Court Holds Plan Does Not Trump Arbitration Clause In Parties’ Agreement

by Cadwalader, Wickersham & Taft LLP
Contact

Pursuant to its prepackaged plan of reorganization, which the bankruptcy court confirmed on December 8, 2009, CIT Group, Inc. rejected a tax agreement it had entered into with its former indirect parent company, Tyco International Ltd.  Tyco filed a proof of claim asserting rejection damages and demanded arbitration proceedings, relying on an arbitration clause in the tax agreement.  CIT then commenced an adversary proceeding, seeking to stay arbitration pending the bankruptcy court’s decision on whether to subordinate Tyco’s claim under section 510(b) of the Bankruptcy Code, as neither party disputed that if the court subordinated Tyco’s claim Tyco would receive no distribution under CIT’s plan of reorganization.  The bankruptcy court granted summary judgment to Tyco on the subordination issue, and CIT appealed directly to the Second Circuit as permitted under 28 U.S.C. § 158(d)(2)(A)(i) and (iii), circumventing an appeal to the district court.  Tyco responded with a motion to compel arbitration of its claim.  The bankruptcy court had to consider whether Tyco’s claim should be arbitrated, and if it should, whether to stay arbitration pending the Second Circuit’s decision.

CIT conceded that the arbitration clause in the tax agreement covered Tyco’s claim and also acknowledged that CIT’s rejection of the tax agreement did not constitute rejection of the arbitration clause.  CIT argued, however, that Tyco’s claim should not be arbitrated because of a clause in CIT’s plan of reorganization that stated that the bankruptcy court retained “exclusive jurisdiction . . . to the fullest extent permitted by law” to “determine all matters with respect to the assumption or rejection of any executory contract.”  Tyco countered by pointing to a contradictory clause in CIT’s plan that stated that the resolution of all claims must be determined “in the manner in which such claim would have been determined, resolved or adjudicated if the chapter 11 cases had not been commenced.”

The court determined that, even if the plan provision granting the bankruptcy court exclusive jurisdiction controlled, in light of the “strong federal policy favoring arbitration agreements,” it would refuse to compel arbitration only if arbitration would “necessarily jeopardize” the goals of the Bankruptcy Code.  CIT argued that permitting arbitration would “necessarily jeopardize” the objectives of the Bankruptcy Code because Tyco’s claim was “uniquely a creature of the Bankruptcy Code.”  The court rejected CIT’s argument, however, noting that unlike the issue of subordination, the determination of Tyco’s damages would not require consideration of bankruptcy law issues.  Furthermore, liquidation of Tyco’s claim would not delay consummation of CIT’s plan because the plan became effective several years ago.

Having decided that Tyco’s claim should be arbitrated, the court turned to the issue of whether to enjoin the arbitration pending a final decision on Tyco’s appeal to the Second Circuit on the subordination question.  The court noted that a stay pending appeal will be entered only when the movant demonstrates “(1) that irreparable harm is likely absent an injunction and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits of the case to make it a fair ground for litigation plus a balance of hardships tipping decidedly in [its] favor.”  CIT asserted that it would suffer irreparable harm because it would waste time and money arbitrating a claim that would have no value if CIT won on the subordination issue.  Although the court rejected this argument, noting that the incurrence of litigation costs does not ordinarily constitute irreparable harm, it nevertheless stayed the matter for a sufficient period to allow the Second Circuit to decide whether to grant CIT’s further stay motion.

In re CIT Group Inc. reaffirms the notion that a bankruptcy court may defer to another tribunal when considering issues that do not conflict with the goals of the Bankruptcy Code.  Further, language in the debtor’s plan with respect to the bankruptcy court’s jurisdiction will not be able to exceed the scope of the law.  The case also reiterates that rejection of a contract does not function to reject an arbitration clause.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP
Contact
more
less

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.