MONTH-IN-BRIEF (Mar 2021)
Bankruptcy Courts Continue to Decline Enforcement of Arbitration Clauses in Core Cases
By Leslie Berkoff
Although the Federal Arbitration Act generally supports enforcement of arbitration clauses, bankruptcy courts often utilize an exception to preclude arbitration of a dispute where there is an inherent conflict between arbitration and the underlying purposes of the implicated statute. A recent decision in the Ninth Circuit held that a bankruptcy court has the discretion to decline enforcement of an otherwise applicable arbitration provision if the arbitration would conflict with the underlying purposes of the Bankruptcy Code. In Pillsbury Winthrop Shaw Pittman, LLP v. Cuker Interactive, LLC, the court denied the request by a law firm to compel arbitration of a dispute for attorneys’ fees based upon an arbitration clause in an engagement letter. The district court found that the underlying dispute was a core bankruptcy issue as it went to whether the claim was a secured claim and held that compelling arbitration would conflict with the underlying purposes of the Bankruptcy Code: (1) having bankruptcy law issues decided by bankruptcy courts; (2) centralizing resolution of bankruptcy disputes; and (3) avoiding piecemeal litigation. This decision is consistent with holdings by other circuit courts dealing with core matters. While courts addressing non-core matters generally find that they don’t have the discretion to deny request for arbitration, several courts, however, have left open the possibility for such discretion, as they limited the importance of the core/non-core distinction and simply analyzed whether arbitration of the non-core matter would undermine the goal of reorganization under the Bankruptcy Code. This area continues to develop along with the growing desire to utilize dispute resolution as a means to address issues.