Polina Kushelev, an International Approach to Breaking the Core of the Bankruptcy Code and Faa Conflict

• Publication year: 2011

AN INTERNATIONAL APPROACH TO BREAKING THE CORE OF THE BANKRUPTCY CODE AND FAA CONFLICT

INTRODUCTION

Arbitration has become the resolution method of choice for parties in international business transactions over the past decade. Arbitration’s popularity is evident today with an increase of cases at major arbitral institutions, such as the International Chamber of Commerce’s International Court of Arbitration, which received 599 requests for arbitrations in 2007, an

almost twenty-fold increase in the past fifty years.1 Additionally, a survey of

eighty-two large corporations found that 88% of corporate counsel have used arbitration at least once, with 38% of the disputes arising from commercial transactions.2 Businesses gravitate towards arbitration because of its ability to provide “a neutral, speedy[,] and expert dispute resolution process, largely subject to the parties’ control, in a single, centralized forum, with internationally-enforceable dispute resolution agreements and decisions.”3 These features are viewed as promoting cost mitigation,4 something parties are extremely sensitive to in this economy.

Commercial arbitration has roots in the Antiquity period of Greece and other prominent civilizations.5 The practice continued to develop throughout Europe’s history,6 and “[c]onsistent with America’s role in the development of state-to-state arbitration in the eighteenth century, arbitration was widely used to resolve commercial (and other) disputes during Colonial times and the early

1. See 1 GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 69 (2009). In 2007, a total of 3,235

   arbitration cases were filed amongst the various arbitral institutions, up 132% from 1993. Id.

2. PRICEWATERHOUSECOOPERS, INTERNATIONAL ARBITRATION: CORPORATE ATTITUDES AND PRACTICES

   2008, at 2, 5 (2008), available at http://www.pwc.co.uk/eng/publications/international_arbitration_2008.html.

3. 1 BORN, supra note 1, at 71.

4. Id. at 84 (“It has long been said that arbitration offers a cheaper, quicker means of dispute resolution than national court proceedings.”).

5. GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION: CASES AND MATERIALS 10 (2011).

   (“Archaeological research reports that clay tablets from contemporary Iraq recite a dispute between one Tulpunnaya and her neighbor, Killi, over water rights in a village near Kirkuk, which was resolved by arbitration (with Tulpunnaya being awarded ten silver shekels and an ox) . . . . Arbitration was no less common in ancient Greece for the resolution of commercial and other ‘private’ disputes than for state-to-state disputes.”).

6. Id. at 13–20, 25–26 (noting the development of arbitration in Europe from the Middle Ages through

   the early twentieth century).

   years of the Republic.”7 However, during the nineteenth century, judges would ordinarily refuse to recognize arbitration agreements because of “concern[s] about private agreements ‘ousting’ the courts of jurisdiction, skepticism about the adequacy and fairness of the arbitral process[,] and suspicions that arbitration agreements were often the product of unequal bargaining power.”8

   The Federal Arbitration Act (FAA) was enacted in 1925 to govern arbitrations and enforcement actions in the United States,9 with the specific objective to eliminate any judicial interference in the enforcement of such agreements.10 This new federal statute was ardently supported by the business community, which had lobbied hard for arbitration reform.11 Despite the FAA, courts were hesitant to embrace arbitration agreements, highlighted best by the Supreme Court’s decision in Wilko v. Swan, which declined to enforce an arbitration agreement in a securities fraud action under the Securities Act of 1933.12

   
   

   The enforceability of arbitration agreements in international commercial contracts was formally established when the United States agreed to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) in 1970.13 By the 1970s, the Supreme Court was

   ready to reverse its negative stance on arbitration, starting with Scherk v. Alberto-Culver Co., which held the international arbitration agreement enforceable for a claim under the Securities Exchange Act of 1934 brought by a German party against an American party.14 Next, in Mitsubishi Motors Corp.

   
   

7. Id. at 20.

8. 1 BORN, supra note 1, at 133.

9. See Federal Arbitration Act, Pub. L. No. 68-401, 43 Stat. 883, 883 (1925) (“An Act To make valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations.”).

10. See Paul F. Kirgis, Arbitration, Bankruptcy, and Public Policy: A Contractarian Analysis, 17 AM. BANKR. INST. L. REV. 503, 511 (2009) (defining the three primary goals of the FAA as: (1) making agreements

    to arbitrate enforceable, (2) enforcing arbitral awards, and (3) making awards final by limiting judicial review).

11. 1 BORN, supra note 1, at 133. The business community viewed litigation as “expensive, slow and unreliable,” which led New York to enact an arbitration statute in 1920 recognizing the enforceability of arbitration agreements in New York courts. Id.

