Goldman Sachs gets Supreme Court review of 4th Circuit arbitration loss

The Supreme Court agreed Friday to decide whether a bankruptcy court can refuse to send a dispute to arbitration, taking up a petition from Goldman Sachs Bank USA in a fight over card collections that could shape how lenders enforce the arbitration clauses in consumer credit agreements.

Goldman says the stakes reach far beyond its own case. In its petition, the bank told the justices that a ruling against it by the U.S. Court of Appeals for the 4th Circuit “imperils the enforceability of arbitration agreements” in many consumer credit contracts, SCOTUSblog reported. The court will decide whether, and under what circumstances, a bankruptcy court may override the Federal Arbitration Act and refuse to honor a valid arbitration agreement for claims under Section 362(k) of the Bankruptcy Code, which lets debtors sue over violations of the automatic stay.

That stay bars creditors from trying to collect from people once they file for bankruptcy. The case began in 2023, when two consumers filed for bankruptcy, one in June and one in November, and listed credit card debts with Goldman, which does business as Marcus by Goldman Sachs. Within days, the court's noticing center told the bank about the filings and the stay, according to the 4th Circuit's published opinion. The debtors said Goldman kept contacting them anyway, by email and telephone, for months.

The two sued the bank inside their bankruptcy cases, alleging willful violations of the stay and seeking damages, punitive damages and attorneys' fees. They also sought to represent a nationwide class of consumers in bankruptcy from whom Goldman had demanded payment of debts owed before they filed. That class claim is part of what is at stake. Goldman's card agreements let either side elect individual binding arbitration and bar claims from being arbitrated on a class basis. They also leave disputes over the clause's validity and scope to a court, and they limit an arbitrator to awarding relief on an individual claim. Two consumer bankruptcy groups, the National Association of Consumer Bankruptcy Attorneys and the National Consumer Bankruptcy Rights Center, filed a brief supporting the debtors in the 4th Circuit.

Goldman moved to compel arbitration. The bankruptcy court refused, reasoning that the claim stems from the bankruptcy itself, and a federal district court in Virginia affirmed. In March, a divided 4th Circuit panel upheld those rulings. Writing for the majority, Judge Niemeyer, joined by Judge Harris, said there were substantial arguments on both sides but concluded that arbitration “would interfere and conflict with the strong and established policies and purposes of the Bankruptcy Code.”

The majority stressed that the stay protects debtors and creditors alike by keeping disputes over a debtor's assets in one forum. It also distinguished a 2006 decision by the 2nd Circuit, MBNA America Bank v. Hill, which held that a bankruptcy court had no discretion to deny arbitration of a stay-violation claim. In that case, the majority noted, the debtor had already received her discharge and her Chapter 7 case had been closed. The majority also pointed to the Senate report accompanying the Bankruptcy Reform Act of 1978, which described the stay's scope as broad and said it halts all proceedings, including arbitration.

Judge King dissented. He wrote that Supreme Court precedent readily compelled sending the claims to arbitration and that the majority had needlessly created a split with the 2nd Circuit, the only other federal appeals court to address whether a claim under the automatic stay belongs in arbitration. That conflict was central to Goldman's petition.

The bank filed its petition in June, and the American Bankers Association filed a brief supporting it. The justices considered the petition at four consecutive conferences before granting it in a Nov. 6 order, according to the court's docket. Roman Martinez of Latham & Watkins, who argued the appeal for Goldman in the 4th Circuit, is the bank's counsel of record.

The case is likely to be argued next year, with a decision expected by late June or early July, SCOTUSblog reported.