|
A federal court in Rhode Island took an expansive view of a bankruptcy court’s authority to deny enforcement of an arbitration agreement, ruling that a bankruptcy court may retain jurisdiction of an otherwise arbitrable claim if the claim constitutes a core bankruptcy proceeding. This ruling has created a split within the First Circuit.
In In re Brown, No. CA 05-5238, 2006 WL 3373333 (D.R.I. Nov. 20, 2006), Brown and Mortgage Electronic Registration Systems (MERS) entered into a loan consolidation agreement containing an arbitration clause. Brown later filed for bankruptcy, and as part of that proceeding, she filed a claim against MERS for alleged violations of the Truth-In-Lending Act (TILA).
MERS filed a motion to compel arbitration. After the bankruptcy court denied the motion, MERS appealed to the district court (the Court).
The question on appeal was whether and when a bankruptcy court may deny enforcement of an otherwise applicable arbitration agreement. As the Court observed, courts have been “deeply split on both the best procedure for resolving th[is] question and the proper outcome.”
In In re White Mountain Mining Co., 403 F.3d 164 (4th Cir. 2005), the Fourth Circuit held that the bankruptcy court properly denied enforcement of an otherwise applicable arbitration agreement because the subject of the debtor’s claim was a “core proceeding,” and “enforcement of the arbitration agreement would [have] frustrated the efficient procession of the bankruptcy case.”
The Second and Third Circuits have taken a narrower view of a bankruptcy court’s authority to deny enforcement of an otherwise applicable arbitration agreement. See MBNA America Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006); In re Mintze, 434 F.3d 222 (3d Cir. 2006). Under the Second Circuit standard set forth in Hill, even if a core bankruptcy proceeding is involved, a bankruptcy judge may deny arbitration only if the otherwise arbitrable claim is based on a provision of the Bankruptcy Code that is in “inherent conflict” with the Federal Arbitration Act (FAA) or if arbitration of the claim would “necessarily jeopardize” the objectives of the Bankruptcy Code.
The Court in this case opted for a bright line rule and a relatively expansive view of a bankruptcy court’s authority to deny arbitration. Specifically, under the Court’s standard, a bankruptcy court may deny enforcement of an otherwise applicable arbitration agreement so long as a core bankruptcy proceeding is at issue. The Court reasoned that this standard puts arbitration agreements on equal footing with other contracts (e.g., forum selection clauses) whereas, according to the Court, the standards enunciated in Hill and In re Mintze give preference to arbitration agreements vis-à-vis other contracts.
Applying its standard, the Court held that the bankruptcy court properly denied enforcement of the arbitration agreement because ordering arbitration would have been “inconsistent with the purpose of the bankruptcy laws to centralize disputes about a debtor’s legal obligations so that reorganization can proceed efficiently.”
The Court’s decision has created a split within the First Circuit because a bankruptcy court in the First Circuit recently embraced the standard set forth in Hill. See In re Merrill, 343 B.R. 1 (Bankr. D. Me. 2006). In that case, the court reasoned that the core/non-core distinction was “too broad” because it would deprive parties of the right to arbitration even when there is no “inherent conflict” between the Bankruptcy Code and the FAA.
Subscribe to a free weekly update on ADR case law and
legislation
|