Virtually every credit card contract issued in Rockland County and throughout the country contains a binding arbitration clause. These clauses require all disputes between the card holder and card issuer to be resolved in a binding arbitration proceeding. The Second Circuit Court of Appeals was recently faced with a case in which a card holder attempted to escape the arbitration clause in a credit card agreement after he had won the discharge of the credit card debt in a Chapter 7 proceeding.
The card holder defaulted on his credit card loan from Credit One Bank. In March 2014, the Bankruptcy Court for the Southern District of New York issued an order discharging the card holder’s debts, including the debt owed to Credit One Bank. The bank had earlier written off the loan at issue but had refused to remove the write-off from the debtor’s credit report. The debtor then asked for permission to reopen his bankruptcy case and allow him to sue the bank to enforce the discharge order. The bank claimed that the dispute must be submitted to binding arbitration per the credit card agreement.
The Court of Appeals affirmed orders issued by both the Bankruptcy Court and District Court that ruled in favor of the debtor. The Court ruled that arbitration of the debtor’s claim conflicted with the “fresh start” guaranteed by the Bankruptcy Code. The arbitration clause was ruled unenforceable because it violated the terms of the Chapter 7 discharge injunction that protected the debtor from collection actions by creditors whose claims were discharged in the bankruptcy case.
This decision is an important victory for credit card holders who choose to discharge their debts in a Chapter 7 proceeding. Arbitration is generally viewed as being more favorable to creditors than to debtors. This decision levels the playing field by allowing debtors to bring their post-discharge disputes in open court.
Source: The Legal Intelligencer, “Second Circuit Court Declines to Enforce Arbitration Clause,” Rudolph J. DiMassa, Jr. and Drew S. McGehrin, April 2, 2018