Second Circuit Holds Arbitration Of Alleged Violation Of Discharge Injunction Conflicts With Purposes Of Bankruptcy Code

Recently, in Anderson v. Credit One Bank, N.A.,1 the Second Circuit affirmed the denial of a credit card issuer's attempt to compel arbitration of a discharged Chapter 7 debtor's putative class action to enforce the bankruptcy discharge injunction. The Second Circuit found that arbitration of an action to enforce a discharge injunction severely conflicts with the purposes of the Bankruptcy Code, as "the bankruptcy court alone has the power to enforce the discharge injunction."2

Background

The debtor-plaintiff, Orrin Anderson ("plaintiff"), had his Credit One Bank, N.A. ("Credit One") credit card debt discharged in his Chapter 7 bankruptcy.3 Nonetheless, the plaintiff's credit report showed the debt as "charged off"—i.e., written off as a loss—rather than "discharged in bankruptcy," indicating that the debt was still due and payable.4 Despite the plaintiff's requests, Credit One failed to correct the report.5

Subsequently, the plaintiff successfully moved to reopen his bankruptcy case in the United States Bankruptcy Court for the Southern District of New York for the purpose of filing a putative class action against Credit One.6 His complaint alleged that it was Credit One's policy not to update the credit reports of Chapter 7 debtors so as to coerce them into paying discharged debts in order to clear up their credit reports.7 The complaint claimed that this policy violated 11 U.S.C. § 524(a)(2),8 which enjoins "any act . . . to collect, recover or offset any . . . discharged debt." The plaintiff sought damages under that provision related to Credit One's failure to correct his credit report and the credit reports of other discharged debtors.9

In response to the complaint, Credit One moved the bankruptcy court to stay the proceedings and to compel arbitration under the Federal Arbitration Act (FAA). The cardholder agreement provided Credit One with the right to compel mandatory arbitration of any dispute.10 But the bankruptcy court denied the motion.11 On appeal, the district court affirmed; Credit One then appealed to the Second Circuit.

The Court of Appeals Decision

The Second Circuit held that the plaintiff's cause of action directly implicated the discharge injunction, "the foundation upon which all other portions of the Bankruptcy Code are built."12

The successful discharge of debt is not merely important to the Bankruptcy Code, it is its principal goal. An attempt to coerce debtors to pay a discharged debt is thus an attempt to undo...