(8).”

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