Arbitration in Bankruptcy: The Straight Talk

Arbitration has a deservedly bad reputation of forcing vulnerable people into a procedure that is touted as a cheaper alternative to litigation. While this is generally true for the company to which the contract was signed, it is generally untrue from the point of view of the person who signed the contract. You know about Wells Fargo killing lawsuits using arbitration clauses in their former depositors’ contracts. Despite their sappy Christmas commercials and the bank’s new CEO vowing to restore customers’ battered trust in Wells Fargo, the company has outraged public opinion enough that there are bills being introduced at the state and federal level to protect consumers from forced arbitration. In fact, a federal judge has called forced arbitration, “restricting Americans access to their own courts.”

You wouldn’t think that this could apply to bankruptcy with the automatic stay, however the Supreme Court has held that courts – even bankruptcy courts – are obligated to enforce arbitration clauses. Neither Congress nor the Supreme Court have provided any further guidance on this matter whatsoever, leaving the field clear for creditors to effectively nullify the bankruptcy proceeding. However, in a 2012 finding the Ninth Circuit Court ruled in Ackerman versus Eber to deny a creditors motion to compel arbitration.

At the root of this is the Federal Arbitration Act, enacted in 1925, holding that arbitration agreements are valid, irrevocable, and enforceable unless some other law or statute exists to countermand them. The automatic stay bars creditors from not only pursuing claims, but for pursuing claims in a venue separate from the bankruptcy court. In my opinion, forcing a debtor into arbitration specifically violates this part of the federal bankruptcy code. Unfortunately judges are required to allow arbitration to proceed unless it would fundamentally conflict with the bankruptcy code, or core matters with the filing itself.

Complaints against forced arbitration are founded on the precept that all citizens have a right to redress of their grievances in court, and that being forced into arbitration violates this basic civil right. Not all companies still compel forced arbitration, for example Bank of America removed its forced arbitration clauses from credit card agreements some time ago. For others potential creditors such as cable companies, you have to go looking for a way to opt out. As an example, I searched for “arbitration opt out” online and came up with this form for Xfinity/Comcast Cable.

What’s worse, is that many of us have more contracts with arbitration clauses than we know. By using the website, shopping on the Internet, or even agreeing to receive a newsletter, we are often presented with contracts that are called “click wrap” which contain often unenforceable agreements, such as the right of the company to change the terms at any time, in any way, without informing you of your new obligations. A number of these disputes are making their way through the courts. As a piece of advice, I would advise you to search for a way to opt out of arbitration wherever possible. You never know when these contracts will come back to haunt you.