Although Interlocutory, Orders Refusing to Compel Arbitration Can Be Appealed

Although an order denying a motion to compel arbitration is interlocutory and not automatically appealable under 28 U.S.C. §158(a), an order from the bankruptcy court can be appealed under the Federal Arbitration Act, for reasons explained by District Judge Gina M. Groh of Martinsburg, W. Va.

After the chapter 11 reorganization of a corporate debtor was converted to chapter 7, the trustee mounted an adversary proceeding against an individual. The defendant filed a motion to compel arbitration or, alternatively, to dismiss for failure to state a claim.

The bankruptcy court denied both aspects of the motion. When the defendant appealed, the trustee moved to dismiss the appeal. The trustee argued that the order denying the motion to dismiss and to compel arbitration was interlocutory and not subject to appeal.

In her opinion on March 15, Judge Groh dismissed the appeal regarding dismissal but held that the defendant could appeal denial of the arbitration motion.

Generally, the right to appeal from orders of the bankruptcy court is governed by Section 158(a). District courts have jurisdiction over appeals from “final judgments, orders, and decrees” and over interlocutory orders when the court has granted leave to appeal.

The trustee contended that the district court had no jurisdiction in view of Section 158(a). With regard to arbitration, Section 158(a) isn’t the last word. Arbitration is governed generally by Title 9 of the U.S. Code.

Section 16(a)(1)(C) of the Federal Arbitration Act, 9 U.S.C. §16(a)(1)(C), says that “an appeal may be taken at any time from . . . an order . . . denying an application under section 206 of this title to compel arbitration.”

To avoid the application of Section 16(a)(1)(C), the trustee contended that the bankruptcy court is not a “court of the United States” as defined in 28 U.S.C. §451. That section defines courts of the United States to mean the Supreme Court, circuit and district courts, the Court of International Trade and courts whose judges have life tenure.

Judge Groh found no “legal precedent indicating that section 451’s definition of court applies for the purpose of limiting the applicability of the FAA, or, most importantly, the purpose of limiting the reviewability of decisions regarding arbitration.”

“Notably,” Judge Groh said, Section 16(a)(1)(C) “does not use the phrase ‘court of the United States.’” She therefore found “no evidence that the reviewability of a bankruptcy court’s order denying arbitration is statutorily limited.”

Judge Groh held that she had jurisdiction to entertain an appeal from an order refusing to compel arbitration. The opposite, she said, “would be an absurd result,” giving bankruptcy courts “unfettered power when adjudicating motions for arbitration.” Similar orders from district courts could be appealed.

The defendant had made an alternative motion to dismiss for failure to state a claim. Denial of the dismissal motion was the interlocutory order not subject to appeal. Because the defendant’s arguments for dismissal and to compel arbitration were “separate and distinct,” Judge Groh dismissed the appeal regarding denial of the motion to dismiss but said she would issue a ruling on the arbitration appeal.

It Ain’t Over Yet

We don’t know exactly where the Supreme Court stands on arbitration in the bankruptcy context. So, Judge Groh’s next decision on arbitration could be a big deal.

The defendant had been an officer of the debtor corporation. The trustee charged in his complaint that the defendant’s actions and inactions caused harm to the corporation, resulting in its demise.

As a corporate officer, the defendant had an employment agreement calling for arbitration of any claims regarding performance of his corporate duties. Based on the employment agreement, the defendant moved to compel arbitration.

The Supreme Court has yet to decide whether or when disputes arising in bankruptcy court are not subject to arbitration. As a general proposition, the high court held in Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987), that arbitration agreements must be upheld absent an inherent conflict between arbitration and the underlying purpose of another federal statute. In a subsequent opinion, the Supreme Court was more adamant about enforcing arbitration clauses. See, e.g., Epic Systems Corp. v. Lewis, 200 L. Ed. 2d 889 (Sup. Ct. May 21, 2018).

Although it was decided before Epiq, the Second Circuit interpreted McMahon liberally by overriding an arbitration agreement in bankruptcy cases, even though the Bankruptcy Code contains no express language barring enforcement of the FAA. Specifically, the appeals court held that a debtor was not required to arbitrate violation of the discharge injunction. 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.

The 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. Will those less-than-explicit provisions in the Bankruptcy Code persuade District Judge Groh to affirm the bankruptcy court’s refusal to compel arbitration?

Stand by!