In re Bateman, 585 B.R. 618 (2018)

May 21, 2018 · United States Bankruptcy Court for the Middle District of Florida · Case No. 8:14–bk–05369–RCT
585 B.R. 618

IN RE: Christopher BATEMAN, Debtor.

Case No. 8:14-bk-05369-RCT

United States Bankruptcy Court, M.D. Florida, TAMPA DIVISION.

Signed May 21, 2018
Filed May 22, 2018

*621Robert M. Geller, Law Offices of Robert M. Geller, P.A., Gus M. Centrone, Dunlap, Bennett & Ludwig, PLLC, Katherine Earle Yanes, Kynes Markman & Felman, PA, Tampa, FL, for Debtor.

MEMORANDUM DECISION

Roberta A. Colton, United States Bankruptcy Judge

Christopher Bateman obtained a discharge in this chapter 7 case in 2014. His discharge included an old cell phone debt to Verizon Wireless Personal Communications, LP ("Verizon"). In early 2015, Verizon, acting through a debt collector, attempted to collect the discharged debt. Now, three years later, Mr. Bateman, on behalf of himself and others similarly situated, seeks to hold Verizon in contempt for violating this court's discharge order and the discharge injunction imposed pursuant to 11 U.S.C. § 524.1

Verizon responds that this contested matter is covered by the arbitration agreement in its original cell phone contract with Mr. Bateman. Accordingly, Verizon moves to compel arbitration of the Motion for Contempt and to stay these proceedings pending the outcome of the arbitration.2

The issue presented is whether the Federal Arbitration Act ("FAA")3 requires that this contested matter be stayed and sent to arbitration.

JURISDICTION

Jurisdiction of this matter is proper under 28 U.S.C. § 1334 and the standing *622order of reference entered by the United States District Court for the Middle District of Florida pursuant to 28 U.S.C. § 157(a). This is a core proceeding within the meaning of 28 U.S.C. § 157.4

BACKGROUND

Mr. Bateman purchased a personal cell phone from Verizon in 2011 and simultaneously entered into a service agreement. As part of this transaction, Mr. Bateman signed a receipt agreeing to the terms and conditions in the Verizon Customer Agreement, which includes an arbitration provision (the "Customer Agreement") (Doc. 29-1). The Customer Agreement also cleverly states that Verizon may unilaterally change the Customer Agreement at any time (Doc. 29-2, p. 4). And in fact, Verizon revised the terms of the Customer Agreement, including the arbitration provision, in 2012 (presumably without consulting Mr. Bateman).

The revised Customer Agreement states, in relevant part:

YOU AND VERIZON WIRELESS BOTH AGREE TO RESOLVE DISPUTES ONLY BY ARBITRATION OR IN SMALL CLAIMS COURT... WE ALSO BOTH AGREE THAT:
(1) THE FEDERAL ARBITRATION ACT APPLIES TO THIS AGREEMENT. EXCEPT FOR SMALL CLAIMS COURT CASES THAT QUALIFY, ANY DISPUTE THAT IN ANY WAY RELATES TO OR ARISES OUT OF THIS AGREEMENT OR FROM ANY EQUIPMENT, PRODUCTS AND SERVICES YOU RECEIVE FROM US (OR FROM ANY ADVERTISING FOR ANY SUCH PRODUCTS OR SERVICES) WILL BE RESOLVED BY ONE OR MORE NEUTRAL ARBITRATORS BEFORE THE AMERICAN ARBITRATION ASSOCIATION ("AAA") OR BETTER BUSINESS BUREAU ("BBB"). YOU CAN ALSO BRING ANY ISSUES YOU MAY HAVE TO THE ATTENTION OF FEDERAL, STATE, OR LOCAL GOVERNMENT AGENCIES, AND IF THE LAW ALLOWS, THEY CAN SEEK RELIEF AGAINST US FOR YOU.

(Doc. 29-3, pp. 8-9) (emphasis in original).5

Two years later, in May 2014, Mr. Bateman filed his chapter 7 bankruptcy petition (Doc. 1). Verizon is duly listed as a creditor with a pre-petition general unsecured claim of $481.00 and is included in the mailing matrix attached to the petition (Doc. 1, pp. 20 & 41). Once filed, the bankruptcy proceeded uneventfully and in August 2014 this court entered an order discharging Mr. Bateman's debts as provided in 11 U.S.C. § 727 (the "Discharge Order") (Doc. 14).

