571 B.R. 226
Bankr. E.D. Ky.2017Background
- Debtor Jimmy L. Kiskaden signed a 2007 high‑interest promissory note (First Bank of Delaware) that included a broad arbitration clause; he did not opt out.
- The note was assigned through intermediaries to LVNV Funding, which filed a proof of claim in Debtor’s Chapter 13 for the loan.
- Debtor filed a class-action adversary complaint alleging the loan scheme violated Kentucky usury/licensing laws and asserting six counts: declaratory relief (Count 1), KCPA (Count 2), common‑law fraud (Count 3), FDCPA (Count 4), remedial relief (Count 5), and abuse of the bankruptcy claims process (Count 6).
- LVNV moved to compel arbitration or stay/dismiss and force arbitration under the loan’s arbitration provision and the FAA.
- The court analyzed (1) whether the arbitration agreement was valid and covered the claims (undisputed), (2) whether Congress intended the statutory claims to be nonarbitrable under McMahon, and (3) whether any claims were constitutionally core under Stern such that arbitration would conflict with Bankruptcy Code purposes.
- Court held Counts 1 and 6 are both statutorily and constitutionally core (stem from bankruptcy/claims allowance) and denied arbitration as to them; Counts 2–4 are statutorily core but not constitutionally core and were compelled to arbitration and stayed; Count 5 is a remedies count and remains in court only to the extent tied to Counts 1 or 6.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability/scope of arbitration clause | Arbitration clause valid and covers disputes but bankruptcy concerns require judicial forum | FAA and clause require arbitration of covered claims | Clause valid and covers the claims (no dispute). Court proceeds to McMahon/Stern analysis |
| Whether statutory claims are non‑arbitrable under McMahon (conflict with Bankruptcy Code) | McMahon exception applies because arbitration would conflict with centralized claims allowance and reorganization purposes | No inherent conflict; FAA mandates arbitration of non‑bankruptcy claims | McMahon exception applies to Counts 1 and 6 (deny arbitration); does not apply to Counts 2–4 (compel arbitration) |
| Core/constitutional (Stern) status of claims | Counts 1 and 6 stem from bankruptcy and are constitutionally core; Counts 2–4 merely augment estate | Counts 2–4 are core for statutory purposes but not Stern‑core, so arbitrable | Counts 1 and 6 are statutorily and constitutionally core; Counts 2–4 are statutorily core but not Stern‑core |
| Whether to stay adversary pending arbitration | All claims should be stayed or arbitrated together to avoid inconsistent results | FAA §3 requires stay only for arbitrable claims; nonarbitrable core claims may proceed | Stay entered for Counts 2–4 pending arbitration; Counts 1 and 6 proceed in court; Count 5 remains in court as remedies tied to 1 and 6 (but Debtor may seek those remedies in arbitration to the extent they derive from 2–4) |
Key Cases Cited
- Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987) (sets framework for when congressional intent or inherent conflict precludes arbitration under the FAA)
- Stern v. Marshall, 564 U.S. 462 (2011) (limits bankruptcy courts’ authority to enter final orders on certain core claims that do not "stem from" the bankruptcy)
- Moses v. CashCall, Inc., 781 F.3d 63 (4th Cir. 2015) (distinguishes arbitrability of declaratory claims affecting claims allowance from damages claims that only augment the estate)
- In re Gandy, 299 F.3d 489 (5th Cir. 2002) (arbitration may be refused where claims derive entirely from Bankruptcy Code and enforcement would conflict with Code purposes)
- In re Mintze, 434 F.3d 222 (3d Cir. 2006) (no McMahon conflict where no bankruptcy issue would be resolved by adjudication of the claim)
- In re Eber, 687 F.3d 1123 (9th Cir. 2012) (refusal to compel arbitration where claims closely intertwined with dischargeability and Code purposes)
- White Mountain Mining Co. v. Citibank, 403 F.3d 164 (4th Cir. 2005) (bankruptcy court may decline to compel arbitration of core matters to preserve centralized resolution of estate disputes)