Reframing Arbitration & Bankruptcy.

Date22 December 2022
AuthorLawless, Robert M.
  1. Introduction II. The Basics A. The Federal Arbitration Act B. The Bankruptcy Code III. The Mistakes A. Forget the Core B. The Irrelevance of "Policy" C. There Is No Discretion IV. Applying the Principles A. Arbitration of the Petition B. Discharge Issues C. Dischargeability D. Cash Collateral, Automatic Stay, Turnover & Other Estate "Housekeeping" E. Claim Allowance F. Avoidance Actions G. Recovery of Nonbankruptcy Claims V. Concluding Thoughts About the "Real World" I. Introduction

    Most every analysis of arbitration in bankruptcy is wrong. A thick crust of judicial rhetoric has obscured unassailable principles of law that should frame the conversation. Going back to these foundational principles will build a coherent framework about how arbitration and bankruptcy law work together.

    This article will work with four principles. First, bankruptcy jurisdiction is in rem jurisdiction over the bankruptcy estate. An entity without that in rem jurisdiction as well as jurisdiction over the claimants to that res lacks authority to issue binding orders about it. Second and somewhat of a corollary to the first principle, a contractual agreement cannot bind third persons who are not parties to the contract. Third, a court has the power to police its own orders. Fourth, a contract signed in one capacity does not bind the person when they act in other capacities. For example, a contract signed in a capacity as a corporate president does not bind the person individually.

    To state these principles is not to say arbitration has no role in bankruptcy. There is nothing special about bankruptcy. The Federal Arbitration Act (FAA) and the Bankruptcy Code are both congressional enactments of equal dignity. Courts must follow both statutes. Arbitration issues in bankruptcy are nothing more than statutory interpretation issues, requiring the reconciliation of two statutory schemes, enacted decades apart, without express guidance on putting them together.

    This article is not normative, at least not in the broad sense. It lays out an analytical framework using well-accepted and uncontroversial principles of law. The article's thesis is that the decisional law often has strayed from these principles or used analyses that obscure the true legal principle at work. As such, this article does not engage with normative proposals on what the law of arbitration and bankruptcy should be. (1) My own preference would be to ban the enforcement of pre-dispute arbitration clauses in any consumer dispute. That is not the law, however. The article is perhaps normative in a narrower sense. Unless amended or repealed through the legislative process, courts should follow both statutes. The rule of law dictates as much.

    This article addresses arbitrability, that is the question whether a predispute arbitration clause strips the court of the power to decide a matter otherwise properly before the court. As such, it does not address post-dispute agreements to arbitrate where bankruptcy litigants agree to settle a matter through arbitration. It also does not address the bankruptcy tribunal's substantial discretion to set procedures to liquidate claims, which might include an arbitrator or special master fixing the claim when there are numerous creditors.

    Another topic that this article does not discuss is the role executory contract analysis plays in deciding arbitrability. In his contribution to this symposium, Professor Ware concludes an arbitration agreement is specifically enforceable in bankruptcy, even if a debtor or trustee has rejected it. (2) I agree with Professor Ware's bottom-line conclusion about the remedy even if I do not necessarily agree with all his other conclusions. (3) Although specific enforcement is the remedy, there remains the question whether the agreement is enforceable in bankruptcy. That is the topic for this article.

    Before proceeding, it is worth it to make clear another terminology point. In their article, Professors Casey and Macey use the wonderful phrase, "bankruptcy tribunal," (4) to describe the court exercising the jurisdiction given to the federal courts to hear cases under title 11 or its predecessors. (5) I wish I had thought of this phrase first, but I am not too proud to borrow it. In this article, "bankruptcy tribunal" then does not necessarily mean the bankruptcy court "unit" of the district court to which the district court can refer bankruptcy matters. (6) As a practical matter, the bankruptcy tribunal will be the bankruptcy court "unit" in most every case because, in most every case, the district court has referred jurisdiction. Where this article uses the phrase "bankruptcy court," it will mean the bankruptcy court "unit" of the district court. In quotations, the original usage of the term "bankruptcy court" has been left unaltered.