After entry of the Discharge Order, Verizon, acting through an agent, Convergent Outsourcing, Inc. ("Convergent"), sent Mr. Bateman a collection notice dated January 20, 2015. The letter states that Mr. Bateman owes Verizon $568.02, but that Convergent is willing to accept $198.81 to settle the claim (Doc. 19-1). Based on this letter, Mr. Bateman claims that Verizon *623has violated the Discharge Order. He not only seeks to hold Verizon in contempt for this alleged violation but also seeks class certification on behalf of all other similarly victimized debtors. Mr. Bateman asserts that Verizon has "flawed policies" and a pattern and practice of attempting to collect discharged debts (Doc. 19, ¶¶ 25-38).

Verizon of course denies these allegations, but more importantly here, moves to stay these proceedings and compel arbitration (Doc. 29). Notwithstanding Mr. Bateman's discharge, Verizon argues that Mr. Bateman remains bound by the arbitration provision in the Customer Agreement (Doc. 29, ¶¶ 5-10).

Meanwhile, Mr. Bateman also filed a complaint, first in federal district court,6 and later in state court,7 alleging that Verizon's conduct warrants class certification to pursue violations of consumer protection laws. His district court complaint was dismissed for lack of jurisdiction. Verizon also tried to stay the State Court Action and compel arbitration, but was unsuccessful. Its motion to stay the State Court Action and to compel arbitration was denied on December 14, 2017. Verizon appealed the state court's decision to the Second District Court of Appeals where it remains pending.8

APPLICABLE LAW

The FAA was enacted in 1925 "in response to widespread judicial hostility to arbitration agreements."9 Section 2 of the FAA states:

A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.10

This section of the FAA represents an early congressional declaration of a "liberal federal policy favoring arbitration,"11 and the "fundamental principle that arbitration is a matter of contract."12 Ultimately, the goal of the FAA is to "place arbitration agreements on equal footing with other contracts"13 and to "enforce them according to their terms."14

*624The FAA, however, "does not mandate the arbitration of all claims."15 "Arbitration under the [FAA] is a matter of consent, not coercion."16 Indeed, enforcement of arbitration agreements according to negotiated terms is intended to "give effect to the contractual rights and expectations of the parties."17

Consistent with this purpose, the Eleventh Circuit has developed a two-step inquiry when considering a motion to compel arbitration. First, the court must determine whether the parties have actually agreed to arbitrate the dispute.18 If the parties have actually agreed, then the court must decide whether any "legal constraints external to the parties' agreement foreclose arbitration."19 Bankruptcy may be one of the legal constraints foreclosing arbitration, but only if the matter under consideration is within the bankruptcy court's "core" jurisdiction, and if enforcement of the arbitration agreement inherently conflicts with the underlying purpose of the Bankruptcy Code.20

ANALYSIS

A. Did the Arbitration Agreement Survive Bankruptcy?

Mr. Bateman first argues that the Customer Agreement (and hence the arbitration provision) is no longer valid because it was effectively discharged and rendered unenforceable in his bankruptcy. He relies primarily on Harrier v. Verizon Wireless Personal Comm. LP ,21 and notes that this decision was recently cited with approval in the order denying arbitration of his State Court Action.

But courts do not agree on how a bankruptcy discharge impacts an agreement to arbitrate. Some, such as the Harrier court, conclude that if an agreement is not reaffirmed, the bankruptcy discharge nullifies the contract and renders it-and any arbitration clause contained therein-totally unenforceable.22 Other courts reason that a discharge is limited to relieving the debtor from personal liability and the arbitration agreement survives the discharge.

*62523 This court finds the latter approach to be more consistent with both the text and structure of the Bankruptcy Code.24

A chapter 7 discharge is provided under § 727 of the Bankruptcy Code.25 Section 727(b) "discharges the debtor from all debts " and "any liability on a claim" that arose, or are determined to arise, before the bankruptcy is filed.26 Section 727(b) thus defines the scope of the discharge that Mr. Bateman received in 2014. He was relieved of all of his pre-petition debts, including the amount owed Verizon.

