After confirmation of chapter 11 plan, a bankruptcy judge in Delaware held that the Supreme Court’s Coinbase decision requires staying prosecution of an adversary proceeding when the defendant is appealing the bankruptcy court’s denial of an arbitration motion.

Bankruptcy Judge Mary F. Walrath was careful to say that her December 13 opinion should not be understood to mean “that the holding in Coinbase is applicable to all adversary proceedings in bankruptcy cases.”

In Coinbase, the Supreme Court held 5/4 that denial of a motion to compel arbitration automatically imposes a stay on the entire action in the trial court, pending appeal from the order denying arbitration. Coinbase Inc. v. Bielski, 143 S. Ct. 1915, 216 L. Ed. 2d 671 (Sup. Ct. June 23, 2023). To read ABI’s report, click here.

The Lawsuit After Confirmation

The corporate debtors had sold all of its physical assets and confirmed a chapter 11 plan vesting causes of action in the reorganized debtor. At the outset of the chapter 11 case, the debtors had sued a third party on claims including breach of contract and fraud. The debtors alleged that the defendants all along intended “to acquire the [debtors’] most valuable asset, their manufacturing plant, for themselves without fulfilling” their obligations under a contract with the debtors.

The defendants had filed a motion to compel arbitration. Previously in the adversary proceeding, Judge Walrath decided that some of the claims were arbitrable and others were not. The defendants filed an appeal from that portion of the decision where Judge Walrath ruled that the claims were not subject to arbitration.

Citing Coinbase, the defendants filed a motion to enjoin the adversary proceeding in bankruptcy court pending outcome of the appeal. Naturally, the reorganized debtor objected.

What Does Coinbase Mean?

Judge Walrath interpreted Coinbase to mean “that a district court must stay its proceedings pending an interlocutory appeal of the arbitrability of the case.” The debtor argued that the Supreme Court made an exception for bankruptcy appeals, noting that footnote 6 in the Court’s majority opinion refers to 28 U.S.C. § 158(d)(2)(D) as a circumstance in which there should not be an automatic stay.

Judge Walrath disagreed with the debtor. She said “that footnote 6 of Coinbase cannot be read to create an exception for all bankruptcy appeals. That footnote does not reference bankruptcy appeals generally; it cites as a statutory exception only subsection 158(d)(2)(D), which is limited to direct appeals from the bankruptcy court to the court of appeal.”

Judge Walrath held that “footnote 6 of Coinbase does not indicate an intention by the Supreme Court to exclude all bankruptcy appeals from its holding that an appeal of denial of arbitration creates an automatic stay of the proceeding pending appeal.”

Coinbase Covered Bankruptcy Courts

Next, the debtor contended that Coinbase did not apply because the Supreme Court only referred to district courts and did not mention bankruptcy courts.

Again, Judge Walrath disagreed. She said that bankruptcy courts are “units” of the district courts. She concluded that “a reference to district courts in Coinbase can logically be interpreted to include the bankruptcy courts.”

Bankruptcy Isn’t Always Unique

Judge Walrath characterized the debtor as contending that Coinbase should not apply because “the Supreme Court and the Third Circuit have acknowledged [that] the unique nature of bankruptcy cases . . . mandates a different practice for bankruptcy appeals.”

Citing academics who foresaw problems in applying Coinbase to bankruptcy appeals, Judge Walrath noted that an automatic stay “could cause disruptive — and clearly unintended — delays in bankruptcy cases ‘where time is often of the essence.’” She agreed that bankruptcy cases “are different” because “they involve numerous (sometimes thousands) of different parties and many issues that may affect directly or indirectly some or all of those parties.”

“The difference,” Judge Walrath said, “requires different appellate practices and procedures.” “However,” she “agree[d] with the Defendant[s] that the policy behind these different practices and procedures in bankruptcy cases is not applicable to the instant adversary proceeding” because “there are essentially only two parties,” not thousands.

Furthermore, Judge Walrath said “there are no significant other issues that depend on the outcome of this adversary proceeding. The Debtors’ Plan has been confirmed and there are few administrative matters pending.” As a result, she said, “[T]his adversary proceeding is more akin to a civil action in district court than to a typical bankruptcy matter.”

Holding that the appeal was not frivolous, Judge Walrath decided to “stay this entire adversary proceeding, pending final resolution of the Defendants’ appeal of this Court’s order denying their Motion to Dismiss the adversary in favor of arbitration.”

Observations

In ABI’s report on Coinbase, we made the following observation:

The Supreme Court has yet to decide where or to what extent arbitration clauses are enforceable in bankruptcy. Is arbitration always prohibited, or only when the dispute falls within the bankruptcy court’s “core” jurisdiction?

The majority opinion does not limit the automatic stay rule to particular sorts of cases. Presumably, it also applies in bankruptcy.

Suppose a creditor’s agreement with the debtor contains a broadly worded arbitration clause. What if the debtor objects to the creditor’s claim, the creditor invokes the arbitration agreement, and the bankruptcy court denies the motion to compel arbitration? Is the objection to claim automatically stayed pending appeal to the district court, the circuit court and the Supreme Court?

Or, what about the question of whether a creditor with an arbitration agreement is impaired by a chapter 11 plan? Or, what if the creditor claims that the plan is not fair and equitable? Are the proceedings in bankruptcy court automatically enjoined until there is a final order declining to compel arbitration?

Compelling arbitration in bankruptcy cases could stall chapter 11 cases. Depending on the nature of the issue, a Coinbase automatic stay pending appeal could delay, disrupt or torpedo a reorganization.