Bankruptcy Court Finds Arbitration Clause In Consumer Loan Agreement Sufficient Cause To Grant Automatic Stay Relief – Insolvency / Bankruptcy / Restructuring


United States: Bankruptcy Court Finds Arbitration Clause In Consumer Loan Agreement Is Sufficient Cause To Grant An Automatic Stay Relief

To print this article, simply register or connect to

When a bankruptcy petition is filed, an automatic stay comes into effect to stay proceedings against the debtor or his property. 11 USC § 362 (a). The suspension centralizes the litigation concerning the debtor and his property in the event of bankruptcy of the debtor. Where the contract entered into before the bankruptcy contains an arbitration clause, a bankruptcy court will consider whether the stay should be enforced or whether the parties can resolve the issue through arbitration. In Regarding Argon Credit, LLC, n ° 16-39654 (Bankr. ND Ill. 21 Sept. 2018), a commercial court considered this question in a dispute between two non-debtor parties concerning the validity of loans issued by the debtor and a part of the debtor’s mass. The bankruptcy court ruled that the arbitration clause was binding and ordered that the stay be lifted to allow the arbitration to continue.

The debtors, Argon Credit and Argon X (“Argon”), had made small consumer loans and funded its loans through a revolving line of credit agreement with Fintech. To secure repayment, Argon has given Fintech a security interest in Argon’s portfolio of receivables generated by its consumer loans. This security was finally assigned to Fund Recovery Services (“FRS”). Argon filed a Chapter 11 petition in December 2016, and the matter was subsequently converted to Chapter 7. FRS sought and obtained a waiver of the automatic stay to collect debts to which it was entitled in view of its security interest. , FRS retaining the proceeds collected on claims up to the amount of its authorized claim against Argon, and consumer credit contracts remaining the property of the estate.

Some small California borrowers have initiated arbitration proceedings against FRS and First Associates, Argon’s loan manager, arguing that the loans they have taken out are invalid because they do not comply with California’s Loan Act. ready. The loan contracts that the borrowers had signed with Argon included broad mandatory arbitration clauses. The bankruptcy court had previously found that this arbitration proceeding was covered by the automatic stay even though Argon was not itself a defendant, as the loan contracts were the property of the estate and the borrowers were asking for declarations of. invalidity of contracts. (The bankruptcy court noted some uncertainty as to whether such statements would bind Argon, a non-party to the arbitrations, but concluded that there was some possibility that they would.) So the borrowers asked an exemption from the automatic stay to allow them to continue the arbitration proceedings.

An applicant for an exemption from automatic stay must prove the “cause”. 11 USC § 362 (d) (1). Relying on previous case law regarding the application of the automatic stay to arbitration agreements, the bankruptcy court ruled that an otherwise binding arbitration agreement is sufficient cause to lift the automatic stay on an issue. particular if the issue is a “non-essential” problem, while such a cause may not exist if it is a “critical” problem. The court held that since there is a strong federal interest in the enforcement of arbitration agreements, there must be a strong federal interest in compensatory bankruptcy to overcome the arbitration agreement. According to the court, non-essential proceedings generally do not involve such strong federal interests in bankruptcy.

Bankruptcy law divides proceedings into main proceedings and non-core proceedings. 28 USC § 157. The origin of this statutory distinction lies in the constitutional limits of the scope of jurisdiction of a bankruptcy court. Since the legal definition is supposed to follow the constitutional definition, the court first considered whether the question regarding the validity of the loan contracts was “essential” as a question of constitutional law. Resting on Stern v. Marshall, 564 US 462, 499 (2011), the court held that a question is constitutionally fundamental whether it “arises from the bankruptcy itself or would necessarily be resolved as part of a claims settlement process”. Since the invalidity claims did not arise out of the bankruptcy or seek redress from the debtor, but rather were state law claims between third parties, the court concluded that they were not essential to the debtor. constitutional right.

The court noted that, nevertheless, the claims arguably fell within the legal definition of Article 157 of the Bankruptcy Code, as they could be understood as “matters concerning the administration of the estate” or “other proceedings. affecting the liquidation of the assets of the mass ”, since the loan contracts and their claims were the main assets of the estate. However, the court read these provisions narrowly in order to preserve a meaningful distinction between core and non-core. He held that because the contracts had been formed before the bankruptcy case was filed, and because the bankruptcy case was now a Chapter 7 liquidation rather than a Chapter 11 reorganization, the adjudication of the validity of contracts was not sufficiently interwoven with the bankruptcy case to count as a basic proceeding.

Because the court concluded that the disability claims were not fundamental issues, the court granted the borrowers’ motion for a lift of the stay.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR POSTS ON: Insolvency / Bankruptcy / Restructuring from the United States

TriMark: Are “sacred rights” still sacrosanct?

Alston & Bird

A recent decision by the New York Supreme Court suggests that the current violence among lenders through increasing majority and removing covenants may not be without recourse.

Use clarity to avoid contempt in bankruptcy

Ward and Smith, Pennsylvania

This comes to us from a July 2021 North Carolina district court ruling overturning a $ 115,000 penalty order issued by a North Carolina bankruptcy court. The story offers a lesson and a moral.

Leave A Reply

Your email address will not be published.