When a contract for the sale of assets contained an arbitration clause, but the bankruptcy court retained jurisdiction to resolve disputes, the Third Circuit affirmed the lower courts and held that the bankruptcy court was entitled to interpret the contract.
The chapter 11 debtor sold assets for $280 million. Later approved by the bankruptcy court, the contract included post-closing adjustments to account for cash and accounts payable. If the buyer and seller could not agree on the adjustments, the contract called for an accounting firm to resolve “any disputed items.”
The sale approval order provided for the bankruptcy court to retain jurisdiction to “interpret . . . and enforce terms and provisions of” the sale contract. The sale contract itself included a section saying that “any and all claims . . . relating to this agreement . . . shall be filed and maintained only in the Bankruptcy Court.”
When the debtor was unable to resolve post-closing adjustments with the buyer, the debtor initiated an adversary proceeding in bankruptcy court to resolve the disputes. Affirmed in district court, the bankruptcy court ruled that the disputes were not subject to arbitration.
Conducting a de novo review, Circuit Judge Julio M. Fuentes sided with the lower courts and held in a nonprecedential opinion on July 27 that the disputes were not arbitrable.
Judge Fuentes said that the arbitration agreement called for arbitration of “disputed items,” not “disputes.” “Disputed items,” he said, is a term of art in accounting that restricts the scope of the arbitration clause to disputes over accounting terms.
To rule that questions of contract interpretation were subject to arbitration “would essentially nullify” the provision in the contract giving the bankruptcy court sole responsibility for resolving “claims . . . relating to the” agreement, Judge Fuentes said.
Adopting an interpretation giving effect to all provisions in the agreement, Judge Fuentes interpreted “‘disputed item’ to exclude threshold matters of contract interpretation, which may be resolved by the courts in the first instance.”
Judge Fuentes was careful to say that the appeals court was not barring the parties from agreeing to arbitrate accounting issues. “We only conclude that the parties here have not done so,” he said.