Second Circuit Rejects Arbitration of Debtor's Asserted Discharge Violation

To reach its extraordinary result, the court strained to distinguish Anderson from its earlier decision in MBNA America Bank v. Hill, 436 F.3d 104, 111 (2d Cir. 2006) (held, arbitration of debtor's “automatic stay claim would not necessarily jeopardize or inherently conflict with the Bankruptcy Code.”). The court also ignored Supreme Court precedent as well as the text of the Bankruptcy Code, the Judiciary Code and the legislative history. Most important, the Anderson decision may have significant consequences in business reorganization cases.

Relevance

Courts have disagreed on a clear test for determining whether a bankruptcy court must refer a dispute to binding arbitration. According to the Supreme Court, “the [Federal Arbitration] Act … mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218 (1985). An agreement to arbitrate requires no relinquishment of substantive rights, but is, instead, a “trade [of] the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” Mitsubishi Motors Corp. v. Solar Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985); American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309-2310 (2013). (Arbitration is “a matter of contract” and courts must “rigorously enforce arbitration agreements according to their terms.”)

The bankruptcy process centralizes the resolution of disputes in the bankruptcy court. That centralization is not absolute, though. See, 28 U.S.C. §1334(b) (district court has “original, but not exclusive jurisdiction” over proceedings “arising under” the Code, or “arising in or related to” bankruptcy cases). Thus, a judge has discretion to determine whether a “core” proceeding, such as an asserted discharge violation claim, should be referred to arbitration. “Bankruptcy courts are more likely to have discretion to refuse to compel arbitration of core bankruptcy matters.” Hill, 436 F.3d at 108. That jurisdictional scheme, however, gives the bankruptcy judge less power with respect to related non-core proceedings when the parties do not consent to a bankruptcy court adjudication. See, In re U.S. Lines, Inc., 197 F.3d 631, 637-37 (2d Cir. 1999).