The Continuing Erosion of Arbitration Clauses in Bankruptcy Cases

Moritt Hock & Hamroff LLP

Although federal courts in the US generally give deference to arbitration agreements, consistent with the mandate of the Federal Arbitration Act (FAA), bankruptcy courts often utilise an exception contained in the FAA and subsequent case law to retain jurisdiction over a dispute; this exception provides that courts may 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, drawing upon precedent in the 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. A 20 January 2021 ruling by the District Court for the S.D. of California, affirming a bankruptcy court decision in the case of Pillsbury Winthrop Shaw Pittman, LLP (“Pillsbury”) v Cuker Interactive, LLC (“Cuker”), denied the request by Pillsbury to compel arbitration of a dispute with a bankrupt debtor as to whether the law firm’s claim for attorney’s fees was secured or unsecured pursuant to an arbitration clause in its engagement letter. The district court first noted that determining whether Pillsbury’s claim was secured or unsecured was a core bankruptcy issue, which should be determined by the bankruptcy court, and found that compelling arbitration would conflict with the underlying purposes of the Bankruptcy Code: (1) having bankruptcy law issues decided by bankruptcy courts; (2) centralising resolution of bankruptcy disputes; and (3) avoiding piecemeal litigation.

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Moritt Hock & Hamroff LLP

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