A federal court in California stayed a bankruptcy case pending an appeal of the bankruptcy court's order denying a motion to compel arbitration.

In In re Wirecomm Wireless, Inc., No. 2:07-cv-02451-MCE, 2008 WL 3056491 (E.D. Cal. Aug. 1, 2008), New Cingular Wireless Services (NCWS) and Wirecomm entered into arbitration regarding a dispute about unpaid commissions and residuals. Four days before the arbitration hearing, Wirecomm filed for bankruptcy, and the bankruptcy trustee removed the claims from arbitration to bankruptcy court.

NCWS moved to compel arbitration, but the bankruptcy court denied the motion, holding that it had discretion to deny arbitration of the state law claims because it had "core" jurisdiction over the proceeding. The bankruptcy court also held that it "was not required to abstain in favor of pending arbitration because in arbitration 'the trier of fact has to be hired by the parties.'" NCWS appealed the denial, and also moved to stay the case pending appeal. The bankruptcy court denied the motion to stay, as well.

On appeal, the Court held that the issue of whether appealing the denial of a motion to compel arbitration requires a stay of core proceedings in a bankruptcy court was one of first impression in the Ninth Circuit. Citing Ninth Circuit precedent and the Federal Arbitration Act (FAA), the Court held that courts are allowed to grant a stay pending appeal where a motion to compel arbitration raises a "substantial question." The Court held that NCWS's motion to compel arbitration raised a substantial question as to the competing objectives of the FAA and the Bankruptcy Code. Thus, the bankruptcy court could properly grant a stay.

The Court next had to determine if a stay of the case was required and not discretionary. Under the first factor, whether the stay applicant is likely to succeed on the merits, the Court held that NCWS was likely to succeed on the merits of its motion to compel arbitration. The Court cited Ninth Circuit authority favoring arbitration even of core bankruptcy proceedings, and also cited the rule of automatic stay where a party makes a non-frivolous appeal of a court order denying a motion to compel arbitration. Thus, the Court held that NCWS "has demonstrated a substantial likelihood of prevailing on its appeal seeking an order to compel arbitration in this matter."

Next, the Court held there would be irreparable injury to NCWS if the bankruptcy proceedings were not stayed pending appeal. The Court held that "[p]arties agree to arbitrate in order to avoid more formal, and frequently far more expensive, proceedings in state or federal court. If parties are required to endure court proceedings before arbitration, the potential savings from arbitration are permanently lost." Consequently, the Court held that NCWS would suffer irreparable injury if a stay was not granted, as NCWS could win its appeal to compel arbitration, and would be forced to waste money litigating its claim in bankruptcy court while that appeal was pending. As a result, the Court reversed the bankruptcy court and stayed the litigation pending NCWS's appeal.