Even though the creditor had filed a proof of claim, a district judge in Arkansas reversed the bankruptcy court and compelled arbitration to determine whether the creditor owed money to the debtor, or vice versa.
The chapter 7 debtor was a grain broker. The trustee initiated a turnover proceeding, alleging that a customer owed several million dollars for grain and shipping costs. The claim against the creditor was the largest asset of the estate.
Disputing the debt in total, the customer filed a claim. The customer moved to compel arbitration of the trustee’s claims, relying on the contracts with the broker that all contained clauses calling for arbitration before the National Grain & Feed Association.
The bankruptcy court denied the arbitration motion, saying that the trustee’s turnover action under Section 542 was a core proceeding. District Judge D.P. Marshall, Jr. of Little Rock, Ark. reversed in an opinion on Aug. 16, stayed the trustee’s action in bankruptcy court, and ordered arbitration. If the arbitrators eventually rule in favor of the trustee, Judge Marshall said the trustee could then pursue the turnover action in bankruptcy court.
Judge Marshall said that characterizing the turnover proceeding as core was a “foundational legal error” because there was no “mature debt” given that the creditor hotly contested the existence of any debt at all. Thus, there was “no work for the turnover power to do yet,” the judge said.
Having concluded that the proceeding in bankruptcy court was not core, Judge Marshall ordered arbitration to avoid “constitutional issues.” He said that the grain association “has been resolving these kinds of disputes for more than a century.”
Because it involved disputed claims brought by the trustee under state law, Judge Marshall was likely correct in saying that the purported turnover proceeding was not core, standing alone. Or, even if it was core, technically speaking, the bankruptcy court might not have final adjudicatory power under Stern v. Marshall. However, the opinion does not discuss the consequences flowing from the proof of claim that the customer filed, such as the question of whether the trustee’s claims could be determined in the process of deciding the validity of the claim filed by the creditor.
In the Second Circuit, a significant appeal is pending to resolve a split among the district courts in the Southern District of New York and decide whether an arbitration agreement is enforceable when a bankrupt mounts a class action claiming that a creditor violated the discharge injunction. In Credit One Financial v. Anderson (In re Anderson), 16-2496 (2d Cir.), the appeal is currently scheduled for oral argument during the week of Oct. 23. To read ABI’s discussion of the two cases in the S.D.N.Y., click here and here.