In a recent decision, a bankruptcy court in Georgia enforced the arbitration agreement contained in a South Carolina consumer loan, holding that it is valid and enforceable, and that enforcement of it did not create an inherent conflict with the purposes of the Bankruptcy Code. 

The Federal Arbitration Act (FAA) provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity.” 9 U.S.C. § 2. The US Supreme Court has long recognized that the FAA declares a national policy favoring arbitration agreements. See, e.g., Southland Corp. v. Keating, 465 US 1, 10 (1984). But, the Court also explained that the FAA’s mandate “may be overridden by a contrary congressional command.” Shearson/Am. Express, Inc. v. McMahon, 483 US 220, 226 (1987). Courts have grappled with the question whether, and in what circumstances, the Bankruptcy Code might override the FAA’s policy in favor of arbitration agreements. These courts have focused on the question whether an inherent conflict exists between arbitration and the purposes of the Bankruptcy Code. See, e.g., In re Elec. Machinery, 479 F.3d 791, 796 (11th Cir. 2007).

In Scott v. AmeriCash Loans LLC, No. 19-01007, --- B.R. --- (S.D. Ga. Bankr. Sept. 26, 2019 (ruling); Nov. 12, 2019 (dismissing case)), the debtor filed a Chapter 13 bankruptcy petition, and AmeriCash filed a proof of claim for amounts outstanding under the parties’ loan agreement. The debtor then filed an adversary complaint alleging claims under Georgia law. AmeriCash moved to dismiss the complaint, arguing that the debtor’s claims were subject to the arbitration agreement. 

The debtor argued that the Court should not enforce the arbitration agreement for three reasons. First, he argued that enforcement presented an inherent conflict with the underlying purposes of the Bankruptcy Code. Second, he argued that AmeriCash had waived its right to rely on the arbitration agreement by failing to attach the arbitration agreement to its proof of claim. And third, he argued that the arbitration agreement was unconscionable and unenforceable under Georgia law. 

In a thorough, 20-page opinion and order, Judge Susan Barrett of the US Bankruptcy Court for the Southern District of Georgia rejected all three arguments. First, the Court held that the debtor’s adversary complaint was a “non-core” proceeding for which the Court lacked discretion to deny arbitration, where a valid agreement applied. See Op. at 7-9 (citing 28 U.S.C. § 157(b)(2)). And even if the adversary complaint were a core proceeding, the Court explained that enforcing the arbitration agreement would not “inherently conflict with the underlying purposes of the Bankruptcy Code” because allowing an arbitrator to adjudicate the claims would not interfere with confirmation of the Chapter 13 plan or the ability of the debtor to reorganize his debts. Id. at 9-15 (citing In re Elec. Machinery, 479 F.3d 791, 798-99 (11th Cir. 2007)). 

Second, the Court rejected the debtor’s argument that AmeriCash’s filing of a proof of claim in the bankruptcy proceeding waived its right to arbitration. The Court explained that filing a proof of claim “does not initiate a contested matter” and that the adversary complaint was “the first time AmeriCash knew Debtor intended to challenge the validity of AmeriCash’s loan.” Id. at 16. The Court found that because AmeriCash promptly raised the arbitration agreement in its motion to dismiss, the debtor had suffered no prejudicial delay. Id. at 17.

Third, the Court rejected the debtor’s argument that the arbitration agreement was unconscionable under Georgia law. The Court noted that AmeriCash’s arbitration clause provided a number of provisions that were fair or favored the consumer, including, for example, that AmeriCash agreed to advance the cost of arbitration fees; allowed the debtor to opt out of the arbitration agreement and still obtain a loan; did not restrict damages that otherwise would be available in court; and agreed that the arbitration hearing would be held in the county of debtor’s residence. Op. at 19-20. After considering all of those provisions, the Court found that AmeriCash’s arbitration agreement was not unconscionable and was enforceable as a matter of law. Id. The Court gave the debtor 21 days to file an arbitration demand, and when the debtor failed to do so, the Court dismissed the adversary complaint in final order dated November 12, 2019.

Scott v. AmeriCash Loans LLC demonstrates the importance of carefully drafted arbitration agreements in consumer contracts and skillfully enforcing those arbitration agreements in litigation, including in the context of bankruptcy proceedings