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A Northern District of California bankruptcy court applied Fifth Circuit precedent whereby core bankruptcy proceedings are arbitrable if arbitration would not conflict with the bankruptcy code; and rejected the debtor's unconscionability challenge, noting that the stand alone nature of the arbitration agreement weighed against a finding of procedural unconscionability.
In In re Saigon Plaza Ass'n, LLC, NO. 07-40169 LT, 07-4149, 2007 WL 3357641 (Bankr. N.D. Cal. Nov. 05, 2007), Saigon Plaza owned real property which it used to secure loans from California Mortgage & Realty (CMR). In conjunction with the loan documents, Saigon Plaza's principal signed a separate arbitration agreement.
Saigon Plaza subsequently filed for voluntary Chapter 11 bankruptcy. CMR filed a proof of claim for the amount of the loan, and Saigon Plaza objected to the claim. Based on this objection, Saigon Plaza filed an Adversary Proceeding consisting of nine claims for relief. It also demanded a jury trial on all triable issues. CMR moved to compel arbitration.
The Court held that the claims governed by bankruptcy law are not arbitrable. See In re Gandy, 299 F.3d 489 (5th Cir. 1997). The bankruptcy court was created "as a court of special expertise." Submitting the claims based wholly or derivatively on bankruptcy law would be "contrary to the purposes for which the bankruptcy court was created."
However, the Court noted that the claims governed by state law, even "core claims," are subject to arbitration under the arbitration agreement, citing federal policy established under the Federal Arbitration Act (FAA). Submitting claims based completely on state law would "clearly not conflict with the bankruptcy code."
Next, the Court rejected Saigon Plaza's unconscionability challenge. The agreement was not oppressive. Saigon Plaza's principal signed the agreement without reading it and did not try to negotiate any of the terms. Further, the stand alone nature of the arbitration agreement weighed against a finding of surprise. Accordingly, the agreement was not procedurally unconscionable.
Nor was the agreement substantively unconscionable. The agreement does not allow CMR to forego arbitration in ways that would be unreasonable, but merely for activities "that would be impossible in the context of arbitration." Further, the agreement provides Saigon Plaza with the opportunity to pursue provisional equitable remedies. Finally, the arbitration is to be held in California, from which both parties would benefit.
Accordingly, the Court granted the motion to compel arbitration with respect to the state claims and denied arbitration with respect to those claims governed by bankruptcy law.
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