In In Re: Ethel Marie Mintze, the United States Court of Appeals for the Third Circuit ruled on the issue of whether the Bankruptcy Court’s decision to deny enforcement of an arbitration clause was proper. The Third Circuit reversed the United States District Court for the Eastern District of Pennsylvania that affirmed the Bankruptcy Court’s decision to deny enforcement of the arbitration clause, and remanded the case to District Court to remand it to Bankruptcy Court with instructions to order the parties to engage in arbitration in accordance with the terms of the arbitration provision.
In Mintze, the debtor alleged that the Defendant American General Financial Services, Inc. (“AGF”) induced her to enter into an illegal and abusive home equity loan. The arbitration clause of the loan agreement stated that “all claims and disputes arising out of, in connection with, or relating to [the] loan” must “be resolved by binding arbitration.”
The Circuit Court held that the U.S. Supreme Court decision Shearson/A.M. Exp., Inc. v. McMahon, 482 U.S. 220 (1987), and the Circuit Court decision applying McMahon to a bankruptcy case, Hays & Co. v. Merrill Lynch Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3rd. Cir. 1989), were controlling. Under McMahon, if a party opposing arbitration can demonstrate that “Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue,” the FAA will not compel courts to enforce an otherwise applicable arbitration agreement. To overcome enforcement of arbitration, a party must establish congressional intent to create an exception to the FAA’s mandate with respect to the party’s statutory claims, which can be discerned in one of three ways: (1) the statute’s text, (2) the statute’s legislative history, or (3) “an inherent conflict between arbitration and the statute’s underlying purposes.” See id. Under Hays, the court held that whether the McMahon standard is met determines whether the court has the discretion to deny enforcement of an otherwise applicable arbitration clause.
In reversing judgment, the Circuit Court ruled that the Bankruptcy Court had no discretion to exercise, given that Mintze could not show that “Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue.” See McMahon. The two reasons it cited were (1) because Mintze raised no statutory claims created by the Bankruptcy Code, the Circuit court cannot find an inherent conflict between arbitration of Mintze’s federal and state consumer protection issues and the underlying purposes of the Bankruptcy Code; and (2) the court perceived no adverse effect on the underlying purposes of the [Bankruptcy] Code from enforcing arbitration.
