Roth v. Butler Univ. (In re Roth)

• Decision Date: 16 November 2018
• Docket Number: Case No. 17-04109-JJG-7,Adversary No. 18-50097
• Citation: 594 B.R. 672
• Parties: IN RE: Matthew Richard ROTH, Debtor. Matthew Richard Roth, Plaintiff, v. Butler University, Discover Financial Services, Inc., and Sallie Mae Bank, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

594 B.R. 672

IN RE: Matthew Richard ROTH, Debtor.Matthew Richard Roth, Plaintiff,

v.Butler University, Discover Financial Services, Inc., and Sallie Mae Bank, Defendants.

Case No. 17-04109-JJG-7

Adversary No. 18-50097

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

Signed November 16, 2018

Michael J. Norris, Mike Norris & Associates, P.C., Indianapolis, IN, for Plaintiff.

Steven M. Lutz, Church Church Hittle & Antrim, Fishers, IN 46038, Christina Marie Bruno, Bose McKinney & Evans LLP, Indianapolis, IN, Allison B. Hudson, William W. Thorsness, Vedder Price P.C., Chicago, IL, Jeanne Sinnott, Miller Nash Graham & Dunn LLP, Portland, OR, for Defendants.

Discover Financial Services Inc., Midvale, UT, pro se.

ORDER DENYING MOTION TO COMPEL ARBITRATION AND DISMISS OR STAY PENDING ARBITRATION

Jeffrey J. Graham, United States Bankruptcy Judge

The motion before the Court asks if an arbitration clause in a student loan contract is enforceable in the context of a dischargeability action. For the reasons stated below, the Court answers that question in the negative.

JURISDICTION

Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. The issue of whether a debt is dischargeable is a core matter pursuant to 28 U.S.C. § 157(b)(2)(I). Both parties consent to this Court's entry of final orders or judgments. See Wellness Int'l Network, Ltd. v. Sharif , ––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). The Court, at least initially, has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334, subject to the determination of whether the arbitration agreement removes this matter from the Court's bailiwick.

BACKGROUND

Plaintiff/Debtor Matthew Richard Roth ("Roth") attended Butler University in Indianapolis, Indiana. While attending Butler, Roth obtained a student loan in the amount of $32,800 from Defendant Sallie Mae Bank ("Sallie Mae"). Roth's promissory note with Sallie Mae contained an arbitration provision that allowed either party to elect to arbitrate any claim arising under the note, including "the imposition or collection of principal, interest, attorneys' fees, collection costs or other fees or charges relating to this Note[.]"

Roth filed a chapter 7 bankruptcy and scheduled a debt to Sallie Mae in the amount of $36,927.88. Roth received a discharge and his case was closed. Roth later moved to reopen his case and filed Plaintiff Matthew Roth's Amended Complaint Regarding Dischargeability of "Private" Student Loans (the "Amended Complaint"), seeking to discharge his student loan debt to Sallie Mae (among other lenders) pursuant to 11 U.S.C § 523(a)(8). Specifically, Roth alleges that his loan with Sallie Mae is not a "qualified educational loan" and, alternatively, that the loan debt should be discharged as its repayment constitutes an undue hardship.

In lieu of an answer Sallie Mae filed its Motion to Compel Arbitration and Dismiss or Stay Pending Arbitration (the "Motion to Compel"). In the Motion to Compel, Sallie Mae argues that the Court should compel arbitration of the Amended Complaint in compliance with the Federal Arbitration Act (the "FAA"), 9 U.S.C. §§ 2 - 3, and dismiss the claims against Sallie Mae for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1), made applicable to this proceeding pursuant to Federal Rule of Bankruptcy Procedure 7012. Alternatively, Sallie Mae asks the Court to stay Roth's claims as to Sallie Mae to allow an arbitrator to decide the issues.

Roth counters by arguing that the promissory note's arbitration provisions are critically vague and unenforceable. Roth further argues that the Court should deny arbitration because the proceeding involves a core matter and that a debtor's discharge is a matter of paramount concern for the bankruptcy court. For the purposes of this opinion, the Court will assume that the promissory note's arbitration provision is clear and enforceable, focusing instead on the question of whether the Roth's claims against Sallie Mae should be subject to arbitration.

DISCUSSION

Roth and Sallie Mae contractually agreed to arbitrate issues regarding claims relating to the promissory note. The FAA, 9 U.S.C. §§ 1 et seq. , places arbitration agreements on equal ground with other contractual provisions and makes them valid, irrevocable and enforceable absent some contrary legal or equitable ground for revocation. Epic Sys. Corp. v. Lewis , ––– U.S. ––––, 138 S.Ct. 1612, 1622, 200 L.Ed.2d 889 (2018). The Supreme Court has read the FAA as establishing "a liberal federal policy favoring arbitration agreements." Id. (citations omitted). Furthermore, courts are to "rigorously enforce agreements to arbitrate." Shearson/American Exp., Inc. v. McMahon , 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). This is true even when the claims at issue are statutory rights. Id.

