Following the Supreme Court’s decision in Henry Schein, a district judge in New York reversed and ruled that the bankruptcy court should have allowed the arbitrators to decide which claims are arbitrable and which are not.

The appeal involved noncore claims that the debtor was bringing against a third party. In her April 22 decision, District Judge Colleen McMahon left the door open for a bankruptcy court to refuse to order arbitration when there are “compelling concerns peculiar to bankruptcy.”

The Integrated Agreements

About 18 months before bankruptcy, the debtor entered into three agreements with a third party. The primary contract was a so-called co-location agreement. The second was a note where the debtor lent the third party $20 million to purchase equipment needed to perform the co-location agreement. The third was a security agreement to secure the loan.

Only the co-location agreement contained an arbitration clause.

Soon after chapter 11 confirmation, the debtor filed an adversary proceeding in bankruptcy court against the third party. The complaint contained 10 claims, some aimed at collecting the loan and others with claims under the co-location agreement.

The third party filed a motion to compel arbitration. Seeing “no special bankruptcy concerns,” the bankruptcy court ordered arbitration of four claims that clearly arose from the co-location agreement, the only agreement with an arbitration clause.

The bankruptcy court denied the arbitration motion as to the six other claims, because they dealt with the note, which had no arbitration clause. The third party prosecuted an expedited appeal and won.

The ‘Broad’ Arbitration Clause

The language of the arbitration agreement in the co-location agreement was pivotal. Judge McMahon called it “exceptionally broad.”

The first half of the arbitration clause was relatively ordinary. It said that the parties would arbitrate “any dispute . . . in connection with this Agreement exclusively” under the rules of the American Arbitration Association. But there was more.

In block capital letters, the paragraph went on to say that the parties “IRREVOCABLY AND UNCONDITIONALLY . . . SUBMIT ANY DISPUTE OF ANY NATURE BETWEEN THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT TO ARBITRATION AS PROVIDED FOR ABOVE.”

To divine the import of the arbitration clause, Judge McMahon said that “a court must determine whether the parties made an agreement to arbitrate.” She therefore said that the bankruptcy court properly decided whether the debtor “made an agreement to arbitrate all such disputes.”

Judge McMahon said that the bankruptcy court “reached the wrong answer” by believing that arbitration applied only to claims “arising under” the co-location agreement. “In fact,” she said, the words “arising under” appear “nowhere” in the arbitration clause. She went on to say that the words in the agreement — “in connection with” — do not mean “arising under.”

Of greater import, Judge McMahon said that boldface language was “significant,” in particular the words “of any nature.” The parties had agreed to arbitrate “ANY DISPUTE OF ANY NATURE BETWEEN THE PARTIES RELATING IN ANY WAY TO THIS AGREEMENT.” [Emphasis in original.]

To counter the broad language, the debtor contended that the six claims were not arbitrable because it was a three-part, unitary transaction. When there are agreements made simultaneously, some with arbitration and some without, Judge McMahon said,

[O]nly clear and unequivocal evidence indicating that the arbitration clause extends to all the contracts will result in the application of the arbitration agreement in one such contract to disputes arising under another.

Because “arising under” was not the test for arbitrability, Judge McMahon vacated the order denying the arbitration motion as to the six other claims.

Who Decides Arbitrability of Claims?

Judge McMahon addressed the next question: Who should decide whether the disputes relate “in any way” to the co-location agreement?

For the answer, Judge McMahon turned to Henry Schein Inc. v. Archer & White Sales Inc., 586 U.S. 63 (Sup. Ct. Jan. 8, 2019), where the Supreme Court held that arbitrators have the exclusive right to determine whether a dispute is within the scope of an arbitration agreement when the arbitration agreement “clearly and unmistakably” so states. To read ABI’s report on Henry Schein, click here.

Stated in the converse, Judge McMahon said that the presumption of arbitrability can be rebutted only with “clear and unmistakable” evidence from the arbitration agreement, citing Second Circuit authority. She also cited the Second Circuit for saying that “mere reference” to AAA rules “does not necessarily” indicate the requisite “clear and convincing” intent to arbitrate.

Reading the arbitration agreement before her, Judge McMahon said that the parties “clearly and unmistakably” agreed to arbitrate anything related “in any way” to the co-location agreement, because there was “much” more than a mere reference to AAA rules.

Judge McMahon ruled that the bankruptcy court “should have sent the entire matter — all ten claims — to the AAA for arbitration.” There, she said that the “first order of business will be for the arbitrator to decide which, if any, of the claims are arbitrable.”

The Escape Hatch

Judge McMahon saw “one last wrinkle.”

“[E]ven when a claim is contractually arbitrable,” Judge McMahon said, “it is possible for a bankruptcy court to decide, in its discretion, not to submit that claim to arbitration, because doing so would implicate compelling concerns peculiar to bankruptcy.”

In the case at hand, Judge McMahon said that the bankruptcy court had “correctly concluded” there were no bankruptcy concerns with respect to the four claims where the bankruptcy court had ordered arbitration. Those four were noncore claims.

Judge McMahon saw “no peculiar bankruptcy rights or concerns” in the other six claims, because they all arose under common law, state law, or nonbankruptcy federal law.

Judge McMahon vacated the order below and ordered the parties to submit the disputes to arbitration “immediately,” with the arbitrator to decide “any challenge to arbitrability.”