Summary Of Bankruptcy / ADR Cases
by: Kyung S. Lee
Diamond McCarthy Taylor Finley & Lee, LLP; Houston
Erin E. Jones
Diamond McCarthy Taylor Finley & Lee, LLP; Houston
A Challenge to the Validity of a Contract as a Whole, and Not Specifically to the Arbitration Clause Within It, Must Go to the Arbitrator, Not the Court, Even if the Contract Is Later Found to Be Void
In Buckeye Check Cashing Inc. v. Cardegna, 546 U.S. ____, 126 S.Ct. 1204 (Feb. 21, 2006), respondents received cash in exchange for a personal check in the amount of the cash plus a finance charge. For each of these deferred-payment transactions that respondents entered into with Buckeye, they signed an agreement containing a mandatory arbitration provision. Respondents sued in Florida state court, alleging that Buckeye charged usurious interest rates and that the agreement violated various Florida laws, rendering it criminal – and thus invalid – on its face. The court reaffirmed and consolidated its holdings in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), and Southland Corp. v. Keating, 465 U.S. 1 (1984)1. The Court held that, regardless of whether it is brought in federal or state court, a challenge to the validity of a contract as a whole, and not specifically to the arbitration clause within it, must go to the arbitrator, not the court. Although this rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void, the opposite approach would permit a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable.
Arbitration of Adversary Proceeding Post-Discharge Would Not Necessarily Jeopardize or Inherently Conflict with Bankruptcy Code – MBNA American Bank N.A. v. Hill, 2006 WL 172213 (2d Cir. 2006).
The Second Circuit reversed a district court opinion affirming the bankruptcy court’s order denying MBNA’s motion to dismiss or stay the adversary proceeding in favor of arbitration under the Federal Arbitration Act (FAA). The debtor-plaintiff filed an adversary proceeding against MBNA (styled as a class action) seeking damages for willful violation of the automatic stay. The debtor-plaintiff alleges that MBNA willfully violated the automatic stay when it automatically withdrew a monthly payment from the debtor’s bank account after the petition date despite having notice of the bankruptcy. MBNA moved to stay or dismiss the adversary proceeding in favor of arbitration based on an arbitration agreement contained in the plaintiff’s credit-account agreement. The bankruptcy court denied MBNA’s motion on the basis that the bankruptcy court was the most appropriate forum for resolving the issues. The district court affirmed. The Second Circuit reversed and remanded to the bankruptcy court with directions and determined that because the debtor’s bankruptcy case had been fully administered and the debtor received a discharge, the debtor no longer needed the protection of the automatic stay. As such, the Second Circuit held that the bankruptcy court did not have the discretion to deny arbitration under the FAA because it would not seriously jeopardize the objectives of the Bankruptcy Code (i.e., reorganization/fresh start) to allow arbitration.
Retention of Judicial Remedies Are Not Sufficient to Render Arbitration Clause “Substantively Unconscionable” – First Franklin Corporation v. Locke D. Barkley (In re Eugene Anthony), 2005 WL 3465522 (Bankr. N.D. Miss. 2005).
A chapter 13 trustee filed an adversary proceeding against a lender for predatory lending practices. The trustee alleged that the lender engaged in “force placing” credit life, disability and/or collateral insurance on various loan transactions and overcharged premiums for such insurance. On a motion for summary judgment filed by the lender to compel arbitration, the court determined that the cause of action for predatory lending was not a “core” matter; rather, it was a “noncore” or “related” proceeding. The court also rejected the trustee’s argument that the contract was unenforceable under Mississippi state law because the arbitration agreement was “substantively unconscionable.” Specifically, the trustee unsuccessfully argued that the contract was one-sided and therefore “substantively unconscionable” under state law because of the provision of the arbitration agreement allowing the lender to retain judicial remedies (such as foreclosure), while the debtor’s remedies were limited only to arbitration. The court held that it did not have the discretion to refuse to compel arbitration because the matter was not a “core proceeding” and the arbitration agreements were otherwise enforceable according to the terms under state law.
Optional Pre-Trial Mediation a Factor in District Court’s Refusal to Withdraw Reference in Preference Case – Plan Administrator, on behalf of the Post Consummation Estate of the Finance Company Debtors v. Lone Star RV Sales Inc. (In re Conseco Finance Corp.), 324 B.R. 50 (D. N.D. Ill. 2005)
After consummation of the plan, the plan administrator brought an adversary proceeding to avoid preferential transfer(s) received by the defendant. The defendant filed a motion with the district court to withdraw the reference. In this case, the plan administrator was granted the authority under the plan to pursue causes of action on behalf of the estate, including preference actions. Due to the large number of adversary proceedings filed by the plan administrator, the bankruptcy court initiated an optional pre-trial mediation procedure, which defendants had the opportunity to opt out of. The defendant in this case did not opt out of the mediation procedure. In determining whether to exercise “permissive withdrawal,” the district court took into account the fact that a preference is a “core proceeding,” which should be heard by the bankruptcy court. The district court also considered the optional mediation procedure as a factor in favor of denying the defendant’s motion to withdraw the reference. Because the optional mediation program (which the defendant did not opt out of) had been so successful, the district court denied the defendant’s motion and held that retention of jurisdiction by the bankruptcy court would result in more uniform administration of all preference cases filed by the plan administrator.
Award of Mediation Sanctions in Pre-Petition State Court Lawsuit Excepted from Discharge –Detroit Forming Inc. v. James B. Wolf (In re James B. Wolf Jr.), 331 B.R. 256 (D. E.D. Mich. 2005)
A former employer of a chapter 7 debtor filed an adversary proceeding seeking to except from discharge a claim based on an award of mediation sanctions in an underlying state court lawsuit. In the suit, the debtor rejected a settlement recommended by the mediation panel and then failed to obtain a more favorable result at trial. As such, the state court awarded mediation sanctions against the debtor. The district court affirmed the bankruptcy court’s holding that under these facts, the claim for mediation sanctions was nondischargeable under 11 U.S.C. §523(a)(6) as debt for the debtor’s willful and malicious injury in pursuing state court action in an attempt to blackmail a former employer into settling.
Montana Arbitration Statute Preventing Arbitration of Insurance Disputes Pre-Empted by Federal Arbitration Act – In re Northwestern Corporation v. National Union Fire Insurance Company of Pittsburgh P.A., 321 B.R. 120 (Bankr. D. Del. 2005)
A chapter 11 debtor moved to compel arbitration of a noncore dispute regarding coverage under an insurance policy. The insurance company resisted the motion to compel arbitration based on the Montana Arbitration Statute, which prevents arbitration of disputes relating to insurance policies or annuity contracts. The bankruptcy court granted the debtor’s motion and held that the Federal Arbitration Act (FAA) preempted the Montana Arbitration Statute. The court held that absent other legally compelling reasons, a bankruptcy court does not have discretion to deny a motion to compel arbitration of a noncore dispute. The court held that states may not decide that a contract is fair enough to enforce all of its basic terms but not fair enough to enforce its arbitration clause. The court held that the FAA makes any such state policy unlawful, and Supreme Court opinions consistently hold that such legislation is preempted by the FAA. The court held that the dispute between the debtor and insurer was a private matter that could not meaningfully impair the state’s ability to regulate the insurance business so that the FAA, as applied to preempt this provision of the Montana Arbitration Statute, was not itself overridden by the McCarran-Ferguson Act.
1 In those cases, the court held that (I) as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract; (II) unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance; and (III) these holdings apply in state as well as federal courts (because the FAA preempts state law).