Are Arbitration Agreements Enforceable In Bankruptcy?

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Posted On: October 19, 2013

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Bankruptcy Basics Case Law and Analysis

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Posted by: John O'Connor

Arbitration enforceable bankruptcy? Arbitration and Bankruptcy

Pursuant to Supreme Court decisions broadly applying the enforceability of the Federal Arbitration Act (FAA) mandatory arbitration clauses are becoming more common in consumer contracts of all kinds. Arbitration, with its limited discovery and lack of judicial review, appeals to large corporations weary of the unpredictable jury.

However, the case by case inquires in arbitration proceedings seem to conflict with one of the fundamental goals of the Bankruptcy Code: centralization of all disputes concerning the debtor.

FAA vs. Bankruptcy Code

This conflict between the FAA and the Bankruptcy Code has led most courts to hold that, at least as to core proceedings, a bankruptcy judge may refuse to enforce an arbitration agreement and may stay any pending arbitration proceedings. Courts have been unwilling to enforce arbitration agreements when core proceedings are involved because arbitration of these claims would interfere with the fundamental jurisdiction of the Bankruptcy Code.

What is a Core Proceeding?

Core proceedings involve matters that arise under the Code or only in bankruptcy cases. In noncore proceedings, there is no inherent conflict between the Code and the FAA. In these circumstances, courts will allow arbitration for dispute resolution as being “consistent with the Bankruptcy Code’s ‘mandate to enforce a valid pre-petition, non-executory contract, the presence of a strong federal policy favoring arbitration, and the absence of a serious conflict with the objectives of the Bankruptcy Code.” See In Re Farmland Industries, Inc. 309 B.R. 14, 19 (Bankr. W.D. Mo. 2004).

The bottom line is that any court is loathe to forfeit its properly conveyed jurisdiction, bankruptcy courts are no exception, and therefore may provide the consumer with a favorable forum for avoiding arbitration clauses so that their claims may be litigated in court.

See also: Will Your Arbitration Agreement Survive Bankruptcy?  , Laws By State

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