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Consumer Arbitration Agreements: 7.10.1 Introduction

The United States Bankruptcy Code provides for one forum to resolve all disputes affecting the administration of a party’s bankruptcy estate, with the goal of swift adjudication and access to the courts.214 For this reason most courts have held that, even when the parties have signed an arbitration agreement, if the issue under dispute is a “core issue” in the bankruptcy proceeding or if arbitration would conflict with the underlying purposes of the Bankruptcy Code, the bankruptcy court has discretion to decline to enforce the arbitration a

Consumer Arbitration Agreements: 7.10.2 Conflict Between Bankruptcy Code and FAA

The centralization of all bankruptcy claims in one forum, unhampered by concurrent proceedings in other forums, is a “fundamental tenet of bankruptcy law.”216 Furthermore, by staying all other proceedings upon filing for bankruptcy, the court protects the rights of creditors who would be prejudiced if the limited assets of a bankrupt estate were used to pay outside costs, such as those associated with arbitration.217

Consumer Arbitration Agreements: 7.10.4 Court Need Not Require Arbitration of Core Matters

If the consumer’s claim concerns a core proceeding, many courts hold that the bankruptcy court has wide discretion to determine if the arbitration should be stayed.235 Even if the core/non-core distinction is not viewed as dispositive, consideration of whether the proceeding is core or non-core often is the first step courts take in determining whether arbitration creates an inherent conflict with the purposes of the Bankruptcy Code.236

Consumer Arbitration Agreements: 7.10.5 Claims Asserted on Behalf of Bankruptcy Estate

There are a number of claims that the trustee or debtor in a chapter 13, chapter 12, or chapter 7 case, or the “debtor in possession” in a chapter 11 case, may assert on behalf of the bankruptcy estate.253 These are generally actions intended to benefit creditors. However, they can also be of significant benefit to debtors, particularly if they result in making more resources available to fund the debtor’s reorganization plan.

Consumer Arbitration Agreements: 7.10.6.1 General

The core/non-core distinction generally favors the resolution of consumer claims in the bankruptcy court rather than by arbitration.257 For example, an action seeking to enforce the rescission of a home mortgage under the Truth in Lending Act may be brought as an adversary proceeding filed within a bankruptcy case and will be treated as a core proceeding.258

Consumer Arbitration Agreements: 7.10.6.2 Nature of Proceeding, Not the Claim, Determines Whether It Is a Core Proceeding

Some courts have wrongly concluded that a claim objection proceeding in which Truth in Lending Act or other consumer protection causes of action are asserted is not a core proceeding because the consumer claims do not derive from bankruptcy law.264 These courts improperly focus on the derivation of the legal claims rather than on the nature of the proceeding itself.265 Non-bankruptcy law is often applied exclusively by bankruptcy courts in determining whether a creditors’ claim should be all

Consumer Arbitration Agreements: 7.10.6.3 Critiquing In re Mintze

In a departure from prior precedent, the Third Circuit in In re Mintze269 reversed the bankruptcy court’s refusal to compel arbitration of an adversary proceeding in a chapter 13 case brought as an objection to the creditor’s bankruptcy claim, which sought to enforce the debtor’s rescission of her home mortgage based on violations of the Truth in Lending Act.

Consumer Arbitration Agreements: 7.10.6.4 Proceedings Related to Automatic Stay or Discharge Injunction Violations

An arbitration clause should not prevent a bankruptcy court from resolving creditor abuses involving the bankruptcy process itself, such as violations of the automatic stay and discharge injunction, as these proceedings are clearly core proceedings and directly implicate the purposes of the Bankruptcy Code.274 It should not matter that a discharge or stay-violation proceeding is brought as a class action.275 Such proceedings also may not fall within the scope of the arbitration agreement.

Consumer Arbitration Agreements: 7.10.7 Non-Core Matters Subject to Arbitration

If the dispute involves a non-core matter, on the other hand, the courts are much more likely to follow the reasoning of Hays & Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc. that a bankruptcy court “should enforce [an arbitration] clause unless that effect would seriously jeopardize the objectives of the [Bankruptcy] Code.”282 As one court explained:

Fair Debt Collection: 7.2.4.1 Generally

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

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Fair Debt Collection: 7.2.4.2 Threats of Arrest

A consumer cannot be arrested for nonpayment of civil debt with certain limited exceptions involving writing an insufficient funds check, hiding collateral, not returning rented or leased property, and not submitting postjudgment to a debtor’s examination.268 Almost any other threat or implied threat of arrest should violate FDCPA § 1692e(4)269 The consumer need not show that the debt collector had no intent to follow through with seeking the consumer’s arrest.

Fair Debt Collection: 7.2.4.3 Threats Involving Postjudgment Remedies

With the exception of student loans,278 nonpayment of a consumer debt cannot result in wage garnishment until the creditor has obtained a court judgment. A court order is also a requirement for seizures of bank accounts or other property, except where property is pledged as collateral or seized pursuant to a banker’s right of setoff.

Fair Debt Collection: 7.2.5.1 Generally

A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

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Fair Debt Collection: 7.2.5.2.1 Introduction

Debt collector threats often are veiled, implied, or ambiguous, but representations are still actionable under FDCPA § 1692e(5) if the least sophisticated consumer would view them as threats to take illegal actions or actions that the collector does not intend to take.308 Where a representation has two meanings, only one of which would violate FDCPA § 1692e(5), the representation can be seen as a violation.309

Fair Debt Collection: 7.2.5.2.2 Implied threats to sue

The Third Circuit finds that a letter indicating that the collector “could” refer a debt to an attorney and “could” institute suit could be found to be a violation as implying to a least sophisticated consumer that suit would be instituted.316 A statement can be viewed as a threat of litigation where it warns that if payment is not made immediately, the consumer “may” be subject to court costs and attorney fees.317 The FTC Commentary states that a “debt collector may state that certain

Fair Debt Collection: 7.2.5.3.1 Introduction

A threat, explicit or implied, is actionable under FDCPA § 1692e(5) if either the threat is unlawful or the collector does not intend to take the threatened action. If there is no intent to act on a threat, the threat need not be to take an unlawful action. FDCPA § 1692e(5) applies to a threat to take any action, as long as the consumer can convince the court that the collector does not intend to take the action.

Fair Debt Collection: 7.2.5.4.1 Introduction

FDCPA § 1692e(5) prohibits threats to take unlawful actions, but some courts have held that the provision applies also to illegal attempts to collect a debt, at least where the attempt results in an ongoing threat of seizure of the consumer’s property or assets.394 Other courts rule that FDCPA § 1692e(5) applies only to threats and not to the taking of illegal action.395 When a claim involves an illegal action, it is safer to allege, in addition to a FDCPA § 1692e(5) claim, violations of other p