The Seventh Circuit Court of Appeals has held that a bankruptcy trustee cannot seek appellate review of a district court order compelling arbitration and execution of a hold-harmless agreement unless the district court certifies the order for appeal as required by statute.

In Moglia v. Pacific Employers Insurance Co. of North America, No. 07-1973, 2008 WL 4810080 (7th Cir. Nov. 6, 2008), a dispute arose between insurer Pacific and Outboard Marine's bankruptcy trustee regarding the release of excess security in certain letters of credit. In accordance with agreements in the letters of credit, the bankruptcy judge compelled arbitration of the dispute.

For five years, the trustee refused to participate in the arbitral proceedings. Noting the trustee's behavior, the arbitrators charged with resolving the dispute required the parties to sign a "hold-harmless" agreement forbidding suit against the arbitrators and providing for recovery of the arbitrators' attorney fees in defense of such a suit. The trustee refused to sign the agreement. At the trustee's request, the bankruptcy judge vacated the order compelling arbitration, opining that the trustee's refusal to sign the hold-harmless agreement was within the valid exercise of his "business judgment."

The district court reversed, holding that the trustee must assume Outboard's arbitration obligation, and granted an order compelling arbitration and directed the trustee to sign the hold-harmless agreement. The trustee appealed, alleging that his assent to the hold-harmless agreement would create an impermissible contingent claim against Outboard's estate.

The Court held that it was without jurisdiction to hear the trustee's appeal. The Court cited 9 U.S.C. § 16(b) for the proposition that an appeal of an order staying litigation in favor of arbitration is forbidden save some limited exceptions not applicable here.

The trustee argued that the district court's order to sign the hold-harmless agreement was an "injunction" appealable under 28 U.S.C. § 1292(b), but the Court found this characterization "full of holes." The instant order, according to the Court, was not an injunction because it did not "resolve the merits in a way that would escape review later." Even if the order was an injunction, the Court found that § 16(b) would forbid appeal because the district judge did not certify the order for appeal as required by § 1292(b). See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546 (1949).

Finally, the Court observed that it could not review the order under the doctrine of pendent appellate jurisdiction, because § 16(b) is a bar to that doctrine. See IDS Life Ins. Co. v. SunAmerica, Inc., 103 F.3d 524, 528 (7th Cir. 1996).