The U.S. Court of Appeals for the Eleventh Circuit has held that the bankruptcy court’s exclusive jurisdiction to dispose of estate property did not preclude the enforcement of an arbitration provision.
The court ruled that in a noncore proceeding, a bankruptcy court lacks discretion to deny enforcement of a valid arbitration clause. Further, in a core bankruptcy proceeding, the court must exercise its discretion to determine whether the arbitration clause should be enforced, the court concluded in In re Electric Machinery Enterprises, Inc., 479 F.3d 791 (11th Cir. 2007). The Eleventh Circuit reversed the district court’s ruling which had affirmed the bankruptcy court’s denial of a motion to compel arbitration.
Whiting-Turner was the general contractor on a theme-park construction job. The debtor, Electric Machine Enterprises, was a subcontractor. Both Whiting-Turner and the debtor incurred additional costs in their efforts to meet deadlines after the project owner refused to grant extensions of time to complete the project. Whiting-Turner and the debtor then submitted amended claims to the project owner for these additional costs. Whiting-Turner included the debtor’s additional costs as a “pass-through” claim in which Whiting-Turner sought to collect the amounts due to it and to the debtor by the project owner.
Whiting-Turner and the debtor entered into a tolling agreement, extending the time in which the debtor could assert its claims against Whiting-Turner, while Whiting-Turner pursued its remedies against the project owner. The tolling agreement provided, in part, that Whiting-Turner and the debtor would resolve any issues arising out of the tolling agreement by binding arbitration. Whiting-Turner and the project owner settled their claims for $9.6 million. Whiting-Turner then informed the debtor that, based on previous payments made by Whiting-Turner to the debtor, Whiting-Turner considered the debtor’s claim to be paid in full.
Prior to the settlement agreement between Whiting-Turner and the project owner, the debtor had initiated its chapter 11 proceedings in the United States District Court for the Middle District of Florida. After Whiting-Turner’s settlement with the project owner, the debtor filed an adversary action against Whiting- Turner seeking to compel payment of approximately $5 million in principal and $2.3 million in interest under the terms of the subcontract. The adversary action included one count for turnover of estate property and another count for breach of contract. The debtor moved for summary judgment claiming it was undisputedly owed certain amounts.
Whiting-Turner responded that the debtor’s records reflected it initially overstated its claim and had been paid in full. Whiting-Turner also filed its motion to compel arbitration.
The bankruptcy court denied the debtor’s motion for summary judgment, finding that the amounts were disputed and unliquidated. The court also denied the motion to compel arbitration, determining that Whiting-Turner had created a “constructive trust” by collecting money from the project owner that would, at least in part, inure to the benefit of the debtor. Having determined that the constructive trust existed, the court ruled that it had jurisdiction over the trust res, that the adversary action was a “core” proceeding, and that arbitration therefore was improper under the Bankruptcy Code.
The district court agreed.
The Eleventh Circuit concluded that where there is a valid arbitration clause, the clause must be enforced unless Congress clearly has expressed an intention to preclude arbitration of a claim. To determine if Congress expressed such a clear intent, the court must review the text of the statute, the legislative history, and whether there is an “inherent conflict between arbitration and the underlying purposes of the statute.”
The court also noted that federal policy favored enforcement of arbitration provisions. Based on these guiding principles, the court concluded that nothing in the text or the legislative history of the Bankruptcy Code evidenced Congressional intent to create an exception to the Federal Arbitration Act in the Bankruptcy Code.
The Eleventh Circuit determined that there was no inherent conflict present that would prohibit enforcement of the arbitration clause.
The court noted that in “noncore” bankruptcy proceedings, the bankruptcy court is compelled to enforce a valid arbitration clause. Even in “core” proceedings, the bankruptcy court must exercise discretion to determine whether the arbitration clause should be enforced in a core proceeding. The Eleventh Circuit concluded that the action at issue was not a “core” bankruptcy proceeding, and that the debtor had not produced evidence that submitting its claim against Whiting-Turner for resolution by arbitration, as the parties had agreed to do, would undermine the purposes of the Bankruptcy Code.