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Joan Johnson v. S.A.I.L., LLC (In re: Joan Johnson)

22 A 00172, 22 B 08837
Debtor borrowed money from SAIL prepetition.  The agreement between Debtor and SAIL provided for arbitration of all disputes.  SAIL filed a proof of claim in Debtor’s chapter 13 case.  Debtor filed a three count adversary proceeding objecting to SAIL’s claim and bringing a counterclaim.  In response, SAIL filed a motion to compel arbitration of all three counts of the complaint.  HELD: When an arbitration demand is made in a bankruptcy case, a conflict exists as to whether the court should enforce the bilateral arbitration agreement, or its in rem jurisdiction over the claims under the Bankruptcy Code.  Neither the Seventh Circuit nor the Supreme Court have addressed the narrow issue regarding the potential conflict between the Federal Arbitration Act and the Bankruptcy Code.  Counts I and III object to SAIL’s claim on the grounds that it is unenforceable under state law, specifically the Predatory Loan Prevention Act and the Consumer Fraud and Deceptive Business Practices Act.. Resolution of Counts I and III involves the allowance or disallowance of a claim against the estate, and must necessarily be determined in adjudicating SAIL’s claim.  Debtor’s plan will not be confirmed, creditors will not receive distributions, and Debtor’s discharge will not issue until Counts I and III are resolved.  If arbitration of these claims for relief is permitted, there would be an inherent conflict with the Bankruptcy Code, so the motion to compel must be denied.  Count II is a counterclaim under the Illinois Interest Act.  This claim for relief arises solely under state law.  Its resolution does not impact adjudication of SAIL’s claim. Debtor’s plan can be modified at a later date to provide for distribution to creditors of any recovery under Count II.  Sending this claim for relief to arbitration does not inherently conflict with the purposes of the Bankruptcy Code, and the motion to compel arbitration is granted as to Count II.

Tuesday, March 28, 2023