A 5/4 arbitration decision by the Supreme Court on June 23 in a nonbankruptcy case could disrupt bankruptcies large and small.
In Coinbase Inc. v. Bielski, the Supreme Court held that denial of a motion to compel arbitration automatically imposes a stay on the entire action in the trial court, pending appeal from the order denying arbitration.
If Coinbase applies in bankruptcy cases, the bankruptcy court would at a minimum be automatically enjoined from deciding issues involving a creditor that unsuccessfully called for arbitration.
The four dissenters in the Supreme Court likened the majority’s opinion to opening “Pandora’s box.” Disruption of bankruptcy cases may be one of the unintended, unanticipated effects to emerge from Coinbase. Application of Coinbase Inc. to chapter 11 cases may impel the Supreme Court to decide whether or not arbitration clauses are generally unenforceable in bankruptcy cases.
The Facts and the Circuit Split
A customer filed a putative class action in federal district court against an online platform for buying and selling cryptocurrencies. The complaint alleged that the platform failed to replace funds taken fraudulently from accounts.
The platform filed a motion to compel arbitration, based on an arbitration clause contained in the user agreement. The district court denied the arbitration motion.
Citing 9 U.S.C. § 16(a), the platform filed an interlocutory appeal. As Justice Brett M. Kavanaugh said in his majority opinion for the Court, “Section 16(a) authorizes an interlocutory appeal from the denial of a motion to compel arbitration.”
The platform moved in district court for a stay pending appeal. The district court denied the stay, as did the Ninth Circuit. To resolve a split of circuits on whether stays pending appeal are automatic following denial of an arbitration motion, the Supreme Court granted certiorari and heard argument on March 21.
The Majority Opinion
Justice Kavanaugh said that Section 16(a) contains “a rare statutory exception to the usual rule” that appeals are not taken from interlocutory orders. He also said that the section “does not say whether the district court proceedings must be stayed.”
Finding an automatic stay, Justice Kavanaugh based his conclusion on a statement in Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982), that an appeal “‘divests the district court of its control over those aspects of the case involved in the appeal.’”
Justice Kavanaugh reasoned that “the entire case is essentially ‘involved in the appeal,’” citing Griggs, id. Citing the Seventh Circuit, he said that whether the case may go ahead in district court is precisely the issue on appeal. Also citing the Seventh Circuit, he said it makes no sense to proceed in district court while the appeals court decides whether there should be a case in district court at all.
“In short,” Justice Kavanaugh said, “Griggs dictates that the district court must stay its proceedings while the interlocutory appeal on arbitrability is ongoing.” Saying that most courts impose a stay automatically, he said that “common practice makes common sense.”
Dismissing five arguments advanced by the plaintiff, Justice Kavanaugh said that the benefits of arbitration could be “irretrievably lost” were the action to proceed in the trial court pending appeal.
The Dissenters
Justice Ketanji Brown Jackson dissented, joined by Justices Sonia Sotomayor and Elena Kagan. Justice Clarence Thomas joined in most of Justice Jackson’s dissent.
Justice Jackson said that the majority “departs from the traditional approach” by imposing “a mandatory stay of trial court proceedings.” The mandatory stay rule, she said, “comes out of nowhere” and “perpetually favor[s] one class of litigants.”
Justice Jackson saw no mandatory stay rule in Section 16(a). Indeed, she said that the section “never even mentions a stay pending appeal.”
Rather than justifying an automatic stay, Justice Jackson said that Griggs “expresses a far narrower principle” that two courts “should avoid exercising control over the same order or judgment simultaneously.” To her way of thinking, “Griggs divests the district court of control over only a narrow slice of the case,” namely, the ability to modify the order refusing to compel arbitration.
On appeals, Justice Jackson said that only arbitrability was before the appellate court, “not the merits.”
Justice Jackson began the last two pages of her 15-page opinion by saying that the majority “ventures down an uncharted path — and that way lies madness.” She said that a “wide array of appeals seemingly fits the bill.”
An “appeal over the proper forum for a dispute” or “all appeals over forum-selection agreements” would “arguably raise the same question,” just like orders granting preliminary injunctions, Justice Jackson said. “Taken that broadly,” she warned, “the mandatory-general-stay rule the Court adopts today would upend federal litigation as we know it.”
Justice Jackson ended her dissent by saying that the “mandatory-general-stay rule that the Court manufactures is unmoored from Congress’s commands and this Court’s precedent.”
Observations
The Supreme Court has yet to decide where or to what extent arbitration clauses are enforceable in bankruptcy. Is arbitration always prohibited, or only when the dispute falls within the bankruptcy court’s “core” jurisdiction?
The majority opinion does not limit the automatic stay rule to particular sorts of cases. Presumably, it also applies in bankruptcy.
Suppose a creditor’s agreement with the debtor contains a broadly worded arbitration clause. What if the debtor objects to the creditor’s claim, the creditor invokes the arbitration agreement, and the bankruptcy court denies the motion to compel arbitration? Is the objection to claim automatically stayed pending appeal to the district court, the circuit court and the Supreme Court?
Or, what about the question of whether a creditor with an arbitration agreement is impaired by a chapter 11 plan? Or, what if the creditor claims that the plan is not fair and equitable? Are the proceedings in bankruptcy court automatically enjoined until there is a final order declining to compel arbitration?
Compelling arbitration in bankruptcy cases could stall chapter 11 cases. Depending on the nature of the issue, a Coinbase automatic stay pending appeal could delay, disrupt or torpedo a reorganization.
A 5/4 arbitration decision by the Supreme Court on June 23 in a nonbankruptcy case could disrupt bankruptcies large and small.
In Coinbase Inc. v. Bielski, the Supreme Court held that denial of a motion to compel arbitration automatically imposes a stay on the entire action in the trial court, pending appeal from the order denying arbitration.
If Coinbase applies in bankruptcy cases, the bankruptcy court would at a minimum be automatically enjoined from deciding issues involving a creditor that unsuccessfully called for arbitration.
The four dissenters in the Supreme Court likened the majority’s opinion to opening “Pandora’s box.” Disruption of bankruptcy cases may be one of the unintended, unanticipated effects to emerge from Coinbase. Application of Coinbase Inc. to chapter 11 cases may impel the Supreme Court to decide whether or not arbitration clauses are generally unenforceable in bankruptcy cases.