If a contract with an arbitration clause has been rejected as an executory contract, the defendant is not entitled to specific performance and may not compel arbitration, according to Bankruptcy Judge Stacey G.C. Jernigan of Dallas.
For our purposes, the facts were simple. The reorganized chapter 11 debtor was suing insiders in Bankruptcy Court to recover on millions of dollars in notes payable to the debtor. The defendants were parties to the debtor’s limited partnership agreement containing a broadly worded arbitration clause.
The defendants filed a motion asking Judge Jernigan to compel arbitration. She denied the motion in an opinion on December 3.
Judge Jernigan began by recognizing the “strong federal policy” for compelling arbitration under the Federal Arbitration Act. She noted how there is no exception allowing bankruptcy courts to ignore arbitration clauses.
Judge Jernigan cited two Fifth Circuit cases allowing bankruptcy courts to decline to enforce an arbitration agreement if the dispute is a “core” proceeding and “enforcement of the arbitration provision would irreconcilably conflict with the purposes or goals of the Bankruptcy Code.” See Gandy v. Gandy (In re Gandy), 299 F.3d 489 (5th Cir. 2002); and Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Nat'l Gypsum Co.), 118 F.3d 1056 (5th Cir. 1997).
Although she said the two cases were “somewhat enlightening,” the case before her was different because the debtor contended that the arbitration agreement was part of an executory contract that had been rejected on confirmation of the plan.
As principal authority for denying the arbitration motion, Judge Jernigan cited a district court opinion from her district and a law review article by Prof. Jay L. Westbrook. See Janvey v. Alguire, 2014 U.S. Dist. LEXIS 193394 (N.D. Tex. Jul. 20, 2014), aff’d on different grounds at 847 F.3d 231 (5th Cir. 2017); and Jay Westbrook, The Coming Encounter: International Arbitration and Bankruptcy, 67 Univ. of Minn. L. Rev. 595 (1983).
Judge Jernigan called Prof. Westbrook “the modern-day expert on executory contracts in bankruptcy.” She cited Prof. Westbrook for characterizing arbitration agreements as classic executory contracts. The professor, she said, went on to say that a court may not compel arbitration under a rejected contract because specific performance against a debtor is no longer available after rejection.
The Janvey decision in district court was virtually identical, except it involved a federal receivership where the receiver had not adopted the arbitration agreement. Upheld by the Fifth Circuit on other grounds, the district court decided that the receiver was not bound to arbitrate.
Judge Jernigan admitted that the bankruptcy court in Delaware had enforced an arbitration agreement in a contract that had been rejected. In re Fleming Companies, Inc., 325 B.R. 687 (Bankr. D. Del. 2005). However, she found Janvey “to be more persuasive.”
Judge Jernigan held that the arbitration clause was “a separate executory agreement that was rejected [that the debtor] cannot be forced to specifically perform.”
To sew up denial of the arbitration motion, Judge Jernigan said that the defendant had waived any right to arbitrate by having litigated for months before raising the issue.
If a contract with an arbitration clause has been rejected as an executory contract, the defendant is not entitled to specific performance and may not compel arbitration, according to Bankruptcy Judge Stacey G.C. Jernigan of Dallas.
For our purposes, the facts were simple. The reorganized chapter 11 debtor was suing insiders in Bankruptcy Court to recover on millions of dollars in notes payable to the debtor. The defendants were parties to the debtor’s limited partnership agreement containing a broadly worded arbitration clause.
The defendants filed a motion asking Judge Jernigan to compel arbitration. She denied the motion in an opinion on December 3.