In a May 16, 2017 ruling, the United States District Court for the District of Delaware affirmed the order of the bankruptcy court denying a party’s motion to compel arbitration. In doing so, the District Court adhered to traditional rules of contract interpretation in holding that the relevant arbitration provision was not written broadly enough to include the type of dispute pending before the bankruptcy court, and thus, the bankruptcy court retained jurisdiction.

In FBI Wind Down, Inc., the debtor sold substantially all of its assets to a third-party purchaser pursuant to an asset purchase agreement (the “APA”). Certain assets and liabilities subject to the sale could not be quantified as of the closing date. The APA provided an adjustment mechanism by which the parties could true up their respective assets and liabilities. The APA also included an arbitration provision covering “any disputed items” regarding the adjustment mechanism. The bankruptcy court entered an order approving the sale, which included language providing the bankruptcy court with jurisdiction over the interpretation and enforcement of the APA and sale order, respectively. Following the sale, the bankruptcy trustee filed an adversary action against the purchaser seeking, among other things, a determination that certain assets were “Excluded Assets” under the APA. The purchaser sought to compel arbitration, which the bankruptcy court denied based on its finding that the relevant dispute concerned the interpretation of the APA and not the method of calculating the post-closing adjustment. The purchaser appealed the decision to the District Court.

The District Court adhered to legal precedent in affirming the order denying arbitration. Whether the relevant dispute was subject to arbitration was a question of contract interpretation. While the purchaser correctly noted that the federal courts favor arbitration provisions, the presumption in favor of arbitration applies only in those instances where the arbitration provision is broad. The District Court and the bankruptcy court each concluded that the relevant arbitration provision was narrow, because the provision was limited to “any disputed items” rather than language creating a broader umbrella, such as ‘any disputes’ or ‘all disputes.’ Accordingly, the purchaser did not receive the benefit of the presumption.

The District Court further held that the controversy concerned the interpretation of certain terms in the APA and whether specific assets were excluded from the sale. Questions of contract interpretation were reserved for the bankruptcy court as set forth in the sale order by the express agreement of the parties. The purchaser sought to overcome the language in the sale order by arguing that the dispute “touched on” matters covered in the arbitration provision, which the District Court rejected as contrary to the express language of the APA. The purchaser also argued that the District Court should give effect to the more specific language of the APA at the expense of the general terminology in the sale order. The District Court dismissed this argument based on its conclusion that the arbitration provision did not pertain to the same subject matter as the sale order, and where the APA did not include specific language resolving disputes concerning its interpretation, the sale order controlled. Accordingly, the District Court affirmed the order of the bankruptcy court.

This case reinforces the importance of word choice in drafting arbitration provisions. One should pay particular attention to the language used to describe the scope of the disputes subject to arbitration and make revisions based on its interest in benefiting from (or avoiding) the presumption in favor of arbitration. While the bankruptcy case added another layer to the analysis, the sale order was likely subject to comment from any interested party, and the purchaser should have filed an objection or negotiated revisions to the order. The purchaser failed to act accordingly, and the bankruptcy court entered the sale order containing the broad jurisdictional language. Consequently, the purchaser was not able to benefit from the arbitration provision in the APA.

The above-referenced case is FBI Wind Down Liquidating Trust v. Heritage Home Grp., LLC (In re FBI Wind Down, Inc.), Civ. No. 16-834-SLR (D. Del. May 16, 2017).