Eventually, the Supreme Court will decide whether debtors can be compelled to arbitrate core and non-core disputes with creditors. For now, at least, courts in the Ninth Circuit are giving short shrift to motions to compel arbitration.
In recent years, the Supreme Court has been adamant about enforcing arbitration agreements in nonbankruptcy disputes. In May 2018, the Supreme Court compelled employees to arbitrate wages and hours claims governed by the Fair Labor Standards Act. The court said a statute like the FSLA did not manifest a clear intention to override the Federal Arbitration Act. Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018).
When (and if) the issue reaches the Supreme Court, the question will be this: Does the Bankruptcy Code manifest a clear intention to override the Arbitration Act? Certainly, there is nothing in the language of the Code that bars arbitration. Will the Supreme Court enforce arbitration agreements against debtors or find an exception to arbitration in the overall structure, purpose and policy regarding bankruptcy?
Two years after Epic, the Second Circuit decided that Epic was not controlling and ruled that a debtor is not compelled to arbitrate a claim that a creditor violated the discharge injunction. GE Capital Retail Bank v. Belton (In re Belton), 961 F.3d 612 (2d Cir. June 16, 2020). To read ABI’s report on Belton, click here.
Similarly, the Fifth Circuit held before Belton but after Epic that the bankruptcy court has discretion not to enforce an arbitration agreement when a debtor initiated a class action contending that a creditor had violated the discharge injunction. Henry v. Educational Finance Service (In re Henry), 941 F.3d 147 (5th Cir. Oct. 17, 2019). To read ABI’s report on Henry, click here.
In a California case, an arbitration dispute arose in a chapter 11 case in San Diego. Before bankruptcy, a law firm had been successful in prosecuting a lawsuit on behalf of the debtor. The firm filed a secured proof of claim, saying it had a security interest in proceeds from the judgment.
The debtor objected to the claim, contending that the security interest was invalid or unenforceable. The law firm responded by demanding arbitration under an arbitration clause in the pre-bankruptcy engagement agreement with the debtor.
The bankruptcy court denied the motion to compel arbitration, and the law firm appealed. District Judge Cathy Ann Bencivengo of San Diego affirmed in a four-page opinion on January 20.
According to Judge Bencivengo, the outcome was controlled by the Ninth Circuit’s pre-Epic decision in Kirkland v. Rund (In re EPD Investment Co. LLC), 821 F.3d 1146 (9th Cir. May 9, 2016). To read ABI’s report on EPD, click here.
According to Judge Bencivengo, the bankruptcy court’s discretion under EPD to override an arbitration agreement is governed by three factors: (1) having bankruptcy issues decided in bankruptcy court; (2) the centralization of bankruptcy disputes in bankruptcy court; and (3) avoiding piecemeal litigation.
Judge Bencivengo quickly affirmed denial of arbitration. She said that Bankruptcy Judge Louise D. Adler had not abused her discretion because the application of the facts to the EPD factors was neither “illogical, implausible, [n]or without support in the record.”
Eventually, the Supreme Court will decide whether debtors can be compelled to arbitrate core and non-core disputes with creditors. For now, at least, courts in the Ninth Circuit are giving short shrift to motions to compel arbitration.
In recent years, the Supreme Court has been adamant about enforcing arbitration agreements in nonbankruptcy disputes. In May 2018, the Supreme Court compelled employees to arbitrate wages and hours claims governed by the Fair Labor Standards Act. The court said a statute like the FSLA did not manifest a clear intention to override the Federal Arbitration Act. Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018).
When (and if) the issue reaches the Supreme Court, the question will be this: Does the Bankruptcy Code manifest a clear intention to override the Arbitration Act? Certainly, there is nothing in the language of the Code that bars arbitration. Will the Supreme Court enforce arbitration agreements against debtors or find an exception to arbitration in the overall structure, purpose and policy regarding bankruptcy?
Two years after Epic, the Second Circuit decided that Epic was not controlling and ruled that a debtor is not compelled to arbitrate a claim that a creditor violated the discharge injunction. GE Capital Retail Bank v. Belton (In re Belton), 961 F.3d 612 (2d Cir. June 16, 2020). To read ABI’s report on Belton, click here.
Similarly, the Fifth Circuit held before Belton but after Epic that the bankruptcy court has discretion not to enforce an arbitration agreement when a debtor initiated a class action contending that a creditor had violated the discharge injunction. Henry v. Educational Finance Service (In re Henry), 941 F.3d 147 (5th Cir. Oct. 17, 2019).