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Supreme Court Justice Samuel Alito recently wrote an opinion of the Third Circuit Court of Appeals ruling that an arbitration panel should halt its proceedings if an award might negatively impact the estate of a debtor protected by the bankruptcy code.
In ACandS, Inc. v. Travelers Casualty & Surety Co., 435 F.3d 252 (3rd Cir. 2006), a dispute arose between ACandS, an installer of asbestos insulation, and its insurer, Travelers Casualty and Surety Co. (“Travelers”). ACandS was facing billions of dollars worth of asbestos-related claims, and the parties disagreed about what percentage of those claims Travelers was obligated to cover.
With an arbitration of this coverage dispute pending, ACandS filed for Chapter 11 bankruptcy, thus triggering an automatic stay of all proceedings against the debtor pursuant to 11 U.S.C. § 362(a). The panel issued an award favorable to Travelers while this stay was in place. ACandS filed a motion in federal court seeking to vacate the award.
On appeal, the Court noted the general rule that “courts may refuse to enforce arbitration awards that violate well-defined public policy as embodied by federal law.” The Court then found that “the automatic stay provision of the Bankruptcy Act promotes a public policy sufficient to preclude enforcement of an award that violates its terms or interferes with its purposes.” See In re Cavanaugh, 271 B.R. 414, 424 (Bankr. D. Mass. 2001). On these grounds, the Court vacated the award.
An arbitration case cannot proceed if a bankruptcy is filed which automatically stays the case, which has been the current, common practice among arbitration providers and knowing arbitrators. Bankruptcy does not, however, prevent a dispute from necessarily being arbitrated. See Mintze v. American General Financial Services, Inc., 2006 WL 45844 (3rd Cir. 2006).
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