In re Argon Credit, LLC

• Decision Date: 21 September 2018
• Docket Number: Case No. 16-39654
• Parties: IN RE Argon Credit, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

IN RE Argon Credit, LLC, et al., Debtors.

Case No. 16-39654

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

September 21, 2018

Chapter 7

Hon. Deborah L. Thorne

(Jointly Administered)

MEMORANDUM OPINION

Introduction

This matter comes before the court upon the motion of Lindsay Fore and others to modify the automatic stay so as to allow the movants to commence arbitration proceedings in California against Fund Recovery Services (FRS), the largest secured creditor in this case, and First Associates, the Debtor's pre-petition loan servicer. Since the claims sought to be arbitrated are non-core, and since they are covered by an arbitration clause by which FRS is bound, the court has no discretion to override the parties' pre-petition bargain. The motion to modify the automatic stay is granted.

I. General Background

Argon Credit and Argon X (hereinafter "Argon")¹ are the Debtors in this case. Prior to filing a petition on December 16, 2016 seeking relief under chapter 11, Argon made on-line, small, high-interest rate loans to individual consumers. See FRS's Response to Mot. Relief from Stay, Docket No. 297, at 4. To finance its lending activity, Argon entered into a revolving line of credit loan agreement with Fintech. See FRS's Mot. Relief from Stay, Docket No. 35, at 2-3, ¶ 10. As consideration for and to secure repayment of the Fintech revolving loan, Argon grantedFintech a security interest covering the receivable portfolio generated from the Argon on-line consumer loans. Id. at 3, ¶ 13. Later Fintech assigned all of its rights arising out of the Argon loan transaction, including its security interest(s), to Princeton, who in turn assigned all of its rights to FRS. Id. at 3, 4, ¶¶ 14, 17.

Immediately upon filing its petition, Argon asked the court to allow it to use FRS' cash collateral. See Argon's Emergency Mot. to Use Cash Collateral, Docket No. 9. After a lengthy hearing, the court ultimately denied the use as Argon was unable to provide adequate protection to FRS. See Order Denying Use of Cash Collateral, Docket No. 66. That same day, the case was converted to one under chapter 7. See Order Converting Debtors' Cases to Chapter 7, Docket No. 68. FRS asked for and was granted relief from the automatic stay to collect the receivables pursuant to its assigned agreement with Argon and applicable nonbankruptcy law. Id. The court granted an agreed order between the chapter 7 trustee and FRS allowing FRS to retain proceeds collected on the receivables portfolio up to the amount of FRS's allowed claim against Argon, with the receivables remaining property of the estate. See Stipulation and Agreed Order Regarding Liquidation of Debtors' Loan Receivables, Docket No. 129; FRS's Mot. Enforce Automatic Stay, Docket No. 266, at 3-4, ¶¶ 9-10.² As April 30, 2018, FRS's claim against the estate is approximately $30.513 million, and the principal amount of the receivables currently outstanding is approximately $19.931 million. See FRS's Supplement, Docket No. 307, at 1-2, ¶¶ 2-3. The final amount of collections on the Argon receivables is unknown, and collection continues to this day.

II. Immediate Background

In August of 2017, a small number of California borrowers initiated arbitration proceedings in California against Argon and First Associates, the latter of which had been Argon's pre-petition loan servicer. See See Lindsay Fore et al.'s Mot. Relief from Stay, Docket No. 289, at 6; Trustee's Mot. Sanctions, Docket No. 261, Ex. D, at 17. Through the arbitrations, the borrowers sought declarations that each of their loan contracts were void under California consumer lending law due to Argon's lack of compliance with several statutory provisions. Id. at 21-22, 26. In addition, they also sought monetary recoveries for illegal collection activities, premised largely on claims that attempts to collect a loan created by an illegal contract amounts to an illegal collection practice under the federal Racketeer Influenced and Corrupt Organizations Act (RICO) and several other California statutes pertaining to lending and collection practices. Id. at 22-26.

The trustee asked this court to enforce the automatic stay and prohibit the arbitration proceedings against Argon. See Trustee's Mot. Sanctions, Docket No. 261. In December of 2017, Wilens and the borrowers dropped Argon, the Debtor, as a respondent/party to the arbitrations and named only FRS and First Associates as respondents. FRS's Mot. Enforce, Docket No. 266, at 12, ¶ 30; Trustee's Notice of Withdrawal, Docket No. 262. The trustee and FRS continued to seek enforcement of the automatic stay notwithstanding this fact. See FRS's Mot. Enforce, Docket No. 266; Trustee's Reply, Docket No. 271; Trustee's Adoption of FRS's Mot. Enforce, Docket No. 274. In February of this year, the court found that without an order modifying the automatic stay, the arbitrations were prohibited under section 362(a)(3) and should be dismissed without prejudice. See Order Enforcing Automatic Stay, Docket No. 278. The California borrowers have now filed a motion seeking relief from the stay to re-file theirarbitration complaints, naming only First Associates and FRS as respondents and still seeking a declaration of the loans' invalidity and a recovery of money from First Associates and FRS. See Lindsay Fore et al.'s Mot. Relief from Automatic Stay, Docket No. 289; see also Lindsay Fore et al.'s Mot Relief from Stay, Docket No. 289, Ex. 2, at 36-46.

