US Courts Weigh Arbitration’s Rising Role in Bankruptcy Disputes

Here is a detailed breakdown of where US courts stand on arbitration’s role in bankruptcy disputes, with the most significant recent developments at the front.

The Anchor Case: Goldman Sachs Bank USA v. Brown (4th Cir., March 18, 2026)

The most consequential recent ruling came from the Fourth Circuit in a 2-1 decision. Two consumer debtors — one in Chapter 13, one in Chapter 7 — alleged that Goldman Sachs continued credit card collection calls, emails, and written notices after their bankruptcy filings, in violation of the automatic stay under 11 U.S.C. § 362(a). Goldman Sachs moved to compel arbitration under its cardholder agreements, which required individual arbitration and barred class proceedings.

The Fourth Circuit affirmed denial of the motion, holding that automatic stay enforcement claims under § 362(k) are too core to the bankruptcy process to be diverted to a private arbitral forum. The court applied the Shearson/American Express v. McMahon framework, which allows courts to decline arbitration of statutory claims where there is an “inherent conflict” between arbitration and a statute’s underlying purposes.

The majority identified six specific conflicts:

1. Arbitration would undermine the bankruptcy court’s supervisory authority over the stay

2. It would fracture the centralized administration of the bankruptcy estate

3. It would erode the debtor’s “breathing spell” and fresh-start protections

4. Private arbitral decisions lack uniformity and are minimally reviewable

5. Arbitrators lack bankruptcy judges’ specialized expertise

6. Moving § 362(k) punitive damages to a private forum blunts their deterrent effect

The court also pointed to Senate Report language from the Bankruptcy Reform Act of 1978 explicitly listing arbitration among the proceedings halted by the automatic stay.

The dissenting judge (King, J.) argued there was no true “inherent conflict” — that adjudicating a stay-violation claim in arbitration would neither add nor subtract a creditor from the estate nor frustrate creditor distribution.

Parallel Activity: In re Bruce v. Citibank (S.D.N.Y., January 2026)

Separately, a New York bankruptcy court denied Citibank’s motion to compel arbitration in a long-running discharge injunction case under § 524. The court held that compelling arbitration of claims that Citibank systematically failed to update credit reports post-discharge would “improperly render practically irremediable” an allegedly intentional policy of frustrating discharge orders — a core and defining characteristic of the bankruptcy process. The court also allowed the plaintiff’s declaratory judgment claim to proceed on a district-wide (though not nationwide) class basis.

The Governing Legal Framework

Courts across circuits apply the McMahon test to resolve the FAA-Bankruptcy Code tension. The key distinction is between:

• Core proceedings — claims arising directly from the Bankruptcy Code (automatic stay, discharge injunction) — where courts have broad discretion to refuse arbitration

• Non-core proceedings — claims that happen to arise in a bankruptcy context but are rooted in pre-existing contract or state law — where courts generally must enforce arbitration agreements

The Fourth Circuit’s opinion explicitly noted that the Supreme Court “has not addressed whether arbitration of bankruptcy claims is in conflict with the Bankruptcy Code” — and has twice denied cert in cases where bankruptcy courts refused arbitration on core claims.

Circuit Landscape

The 3rd Circuit remains the most creditor-friendly on this question, creating meaningful circuit tension that has yet to be resolved at the Supreme Court level.

Practical Implications for Consumer Creditors

The Goldman Sachs ruling has direct implications for credit card issuers, debt collectors, and loan servicers:

• Arbitration clauses will not shield post-petition collection activity from bankruptcy court adjudication in the 4th Circuit, and likely in the 2nd, 5th, and 9th as well

• Class action exposure is preserved in this context — the Fourth Circuit did not address Goldman’s class action bar separately, and the SDNY Bruce court allowed district-wide class proceedings

• Punitive damages under § 362(k) remain on the table in bankruptcy court, maintaining a meaningful deterrent that arbitration would have diluted

• Creditors with operations in multiple circuits face inconsistent compliance exposure until the Supreme Court resolves the split — a cert petition in Goldman Sachs v. Brown seems likely given the stakes