Section 524 of the Code sets forth the effect of a discharge and defines the scope of the discharge injunction which is applicable to all chapters of the Bankruptcy Code.27 A discharge voids any judgments for personal liability of the discharged debt and generally enjoins any effort to collect the discharged debts.28 Section 524 also limits the discharge by providing detailed instructions on how a debt may be reaffirmed and excepted from the discharge.29 But nothing in § 524 expands the discharge granted under § 727. Indeed, the Supreme Court has made clear that the effect of a chapter 7 discharge is simply to relieve the debtor of personal liability.30

The fact that Mr. Bateman did not reaffirm his debt with Verizon does not change this analysis. Section 524(c) is an exception to the general discharge provided in § 727. It provides that an agreement to reaffirm a debt is only enforceable against the debtor if that agreement complies with the strict requirements of the statute.31 Read in context, the "agreement" referred to in § 524(c) is the potential reaffirmation agreement. It is not the underlying contract that formed the basis of the original debt. Section 524(c) painstakingly instructs how to create a valid and enforceable reaffirmation agreement. It does not speak to the original contract between the debtor and the creditor.

But even if the Customer Agreement is unenforceable after a bankruptcy discharge, it is well-settled "as a matter of substantive federal arbitration law, [that] an arbitration provision is severable from the remainder of the contract."32 So even if the financial obligations of the Customer Agreement are unenforceable after a discharge, the arbitration provision is severable and survives.

*626Similarly, any implied "rejection" of the Customer Agreement under § 365 of the Bankruptcy Code does not void the arbitration provision.33 The record is not clear if the Customer Agreement was an "executory contract" when Mr. Bateman filed bankruptcy. It is not listed as such on his bankruptcy schedules, and he indicates only that his last use of the cell phone was in 2013 (Doc. 1, p. 20). But if the Customer Agreement was executory and if it was impliedly rejected, the rejection simply means that the contract is in "breach."34 Few would argue that a "breach" of a contract would terminate an arbitration clause contained in the contract.35 It is the very reason for the arbitration clause in the first place. Similarly, if a contract terminates before bankruptcy, that does not void a severable agreement to arbitrate.36

Although the court is skeptical that the arbitration agreement between Mr. Bateman and Verizon truly is a negotiated contract within the meaning of a statute enacted in 1925,37 particularly since Verizon can unilaterally change any term at any time, the Supreme Court does not distinguish between consumer and commercial arbitration.38 And this court is bound to uphold consumer as well as commercial arbitration agreements.

For these reasons, the court concludes that the arbitration agreement between Mr. Bateman and Verizon is valid and survives Mr. Bateman's discharge.

B. But did the Parties Agree to Arbitrate the Contempt Motion?

Verizon argues that the Motion for Contempt falls within the broad scope of the arbitration agreement because it "necessarily results from his relationship with Verizon and the cellular services provided by Verizon, as it stems from efforts to collect on a debt that Bateman incurred as a result of using Verizon's services" (Doc. 29, ¶ 31). Mr. Bateman responds that enforcement of the Discharge Order is unrelated to the Customer Agreement and thus falls outside the scope of the arbitration agreement (Doc. 36, p. 11).

In bankruptcy, "the interpretation of private contracts is ordinarily a question *627of state law."39 Florida law provides the necessary guidance.

Arbitration agreements generally fall into one of two categories: (1) agreements narrow in scope and application, and (2) agreements broad in scope and application.40 A narrow arbitration provision requires arbitration for claims "arising out of" the subject contract.41 In contrast, a broad arbitration provision typically requires arbitration for claims "arising out of or relating to" the subject contract.42 Addition of the words relating to broadens the scope of an arbitration provision to include claims that have a "significant relationship" to the contract.43

The arbitration provision in the Customer Agreement is obviously broad in scope because it requires arbitration of "any dispute that in any way relates to or arises out of this agreement [.]" (Doc. 29-3, p. 9) (emphasis added). So the inquiry is whether the Motion for Contempt bears a significant relationship to the Customer Agreement.

Such a significant relationship exists when there is a "contractual nexus" between the claim and the contract.44 "A contractual nexus exists between a claim and a contract if the claim presents circumstances in which the resolution of the disputed issue requires either reference to, or construction of, a portion of the contract."45 Conversely, "a claim does not have a nexus to a contract if it pertains to the breach of a duty otherwise imposed by law or in recognition of public policy, such as a duty under the general common law owed not only to the contracting parties but also to third parties and the public."46 Indeed, a "relationship between the dispute and the contract is not satisfied simply because the dispute would not have arisen absent the existence of a contract between the parties."47 "[T]hat a dispute could not have arisen but for the agreement does not mean that the dispute necessarily 'relates to' that agreement."48

Verizon misses the mark when describing the nature of the Motion for Contempt.49 Mr. Bateman does not argue that *628the debt collection letter from Verizon's agent violated the Customer Agreement. Rather, Mr. Bateman seeks an order of this court holding Verizon in contempt for violating the Discharge Order and the discharge injunction in 11 U.S.C. § 524.

