In re Matter of Eber: Ninth Circuit Considers Role of Arbitration in Bankruptcy Proceedings

In the Matter of Eber, --- F.3d --- (7/5/12), is not an employment case, but it is interesting because brings the Arbitration Wars to an unusual forum: the Bankruptcy Court.

This case arises on appeal from a bankruptcy court order denying motion to compel arbitration of claims for breach of contract, fraud, and breach of fiduciary duty. The bankruptcy court found that enforcing the arbitration agreement would allow the arbitrator to determine the dischargeability of the alleged debt, infringing on the bankruptcy court's exclusive jurisdiction to determine the dischargeability of debts for fraud, breach of fiduciary duty, and willful and malicious injuries. 11 U.S.C. 523(a).

The creditors appealed to the district court (C.D. Cal., Judge George H. Wu), which affirmed. They then appealed to the Ninth Circuit, which also affirmed.

The question for the Court was how to reconcile the Federal Arbitration Act (FAA) with the Bankruptcy Code.

While the FAA establishes a federal policy of favoring arbitration, “[l]ike any statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional command.” Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). The party that is opposing arbitration has the burden of proving “that Congress intended to preclude a waiver of judicial remedies for [the particular claim] at issue.” Id. at 227.   

To determine if Congress intended to override the FAA’s policy favoring arbitration in a particular statute, courts must examine: (1) the text of the statute; (2) its legislative history; and (3) whether an inherent conflict between arbitration and the underlying purposes of the statute exist. Id.  

***  

This Circuit and sister circuits applying the McMahon factors to the Bankruptcy Code have found no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code.... The relevant inquiry then becomes “whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.” 

Slip op. at 7898.

The Court held that "allowing an arbitrator to decide issues that are so closely intertwined with dischargeability would 'conflict with the underlying purposes of the Bankruptcy Code.'" Slip op. at 7901. These "underlying purposes" include "centralization of disputes concerning a debtor’s legal obligations, and protection of debtors and creditors from piecemeal litigation." Ibid. As a result, the bankruptcy court did not abuse its discretion in denying the motion to compel arbitration. Ibid. 

This decision of course brings to mind D.R. Horton (discussed here), in which the National Labor Relations Board found (1) no conflict between Federal labor law and the FAA, and (2) even if such a conflict exists, the FAA must yield.  D.R. Horton is pending before the Fifth Circuit Court of Appeals (Case No. 12-60031), and I have added it to our watch list of pending cases.  

The opinion is available here.