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A Federal Bankruptcy Court in Texas refused to enforce an otherwise valid arbitration agreement because the claims arose solely from the Bankruptcy Code and enforcement of the agreement would conflict with the purposes of the Code.
In In re Martinez, No. 06-3669, 2007 WL 1080148 (Bankr. S.D. Tex. April 03, 2007), Martinez (Debtor) brought suit against Beneficial Texas, Inc. (Lender), after Debtor inherited an estate under lien to Lender from his grandmother. The grandmother had signed a broadly worded Arbitration Rider with the Lender.
As a preliminary matter, the Court determined that although the Debtor was a non-signatory, he was nevertheless bound by the agreement to arbitrate since his claims were based upon it. In addition, the Court determined that the dispute fell within the scope of the arbitration agreement.
However, a court may deny enforcement of an otherwise valid arbitration agreement if: (1) the proceeding derives solely from the provisions of the Code; and (2) arbitration … would conflict with the purposes of the Code. In re National Gypsum, 118 F.3d 1056, 1067 (5th Cir. 2002).
Here, the Court determined that both prongs of the test had been met and refused to compel arbitration. Debtor's objections to the claim derived solely from the Code. Additionally, because one purpose of the Code is to provide a central forum for resolution of all claims, deciding part of the claim in arbitration and part in court would conflict with that purpose.
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