I typically put a clause in my Chapter 13 plans that specifically rejects the arbitration provisions contained in any consumer credit agreements.  Today during a hearing on confirmation in the Eastern District of New York I was questioned on the subject; the case trustee didn’t care for the provision, and the judge was curious about it.

My reasoning comes from the U.S. Court of Appeals for the 2nd Circuit opinion in MBNA America Bank v. Hill, 436 F.3d 104, Bankr. L. Rep.P 80,445 (2nd Cir. 2006) holding that a bankruptcy court did not have the authority to deny arbitration of charges of a bankruptcy stay violation.

In the case, Kathleen Hill was one of a class of individuals that filed suit against MBNA America Bank for allegedly violating a stay that the bankruptcy court had granted her when she filed for Chapter 7 bankruptcy. MBNA appealed to the bankruptcy court to dismiss the case in favor of arbitration, since Hill’s credit agreement contained a clause that compelled arbitration to settle any claim or dispute related to the account. The Court of Appeals ruled that the bankruptcy court did not have the authority to deny arbitration in this case. While the court acknowledged that bankruptcy courts generally have discretion to refuse to compel arbitration of core bankruptcy matters (those directly related to the bankruptcy case), they do not have the discretion to override an arbitration agreement unless it finds that the proceedings are based on provisions of the Bankruptcy Code that inherently conflict with federal arbitration laws or if they necessarily jeopardize the objectives of the Bankruptcy Code. In this case, the court found that arbitration would not seriously jeopardize the Bankruptcy Code objectives because: (1) Hill’s estate had been fully administered and her debts had been discharged, meaning she no longer required protection from her creditors; (2) as a class-action case, her claims weren’t directly connected to her bankruptcy case; and (3) the bankruptcy court is not uniquely able to interpret and enforce provisions of an automatic stay, and therefore the matter can be decided by someone other than the bankruptcy court.

So what does my Chapter 13 Plan clause accomplish? It rejects the arbitration clauses, thereby rendering the decision in Hill moot. In the event that a claim accrues against a creditor for a stay or discharge violation, I believe that the creditor will no longer have the ability to enforce the arbitration clause because it will no longer exist.

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