March 27, 2014 Articles

Compelling Arbitration in an Adversary Proceeding

More and more bankruptcy and district courts have compelled arbitration against debtors or their trustees.

By Gregory W. Werkheiser and Christopher M. Hayes

Although debtors and bankruptcy trustees typically favor litigating claims against third parties in the friendly confines of a bankruptcy court, those initiating adversary proceedings against counterparties to a contract that contains an arbitration provision may find themselves litigating in a somewhat less friendly venue: in a conference room in the local offices of an arbitration association. Debtors and bankruptcy trustees, who stand in the shoes of the debtor, are often subject to arbitration provisions contained in the debtor’s pre-petition contracts when they assert claims arising from those agreements. In such a case, the Federal Arbitration Act generally requires bankruptcy judges to compel a debtor or trustee to comply with the debtor’s agreement to arbitrate certain disputes between the parties, unless arbitration would conflict with a fundamental purpose of the Bankruptcy Code. As explained below, conflicts between the Bankruptcy Code and arbitration are not easily identified, and more and more bankruptcy and district courts have compelled arbitration against debtors or their trustees. See, e.g., In re Great Spa Mfg. Co., 2009 WL 1457740 (Bankr. E.D. Tenn. 2009); In re Tirex, Inc., 395 B.R. 182 (Bankr. S.D. Fla. 2008); In re Shores of Panama, Inc., 387 B.R. 864 (N.D. Fla. 2008); In re Wire Comm Wireless, Inc., 2008 WL 4279407 (E.D. Cal. 2008); In re Piedmont Engineers of Carolinas, P.C., 2008 WL 2902182 (Bankr. M.D.N.C. 2008); Brownstone Inv. Grp., LLC v. Levey, 514 F. Supp. 2d 536 (S.D.N.Y. 2007); In re Martin, 387 B.R. 307 (Bankr. S.D. Ga. 2007); In re Friedman’s, Inc., 372 B.R. 530 (Bankr. S.D. Ga. 2007); Pac. Emp’rs Ins. Co. v. Moglia, 365 B.R. 863 (N.D. Ill. 2007); In re Cooley, 362 B.R. 514 (Bankr. N.D. Ala. 2007); In re Fries, 2007 WL 1073868 (Bankr. D. Md. 2007); In re Dixon, 2007 WL 703612 (Bankr. M.D. Ala. 2007); In re Arellano, 2007 WL 1746246 (Bankr. D. N.M. 2007); In re Dawsey, 2007 WL 1140358 (Bankr. M.D. Ala. 2007); In re Rozell, 357 B.R. 638 (Bankr. N.D. Ala. 2006); In re White, 2006 WL 3694858 (Bankr. N.D. Ala. 2006); In re Merrill, 343 B.R. 1 (Bankr. D. Me. 2006).

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