    First is a primer on the FAA basics and the bankruptcy law relevant to this article. Much of it will deal with the jurisdiction and structure of the bankruptcy system. Next, this article will identify common mistakes courts and commentators make when analyzing arbitration issues in bankruptcy. The final part offers a set of principles that determine how to decide arbitration issues in bankruptcy.

    Bankruptcy proceedings deal with comprehensive default and all a debtor's problems. As such, they can raise almost any legal issue. Setting out to state a set of principles that will resolve all issues is a fool's errand, ah though my critics may say that is exactly the sort of errand I am on. The principles should resolve most every issue that might arise, but exceptional cases will arise.



      To state the obvious, the FAA is just another federal statute. Congress can repeal or amend it. Congress might pass other statutes that implicate the FAA. When Congress enacts a statute, it would be great if it specified all the ways that statute interacted with all other congressional enactments. That, of course, does not happen, nor do we want it to happen lest the legislative process become even more sclerotic than it already is. Grappling with how two statutes work together is a common exercise in statutory interpretation.

      Stating the obvious demystifies the exercise at hand. An oft-cited formula says the FAA applies unless the "other statute" has text or legislative history saying the FAA does not apply, or the "other statute" has an inherent conflict with the FAA. (7) Of course, if another statute says "the FAA shall not apply," the intellectual task is not difficult. The court simply follows that command. (8) Legislative history is a tool in furtherance of an interpretive inquiry, not an independent ground to ignore the FAA. Even the most ardent nontextualist must concede that legislative history alone has no force-of-law legitimacy. It can help us understand statutory language, but it is not statutory language. The difficult cases revolve around whether an "inherent conflict" exists and is certainly the issue for bankruptcy cases as the Bankruptcy Code is silent on the topic of the FAA's application.

      To return to the opening point, the FAA is just another federal statute. That also means courts must obey it. Section 2 provides:

      A written provision in any ... contract ... to settle by arbitration a controversy thereafter arising out of such con' tract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract .... (9) This provision is the FAA's core. It may strike today's lawyer as odd to have a statute that directs a court to enforce a contract as written. The FAA, however, overturned a body of case law hostile to the idea of arbitration. (10) The FAA is nothing more or nothing less than a statutory command to the courts to abandon that body of case law.

      The FAA is more than section 2, of course. Section 3 requires the court to stay any "suit or proceeding" sent to arbitration. (11) In a bankruptcy case, section 3 adds little to the analysis. The stay determination should follow automatically from the arbitrability decision. The language of the section itself distinguishes "suits" and "proceedings," providing textual support that only the portion of the bankruptcy case sent to arbitration gets stayed. No one appears to have decided (or even argued) otherwise. It would be absurd, for example, to halt the entirety of multibillion restructuring over the arbitration of a contract dispute with one supplier. The main implication of section 3 for the bankruptcy tribunal is that parties have a right to appeal when a stay is denied. (12) Because the bankruptcy tribunal will not issue a stay when it finds a matter is nonarbitrable, the upshot is that such a finding is appealable. There is no comparable right to appeal a ruling sending a matter to arbitration.

      Section 4 of the LAA gives a party the right to petition a district court for an order directing arbitration when its counterparty has not respected an agreement to arbitration. (13) The district court must otherwise have jurisdiction. (14) Of course, one district court--acting through its bankruptcy court "unit"--already has jurisdiction by virtue of the bankruptcy petition. And, the bankruptcy removal statute allows the removal even of actions in other federal district courts to the court hearing the bankruptcy case. (15) Thus, section 4 does no real work in bankruptcy cases as a party can raise arbitrability directly in the bankruptcy case, and the court would simply proceed to decide the issue under command in section 2 about the enforceability of arbitration clauses.

      Section 2 is what bankruptcy tribunals need to follow when confronted with an arbitration clause. They are "valid, irrevocable, and enforceable,"...

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