MORE BANKRUPTCY ARBITRATION NEWS

Dispute Resolution Journal, May-Jul 2006

Arbitration continues to play a role in bankruptcy cases. The latest decision comes out of the 2nd Circuit.

Consumer case

In MBNA America Bank, N.A. v. Hill (No. 04-2086), 2006 WL 172213 (Feb. 2, 2006), the 2nd Circuit held that the bankruptcy court should have enforced an arbitration clause in an amendment of a consumer credit agreement, since the court lacked discretion to deny a stay of an adversary proceeding pending arbitration.

Shortly before filing a Chapter 7 petition under the Bankruptcy Code, the consumer authorized MBNA to make monthly withdrawals from her account in order to pay down her debt. She later filed a putative class action against MBNA, claiming that even though the company received notice of the bankruptcy proceeding, it continued to make withdrawals in violation of the automatic stay provision in § 362 of the Bankruptcy Code. MBNA filed a motion to stay the litigation in favor of arbitration pursuant to the arbitration clause in the parties' agreement. The bankruptcy court denied this motion and the district court affirmed. Both courts concluded that the § 362 claim was a "core" proceeding that was best heard in the bankruptcy court.

MBNA appealed to the 2nd Circuit, which reversed. It held that even in core bankruptcy matters, bankruptcy courts do not have discretion to override an arbitration agreement unless: (1) the proceedings are based on Bankruptcy Code provisions that "inherently conflict" with the Federal Arbitration Act, or (2) arbitration would "necessarily jeopardize" the objectives of this Code.

The 2nd Circuit ruled that arbitration would not seriously jeopardize the objectives of the bankruptcy law because the debtor's estate had already been administered and her debts discharged, leaving her estate unaffected by the present claim. The court also found that because the case was filed as a purported class action, the consumer's claims lacked the direct connection to her bankruptcy case that might call for refusing to compel arbitration.

This case follows on the heels of another pro-arbitration consumer bankruptcy decision, this one by the 3rd Circuit. This case, Mintze v. American General Financial Services, 2006 WL 45844 (2006), discussed in the February-April 2006 issue of this Journal, also involved a consumer. Minze held that the district court should have compelled arbitration between a Chapter 13 debtor and a lender because there were no bankruptcy issues involved in the case.

Commercial Bankruptcy case

Early in the year, on Jan. 19, 2006, the 3rd Circuit reached a different result in an automatic stay case involving commercial parties, ACandS Inc. v. Travelers Insurance (435 F.3d 252). The dispute involved insurance coverage for asbestos-related claims. After the panel was formed, ACandS, an asbestos installer, filed a Chapter 11 petition, triggering § 362 of the Bankruptcy Code. Thereafter, the arbitrators issued an award favorable to Travelers. ACandS sought to vacate the award but the district court denied the motion. On appeal, the 3rd Circuit reversed. It said that § 362 "promotes a public policy sufficient to preclude enforcement of an award that violates its terms or interferes with its purposes."