The lack of a nexus is apparent. The Customer Agreement bears no relation to the issue of contempt. Indeed, to determine if the Convergent letter rises to the level of contempt, it is not even necessary to look at the Customer Agreement. Although federal policy does require that doubts generally be resolved in favor of arbitration, federal policy cannot serve to stretch a contract beyond the scope originally intended by the parties.50

More importantly, a court has a significant interest in enforcing any injunction it issues, and this court has not agreed to arbitrate its contempt powers. As discussed in more detail below, the court has a substantial interest in enforcing its own orders and protecting the integrity of the discharge injunction.51 Contempt powers are vital and significant to any judicial process, but are particularly crucial when enforcing injunctions. And they may include, in the proper case, those traditional sanctions for coercing compliance with an injunction such as incarceration or financial penalty.52

C. Is there an Inherent Conflict between Enforcement of the Arbitration Agreement and the Underlying Purposes of the Bankruptcy Code?

Enforcement of an arbitration provision under the FAA may be overridden by a "contrary congressional command."53 To determine this congressional intent, the Supreme Court directs courts look to three factors: "(1) the text of the statute; (2) its legislative history; and (3) whether 'an inherent conflict between arbitration and the underlying purposes [of the statute]' exists."54

The Eleventh Circuit already has found "no evidence within the text or in the legislative history that Congress intended to create an exception to the FAA in the *629Bankruptcy Code."55 This finding was in the context of a motion to compel arbitration of a "non-core" bankruptcy proceeding involving damages under a complex commercial construction contract. Indeed, in such non-core proceedings, the Eleventh Circuit has stated that bankruptcy courts have no discretion to ignore a valid arbitration agreement negotiated between parties to the dispute.56

But with respect to "core" bankruptcy matters, the Eleventh Circuit has left the door open, and directed consideration of whether an inherent conflict exists between enforcement of an arbitration provision and the underlying purposes of the Bankruptcy Code.57 Because Mr. Bateman's Motion for Contempt falls within this court's "core" jurisdiction, the court must therefore determine whether enforcing the parties' arbitration agreement presents an inherent conflict with the underlying purposes of § 524(a)(2) and the Discharge Order.

Most recently, the Second Circuit answered this precise question with a resounding yes.58 The Anderson court affirmed the bankruptcy court's conclusion that a dispute as to an alleged discharge violation should not be sent to arbitration. In so ruling, the Second Circuit found a specific and inherent conflict between enforcement of the arbitration agreement and enforcement of a bankruptcy discharge. The court noted that "the successful discharge of a debt is not merely important to the Bankruptcy Code, it is its principal goal," and further finds that enforcement of a discharge "strikes at the heart of the bankruptcy court's unique powers to enforce its own orders."59

The Eleventh Circuit likewise recognizes the unique contempt powers of a bankruptcy court to enforce a discharge injunction. In Alderwoods , Judge Tjoflat writes:

Bankruptcy judges like district judges have the power to coerce compliance with injunctive orders. In the bankruptcy context, "the creditor who attempts to collect a discharged debt is violating not only a statute but also an injunction and is therefore in contempt of the bankruptcy court that issued the discharge." (citations omitted) ... In addition to the traditional sanctions for contempt for coercing compliance with an injunction-incarceration or financial penalty (citation omitted)-a bankruptcy court may issue orders to obviate conduct that stands to frustrate administration of the Bankruptcy Code (citations omitted).60

Judge Tjoflat concludes that "the court that issued the injunctive order alone possesses the power to enforce compliance with and punish contempt of that order."61

Accordingly, the court finds that arbitration of a contempt proceeding for violation of the discharge injunction inherently conflicts with the Bankruptcy Code and undermines the bankruptcy court's authority *630to enforce its orders and exercises its powers of contempt.62

For these reasons, the Motion to Compel is denied. The court will enter a separate order denying the motion and setting a schedule for further proceedings.