By: Donald L Swanson
A recent bankruptcy opinion[fn. 1] recites the following arbitration policies under the Federal Arbitration Act (“FAA”), based on an old U.S. Supreme Court opinion[fn. 2]:
- “The FAA is rooted in the notion that arbitration agreements are private contracts affecting commerce, creating a strong presumption in favor of the parties’ agreement to privately resolve disputes”; and
- “the FAA establishes a federal policy favoring arbitration“ (emphasis added).
Supreme Court Clarification
But the U.S. Supreme Court has clarified such presumption and policy in Morgan v. Sundance, Inc., 596 U.S. 411 (2022), like this:
- “Nine circuits, including the Eighth, have invoked ‘the strong federal policy favoring arbitration’ in support of an arbitration-specific waiver rule demanding a showing of prejudice;
- “Two circuits have rejected that rule”; and
- “We do too” (at 416).
Supreme Court Explanation
The Supreme court explains, in Morgan v. Sundance:
- “the FAA’s ‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules”;
- “Our frequent use of that phrase connotes something different”;
- “The policy . . . is merely an acknowledgment of the FAA’s commitment to overrule the judiciary’s longstanding”
- “refusal to enforce agreements to arbitrate”; and
- “to place such agreements upon the same footing as other contracts”; or
- “in another formulation: The policy is to make arbitration agreements as enforceable as other contracts, but not more so” (id. at 418).
The Supreme Court explains further, in Morgan v. Sundance:
- “a court must hold a party to its arbitration contract just as the court would to any other kind”; but
- “a court may not devise novel rules to favor arbitration over litigation”;
- “If an ordinary procedural rule—whether of waiver or forfeiture or what-have-you—would counsel against enforcement of an arbitration contract, then so be it”; and
- “The federal policy is about treating arbitration contracts like all others”;
- it is “not about fostering arbitration” (id.).
Supreme Court Emphasis
And the Morgan v. Sundance Supreme Court opinion provides this emphasis:
- “the FAA’s policy is based upon the enforcement of contract, rather than a preference for arbitration as an alternative dispute resolution mechanism” (id.).
Conclusion
Every bankruptcy opinion on arbitration needs to include the U.S. Supreme Court’s Morgan v. Sundance clarification of presumptions and policies under the Federal Arbitration Act.
The clarification is that federal policies on arbitration are limited to this:
- contractual arbitration rights are to be treated and enforced like any other contract right; and
- nothing more and nothing less.
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Footnote 1. Brown v. Goldman Sachs Bank USA (In re Brown), Adv. Pro. No. 24-07009, Western Virginia Bankruptcy Court (decided 7/15/2024, Doc. 23), at 6 (emphasis added).
Footnote 2. The U.S. Supreme Court opinion is Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220 (1987).
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