The Supreme Court's decision in Epic is the most recent case to explore the alleged conflict between the FAA and another federal statute. There, the Supreme Court was asked to determine if the Fair Labor Standards Act and the National Labor Relations Act overrode an arbitration agreement. When reviewing an alleged conflict between the FAA on the one hand and the FLSA and NLRA on the other, the Supreme Court noted that the party asserting a conflict "bears a heaving burden of showing "a clearly expressed congressional intention' that such a result should follow" and that there is a " ‘stron[g] presum[ption]’ that repeals by implication are ‘disfavored’ and that ‘Congress will specifically address’ preexisting law when it wishes to suspend its normal operations in a later statute." Id. at 1624 (citations omitted). Moreover, the language must be "clear and manifest" for the FAA's mandate to arbitrate to be overridden. Id.

Sallie Mae points to the language in Epic and notes that nothing in § 523 of the Bankruptcy Code contains a clear and manifest Congressional intent to override an agreement to arbitrate. Were Epic the only Supreme Court to case to address the interplay of federal statutes and the FAA, Sallie Mae might prevail. But Epic does not stand alone on this issue.

In 1987 the Supreme Court tackled the issue of whether the Securities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act rendered a matter non-arbitrable in Shearson/American Exp., Inc. v. McMahon , 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). Acknowledging that the FAA mandated the enforcement of arbitration agreements, the Supreme Court held that "[l]ike any statutory directive, the Arbitration Act's mandate may be overridden by a contrary congressional command." Id. at 226, 107 S.Ct. 2332. The Supreme Court then set forth a test for determining whether a contrary congressional command existed: (1) the statute's text; (2) the statute's legislative history; or (3) an inherent conflict between arbitration and the statute's underlying purpose. Id. at 227, 107 S.Ct. 2332.

This approach makes sense. The FAA was intended to put arbitration agreements "upon the same footing as other contracts." McMahon , 482 U.S. at 225-26, 107 S.Ct. 2332 (citations omitted); see also Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Jr. Univ. , 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) (FAA "simply requires courts to enforce privately negotiated settlements to arbitrate, like other contracts, in accordance with their terms."). But the FAA did not make arbitration agreements more enforceable than other contracts. See Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U.S. 395, 404 n.12, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)and In re Brown , 354 B.R. 591, 600 (D.R.I. 2006). Similarly, arbitration agreements have been held akin to contractual forum selection clauses, privately negotiated provisions meant to be enforced according to their terms. Id. (collecting cases).

Federal bankruptcy law also is a fundamental public policy, one that is grounded in the Constitution. Moses v. CashCall, Inc. , 781 F.3d 63, 72 (4th Cir. 2015). The very purpose of the Bankruptcy Code is to modify the rights – contractual and otherwise – of debtors and creditors. See In re D & B Swine Farms, Inc. , 430 B.R. 737, 744 (Bankr. E.D.N.C. 2010). So it should come as no surprise that a bankruptcy court could, in certain circumstances, override a contractual agreement such as an arbitration provision or a forum selection clause. See In re Anderson , 884 F.3d 382 (2d Cir. 2018) (upholding decision not to enforce arbitration provision) and In re Dozier Fin., Inc. , 587 B.R. 637 (Bankr. D.S.C. 2018) (declining to enforce a forum selection clause in adversary proceeding). The McMahon framework provides a way for courts to balance the competing public policies of enforcing arbitration agreements and bankruptcy court's ability to alter the contractual rights of debtors and creditors. To take away this framework and rely solely on an explicit textual override would elevate arbitration agreements over other contractual provisions and unfairly diminish the Bankruptcy Code.

The High Court's decision in McMahon has never been overruled, and in fact the case was cited in the Epic decision. Supreme Court precedent is only overruled after "appropriate consideration and clarity[.]" In re Williams , 564 B.R. 770, 777 (Bankr. S.D. Fla. 2017) (collecting cases). Because Epic is silent as to any attempt to overrule McMahon , the Court will treat McMahon as good law and will apply it to the matter at hand. See In re Golden , 587 B.R. 414, 424 (Bankr. E.D.N.Y. 2018) (applying McMahon after Epic was decided).

No appellate court has found that either the text of the Bankruptcy Code or its legislative history suggests that Congress intended to have the Bankruptcy Code override the FAA. In re Eber , 687 F.3d 1123, 1129 (9th Cir. 2012) (collecting cases). The analysis therefore hinges on a single question: whether arbitration would create an inherent conflict with the purposes of the Bankruptcy Code. I...