12. Wilko v. Swan, 346 U.S. 427, 435–38 (1953), overruled by Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989); see also Kirgis, supra note 10, at 512 (“The [Wilko] Court focused on the

    inadequacy of arbitration as a substitute for formal adjudication.”).

13. See Lindsay Biesterfeld, Note, Parties to International Commercial Arbitration Agreements Beware: Bankruptcy Trumps Supreme Court Precedent Favoring Arbitration of International Disputes, 2006 J. DISP. RESOL. 273, 279. “Congress incorporated the Convention into the United States Arbitration Act. The United States Arbitration Act requires the courts to recognize and enforce arbitration agreements between parties to an international commercial contract.” Id. at 279–80 (footnote omitted).

14. Scherk v. Alberto-Culver Co., 417 U.S. 506, 508–09, 519–20 (1974); see also Fred Neufeld, Enforcement of Contractual Arbitration Agreements Under the Bankruptcy Code, 65 AM. BANKR. L.J. 525, 532 (1991). Scherk did not overrule Wilko, but the Supreme Court noted “that the refusal to enforce arbitration

    v. Soler Chrysler-Plymouth, Inc., the Supreme Court expanded the enforceability of international commercial arbitration clauses to actions alleging violation of the Sherman Act.15 In Shearson/American Express, Inc. v. McMahon, the Court found no congressional intent to impede arbitration in claims under both RICO and the 1934 Securities Act.16 Lastly, the Supreme Court overruled Wilko in Rodriguez de Quijas v. Shearson/American Express, Inc., expressing that Wilko “was incorrectly decided and is inconsistent with

    the prevailing uniform construction of other federal statutes governing arbitration agreements in the setting of business transactions.”17 These decisions are the key to gleaning insight into whether the Supreme Court would enforce arbitration in bankruptcy, given that “[t]he four statutory areas

    that federal appellate courts [had] carved out as exceptions to the Arbitration Act [were] securities law, antitrust law, RICO, and bankruptcy law.”18 At the same time that the Supreme Court was adopting “a radically pro-arbitration agenda,”19 Congress was making large substantive changes to the federal bankruptcy law.20

    
    

    The National Bankruptcy Act of 1898 created the first modern and permanent uniform bankruptcy law and bankruptcy courts.21 However, the bankruptcy courts had limited jurisdiction and were only able to address issues involving case administration, the debtor’s property, other areas allowed by the

    1898 Act, or where the parties had consented to the court’s jurisdiction; all other disputes were decided by either state or district courts.22 This resulted in

    
    

    clauses in international agreements ‘would surely damage the fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into international agreements.’” Neufeld, supra, at 532–33 (quoting Scherk, 417 U.S. at 517).

15. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 636–40 (1985); see also

    Neufeld, supra note 14, at 535.

16. See Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 238, 242 (1987); see also Neufeld, supra note 14, at 537 (“Regarding the 1934 Act claims, the Court said that Wilko v. Swan only made sense at a time when arbitration was seen as inadequate to enforce the statutory rights afforded by the federal securities laws.”).

17. Rodriguez de Quijas, 490 U.S. at 484–85; see also Neufeld, supra note 14, at 537–38.

18. Neufeld, supra note 14, at 535. Thus, bankruptcy is the only exception that the Supreme Court has yet to address.

19. Kirgis, supra note 10, at 512.

20. See Bankruptcy Reform Act of 1978, Pub. L. 95-598, 92 Stat. 2549 (codified as amended at 11 U.S.C.

    §§ 101–1330 (2006)).

21. Patrick M. Birney, L.L.M. Thesis, Reawakening Section 1334: Resolving the Conflict Between Bankruptcy and Arbitration Through an Abstention Analysis, 16 AM. BANKR. INST. L. REV. 619, 640 (2008);

    see also Bankruptcy Act of 1898, ch. 541, 30 Stat. 544 (repealed 1978).

22. Birney, supra note 21, at 641.

    
    

    an inefficient and costly adjudication process,23 which was finally resolved by the Bankruptcy Reform Act of 1978. The Bankruptcy Code originally granted bankruptcy courts jurisdiction over all proceedings, whether arising under or related to the Code.24 There was, however, one shortcoming: the Bankruptcy

    Reform Act did not grant the newly created bankruptcy judges Article III status.25 This omission led to a major setback when the Supreme Court in Northern Pipeline Construction Co. v. Marathon Pipe Line Co. held that non- Article III judges could not rule upon state-created rights, effectively repealing the 1978 Bankruptcy Code’s extensive jurisdiction over bankruptcy proceedings.26

    
    

    Congress took action after the Marathon ruling to draft a new amendment protecting the Bankruptcy Code’s comprehensive...