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In re Farmer

United States District Court, W.D. Washington, Seattle

October 16, 2017

In re JANAY L. FARMER, Debtor.
v.
JANAY L. FARMER, Appellee. NAVIENT SOLUTIONS, LLC, Appellant,

          ORDER AFFIRMING BANKRUPTCY COURT

          JOHN C. COUGHENOUR, UNITED STATES DISTRICT JUDGE.

         This matter comes before this Court on Appellant Navient Solutions, LLC's (“Navient”) Brief (Dkt. No. 10), Appellee Janey Farmer's (“Farmer”) Brief (Dkt. No. 13) and Navient's Reply (Dkt. No. 14). Having considered the briefs and other papers submitted by the parties, and determining that oral argument is unnecessary, this Court AFFIRMS the decision of the bankruptcy court.

         I. BACKGROUND

         Navient appeals a decision by the bankruptcy court denying its motion to compel arbitration on a loan it services between Farmer and Sallie Mae (Dkt. No. 10). See In re Farmer, 567 B.R. 895, 897-98 (Bankr. W.D. Wash. 2017). Farmer took out the loan in 2010 to finance her post-graduate bar examination. Id. She never repaid it, and in 2016 filed a Chapter 7 bankruptcy case, scheduling the loan as a $20, 751.15 unsecured claim. Id. Farmer does not dispute the applicability or enforcement of an arbitration clause contained within the Note. Id. But she contends that because arbitration would address a core bankruptcy matter-whether the loan is a non-dischargeable education debt-the bankruptcy court has discretion to retain jurisdiction to resolve the matter. Id. The bankruptcy court agreed, denying Navient's motion to compel arbitration and to dismiss or to stay the case pending arbitration. Id. Navient appeals this decision. (Dkt. No. 10.)

         II. DISCUSSION

         This Court may review the bankruptcy court's decision. 9 U.S.C. § 16(a)(1)(A)-(B); 28 U.S.C. § 158(a)(1). Conclusions of law are subject to de novo review. In re EPD Inv. Co., LLC, 821 F.3d 1146, 1150 (9th Cir. 2016). Discretionary matters are reviewed “only for an abuse of discretion.” Id.

         A. Statutes Conflicting with the Federal Arbitration Act

         In Shearson/Am. Exp., Inc. v. McMahon, the Supreme Court held that even though the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., “establishes a federal policy favoring arbitration . . . the [FAA's] mandate may be overridden by a contrary congressional command.” 482 U.S. 220, 227 (1987). The Court went on to articulate a three-factor test to allow courts to assess whether another statute reflects Congress's desire to override the FAA. Id. Courts are to examine: (1) the text of the statute; (2) the statute's legislative history; and (3) absent such express conflict, whether an inherent conflict exists between arbitration and the underlying purposes of the statute. Id.

         At issue in this case is whether the Bankruptcy Code, 11 U.S.C. § 1 et seq., represents a contradictory statute. Farmer concedes “that there is nothing in the text or legislative history of the Bankruptcy Code evincing Congressional intent to override the FAA.” (Dkt. No. 13 at 22.)

         Therefore, the question before this Court is limited to the third factor-whether an inherent conflict exists between the underlying purpose of the Bankruptcy Code and arbitration.

         Navient argues that Supreme Court jurisprudence has evolved since McMahon and no longer includes the inherent conflict factor. (Dkt. No. 10 at 34.) It asserts the bankruptcy court misapplied Supreme Court precedent in relying on an inherent conflict between the Bankruptcy Code and arbitration to conclude that it had discretion to refuse to compel arbitration. (Dkt. No. 10 at 29.) In support, Navient cites CompuCredit Corp. v. Greenwood, 565 U.S. 95 (2012), and Am. Exp. Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013). In both cases, the Supreme Court considered solely the text and legislative history of potentially-conflicting statutes to address whether a congressional command existed.[1] See CompuCredit, 565 U.S. at 104; Italian Colors, 133 S.Ct. at 2308-09. But as the bankruptcy court noted here, “[i]n neither case did the Supreme Court specifically apply the McMahon factors.” In re Farmer, 567 B.R. at 899.

         Furthermore, in 2016, the Ninth Circuit applied the inherent conflict analysis in affirming a bankruptcy court's denial of a motion to compel arbitration. See In re EPD Inv. Co., 821 F.3d at 1150. Navient argues EPD conflicts with Supreme Court precedent and is wrongly decided (Dkt. No. 10 at 34.) This Court sees no such conflict. EPD was decided well after CompuCredit and Italian Colors, and if the Supreme Court wanted to abandon inherent conflict as a consideration, it would have done so explicitly in those prior cases. In Italian Colors, the Court referenced McMahon without explicitly challenging any aspect of that ruling. 133 S.Ct. at 2309. In CompuCredit, Justices Sotomayor and Kagan indicated that they did “not understand the majority opinion to hold” that express preemption is required. 565 U.S. at 109 (Sotomayor, J., concurring in judgment). Therefore, this Court finds that the bankruptcy court's consideration of the inherent conflict factor was appropriate.

         B. Bankruptcy Court's Application of the Inherent Conflict Factor

         Navient argues that even if inherent conflict is a relevant factor, the bankruptcy court abused its discretion in applying it. (Dkt. No. 10 at 37.) Navient seeks to arbitrate whether Farmer's loan is precluded from discharge as a qualifying education loan pursuant to 11 U.S.C. § 523(a)(8). (Dkt. No. 10-1 at 44, 60.); see In re Coleman, 560 F.3d 1000, 1004 (9th Cir. 2009) (discussing the non-dischargeability of such loans). It asserts that given the facts specific to this case-a single adversary proceeding to determine the dischargeability of debt owed to ...


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