III. The Loan Agreements' Arbitration Clause

The arbitration clause contained in the loan agreement between Argon and each borrower is very broad. It begins by explaining arbitration: "In arbitration, a third party ("Arbiter") solves Disputes in a hearing ("hearing"). You, related third parties, and we waive the right to go to court." See Lindsay Fore et al.'s Mot Relief from Stay, Docket No. 289, Ex. 1, at 26 (emphasis added). As for parties, the clause covers "the parties, their heirs, successors, assigns, and third parties related to any dispute." Id. (emphasis added). All disputes are included within the clause's scope:

In this Clause, the word 'Disputes' has the broadest possible meaning. This Clause governs all 'Disputes' involving the parties. This includes all claims even indirectly related to your application and agreements with us. This includes Disputes related to information you previously gave use. It includes all past agreements. It includes extensions, renewals, refinancing's [sic], or payment plans. It includes claims related to collections, privacy, and customer information. It includes claims about the Clause's validity and scope. It includes claims about whether to arbitrate.

Id. at 26-27. Any covered disputes are to be arbitrated not more than 30 miles from the borrowers' homes. Id. at 29. The Federal Arbitration Act governs the arbitration clause. Id. at 27.

The California borrowers seek modification of the stay to allow them to proceed, pursuant to their arbitration agreement, with the arbitrations against FRS and First Associates.³FRS does not want to arbitrate the claims, and the trustee has joined with FRS despite not being named as a party/respondent to the arbitration proceedings. See Trustee's Response, Docket No. 294; FRS's Response, Docket No. 297. The trustee and FRS argue that the borrowers should file claims against the estate, or that they should file an adversary proceeding in the Bankruptcy Court seeking their currently requested relief against First Associates and FRS or, finally, that they could simply await an affirmative lawsuit or arbitration complaint to be filed against them for collections purposes, since they would not be barred by the automatic stay from raising the loans' invalidity as a defense. See FRS's Response, Docket No. 297, at 11-12, ¶ 27 & n.5; Trustee's Response, Docket No. 294, at 5.

As explained more fully below, the court grants the motion to modify the stay allowing the California borrowers to proceed to initiate arbitrations in California.

Discussion⁴

The petitioning California borrowers seek in their arbitration complaints a determination that their loan agreements are void under California law. Additionally, each of the petitioning borrowers seeks damages and other relief against First Associates and FRS. Seeking that voidness declaration amounts to a positive act to exercise control over property of the estate - the loan contracts - due to the likelihood that the Debtor and/or the estate would be bound by that part of the arbitration award finding the loan contracts invalid despite not having been made a party to the arbitration proceedings.⁵ See 11 U.S.C. § 362(a)(3); Nat'l Tax Credit Partners, L.P.v. Havlik, 20 F.3d 705, 708 (7th Cir. 1994) ("362(a)(3), however, reaches farther, encompassing every effort to "exercise control over property of the estate."); In re Berau Capital Res. Pte Ltd, 540 B.R. 80, 83 (Bankr. S.D.N.Y. 2015); In re Stinson, 221 B.R. 726, 730 (Bankr. E.D. Mich. 1998) (discussing the exercise of control over intangible property rights belonging to the estate); Acands, Inc. v. Travelers Cas. & Sur. Co., 435 F.3d 252, 260 (3d Cir. 2006) ("By effectively terminating [the debtor's] insurance coverage, the arbitration award had a clear adverse effect on [the debtor's contractual right, which was a] property interest."); In re Coporacion de Servicios Medicos Hospitalarios de Fajardo, 805 F.2d 440, 447 (1st Cir. 1986) (concluding, after holding exceptions inapplicable, that "the actions taken . . to terminate the [debtor's contract] violated the automatic stay"); In re Nat. Century Fin. Enterprises, Inc., 423 F.3d 567, 578 (6th Cir. 2005); In re Gucci, 126 F.3d 380, 392 (2d Cir. 1997); In re Johnson, 548 B.R. 770, 797 (Bankr. S.D. Ohio 2016); In re Klarchek, 508 B.R. 386, 397 (Bankr. N.D. Ill. 2014) (noting that the risk of non-party preclusion justifies the application of section 362(a)(3)).⁶

I. The Court's Discretion to Continue Staying...