We follow arbitration cases in the Supreme Court because the justices have never granted certiorari to decide whether arbitration agreements are generally enforceable in bankruptcy. For example, must a debtor arbitrate the allowance of a claim or rejection of an executory contract or even enforcement of a plan that impairs a creditor’s claim?
Late last week, the justices ruled 8/1 in Badgerow v. Walters, 20-1143 (Sup. Ct. March 31, 2022), that there must be an independent basis of federal jurisdiction to mount an action in federal court to confirm (or to attack confirmation of) an arbitration award. The opinion means this: The federal court may have had subject matter jurisdiction to compel arbitration but may not have jurisdiction later to confirm or enforce the resulting award.
As expected, the opinion has no language that would apply expressly to bankruptcy. At best, the new opinion could be read to mean that federal courts do not champion arbitration in all circumstances.
Another arbitration case was argued in the Supreme Court on March 30: Viking River Cruises Inc. v. Moriana, 20-1573 (Sup. Ct.). The case deals with the ability of a state to curtail an arbitration agreement. We will not speculate on the outcome.
The Issue in Badgerow
An employee had an arbitration clause in her employment agreement. She launched an arbitration against her employer and lost.
Alleging that the arbitration proceedings has been infected with fraud, she sued her employer in state court to vacate the arbitration award. The employer removed the suit to federal district court. The district court decided that it had jurisdiction, denied the employee’s motion to remand, and confirmed the award.
The Fifth Circuit affirmed. Like the district court, the New Orleans-based appeals court looked through the petition and found subject matter jurisdiction because the employee’s underlying claims were based on federal law.
The Supreme Court granted certiorari to resolve a 4/2 circuit split, where the majority of circuits found jurisdiction if the underlying dispute was based on federal law.
Different Jurisdiction for Compelling and Confirming
Justice Elena Kagan reversed, writing the opinion for the majority. She based the outcome on differing provisions in the Federal Arbitration Act, or FAA.
Section 4 of the FAA deals with enforcing arbitration agreements. It provides that a party may petition to enforce an arbitration agreement in “any United States district court which, save for such agreement, would have jurisdiction . . . of the subject matter of a suit arising out of the controversy between the parties.”
In Vaden v. Discover Bank, 556 U.S. 49 (2009), Justice Kagan said, the Supreme Court held that the court will “look through” to the underlying dispute to decide whether there is jurisdiction. If there is diversity or if a federal question will be arbitrated, then the district court has jurisdiction to compel arbitration.
Enforcement of an arbitration award does not fall under Section 4 of the FAA. Rather, enforcement is under Sections 9 and 10. Justice Kagan based her holding on the conclusion that “[t]hose sections lack Section 4’s distinctive language directing a look-through, on which Vaden rested.”
In other words, ordinary rules about subject matter jurisdiction apply to petitions for confirmation of an arbitration award because Sections 9 and 10 do not have their own special provisions governing jurisdiction. When the petition to the district court is for enforcement of an award, Justice Kagan said that the court must decide whether there is jurisdiction without relying on the subject matter of the underlying dispute.
In other words, if the parties are diverse, there is jurisdiction. Or, if enforcement itself raises a federal question, there would be jurisdiction to confirm an award.
In the case on certiorari, Justice Kagan said that the parties were not diverse and there was no federal question regarding confirmation of the award.
Rather, the issue regarding enforcement of the arbitration award was nothing “more than a contractual resolution of the parties’ dispute . . . . And quarrels about legal settlements — even settlements of federal claim — typically involve only state law, like disagreements about other contracts.”
There being no diversity and no federal question controlling confirmation of the award, Judge Kagan reversed and remanded, since enforcement would turn on state contract law. Presumably, confirmation of the award will be vacated for lack of subject matter jurisdiction, and the employee will have her day in state court to attack the confirmation award.
Any Applicability to Bankruptcy?
On the surface, there is little or nothing on the face of the opinion regarding enforcement of arbitration agreements in bankruptcy. Furthermore, the decision deals with enforcement of arbitration awards, not enforcement of arbitration clauses.
In recent terms, the Supreme Court has been adamant about enforcing arbitration agreements. See, e.g., Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018). One might perhaps read Badgerow to mean that federal courts are not bound by the FAA to enforce arbitration clauses and awards in all circumstances. However, Badgerow is not based on policy. It’s based strictly on statutory interpretation.
When it comes to enforcement of arbitration agreements, Vaden and Badgerow both suggest that the bankruptcy court has “related to” jurisdiction even if there is no diversity and no federal question.
Still, having jurisdiction does not automatically mean that the bankruptcy court must enforce an arbitration clause. In Epic, the Supreme Court said that courts must compel arbitration unless the federal statute manifests a clear intention to override the FAA. Does the Bankruptcy Code manifest a clear intention to override an arbitration agreement?
Although it was decided before Epiq, some circuits still interpret Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987), liberally by overriding arbitration agreements in bankruptcy cases, even though the Bankruptcy Code contains no express language barring enforcement of the FAA. See, e.g., Credit One Bank NA v. Anderson (In re Anderson), 884 F.3d 382 (2d Cir. March 7, 2018), cert. denied, 139 S. Ct. 144 (2018). To read ABI’s report, click here.
Centrality of administration is evident throughout the Bankruptcy Code, in provisions like the automatic stay, the requirement to file claims, and the encompassing nature of “core” jurisdiction. Perhaps those (less than explicit) provisions in bankruptcy law would persuade the Supreme Court to override arbitration agreements in most bankruptcy disputes.
We follow arbitration cases in the Supreme Court because the justices have never granted certiorari to decide whether arbitration agreements are generally enforceable in bankruptcy. For example, must a debtor arbitrate the allowance of a claim or rejection of an executory contract or even enforcement of a plan that impairs a creditor’s claim?
Late last week, the justices ruled 8/1 in Badgerow v. Walters, 20-1143 (Sup. Ct. March 31, 2022), that there must be an independent basis of federal jurisdiction to mount an action in federal court to confirm (or to attack confirmation of) an arbitration award. The opinion means this: The federal court may have had subject matter jurisdiction to compel arbitration but may not have jurisdiction later to confirm or enforce the resulting award.
As expected, the opinion has no language that would apply expressly to bankruptcy. At best, the new opinion could be read to mean that federal courts do not champion arbitration in all circumstances.
Another arbitration case was argued in the Supreme Court on March 30: Viking River Cruises Inc. v. Moriana, 20-1573 (Sup. Ct.). The case deals with the ability of a state to curtail an arbitration agreement. We will not speculate on the outcome.