by Lorenzo Antonio Hoppe Villegas*
While the Bankruptcy Code’s automatic stay halts actions against debtors who have declared bankruptcy, the Federal Arbitration Act (“FAA”) may nonetheless require debtors to resolve disputes with their creditors in arbitration. In this Contribution, Lorenzo Villegas (’22) argues that the passage of 11 U.S.C. § 362 and related judicial code provisions does not impliedly repeal the Federal Arbitration Act (“FAA”). Therefore, arbitration agreements between creditors and debtors who have filed a Chapter 11 bankruptcy petition are valid and enforceable in the face of the Bankruptcy Code’s automatic stay in some circumstances.
The Federal Arbitration Act (“FAA”) allows parties to enter into arbitration agreements that provide “quicker, more informal, and often cheaper resolutions for everyone involved.”1 The FAA requires courts to treat arbitration agreements as “valid, irrevocable, and enforceable.”2 Congress subsequently enacted 11 U.S.C. § 362 and related judicial code provisions (the “Bankruptcy Code”), which halts actions by creditors against a debtor who has declared bankruptcy. This raises the question of whether arbitration agreements between a debtor and their creditors are enforceable once the debtor has declared bankruptcy and the automatic stay is in place.
The plain meaning and legislative history of the Bankruptcy Code demonstrate that Congress did not intend to repeal the FAA. There is no evidence to suggest that Congress intended to create an inherent conflict between the Bankruptcy Code and the FAA, and thus repeal the latter. Even if the existence of an inherent conflict is independently sufficient grounds to support limited implied repeal, enforcement of arbitration agreements is still appropriate under certain circumstances. First, the distinction between core and non-core bankruptcy proceedings is not dispositive. Second, the importance of the automatic stay to the bankruptcy scheme is, on its own, insufficient to create a conflict. Third, allowing arbitration would not necessarily jeopardize the Bankruptcy Code’s objectives of providing a “fresh start,” proper administration of the bankruptcy estate, and preserving the collective nature of a bankruptcy dispute.
The Supreme Court has interpreted the congressional mandate of the FAA as creating “a liberal federal policy favoring arbitration agreements . . . .”3 While subsequent congressional action can allow courts to decline to enforce arbitration agreements, Congress’s intention must be evident from the statute’s text, legislative history, or an irreconcilable conflict between arbitration and the subsequent statute.4
The argument that a subsequent statute overrides the FAA “faces a stout uphill climb.”5 When facing two congressional acts concerning the same topic, the Court must strive “to give effect to both.”6 A contrary congressional command may override the FAA’s mandate to enforce arbitration agreements.7 However, when evaluating a claimed conflict, the Court must come armed with “the ‘stron[g] presum[ption]’ that repeals by implication are ‘disfavored’ and that ‘Congress will specifically address’ preexisting law when it wishes to suspend its normal operations in a later statute.”8 This command “will be deducible from [the statute’s] text or legislative history . . . or from an inherent conflict between arbitration and the statute’s underlying purposes.”9
Looking first to the statute’s text, there is no mention of the FAA anywhere in the Bankruptcy Code. The word “arbitration” does not appear once in the Bankruptcy Code. Additionally, the legislative history of the Bankruptcy Code makes only a single passing reference to arbitration.10 Even though legislative history can potentially “illuminate ambiguous text” and, in the present case, the legislative history does reference arbitration, the Supreme Court has stated that it will not allow “ambiguous legislative history to muddy clear statutory language.”11 In the present case, the legislative history is ambiguous and the absence of arbitration from the text reveals a clear lack of intention to repeal. Ultimately, the text and legislative history of the Bankruptcy Code do not support the contention that Congress impliedly repealed the FAA.
Congress has repeatedly shown its capability—in, for example, the Motor Vehicle Franchise Contract Arbitration Fairness Act,12 Commodity Exchange Act,13 Consumer Financial Protection Act,14 and the Military Lending Act15—to override the FAA when it wishes. The fact that no similar language is present in the Bankruptcy Code weighs heavily against a claim that Congress intended to repeal the FAA as applied.
The Supreme Court’s ruling in Epic has produced two diverging theories on the implied repeal of the FAA. One interpretation of the case is that Epic altered, clarified, or otherwise overruled the test employed in McMahon and established that irreconcilable conflict between a statute and the FAA must be supported with clear and manifest congressional intent.16 The other interpretation holds that the McMahon test remains fully in effect and that congressional intent is deducible from the presence of inherent conflict between the statutes.17
In order to demonstrate that two statutes are irreconcilable, the moving party bears the burden of showing “a clearly expressed congressional intention” that such a result should follow.18 In other words, the moving party must demonstrate not only that the statutes cannot be harmonized, but also that Congress had a “clear and manifest” intention that they conflict.19 As stated in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, “[w]e must assume that if Congress intended the substantive protection afforded by a given statute to include protection against waiver of the right to a judicial forum, that intention will be deducible from text or legislative history.”20 This holding would seem to foreclose a court’s ability to engage in irreconcilable conflict analysis absent some support from text or legislative history. In the context of the Bankruptcy Code and the FAA, the absence of intent to conflict in the text and legislative history means that courts must find a way to reconcile the two statutes. As the Epic Court put it: the later statute “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.”21
Earlier cases like Gilmer and McMahon would seem to imply that any one of three indicators—such as the Bankruptcy Code’s text, the legislative history, or an irreconcilable conflict between the Bankruptcy Code and the FAA—independently constitute sufficient evidence of implied repeal. Specifically, McMahon held that congressional intent to impliedly repeal a statute may be “deducible . . . from an inherent conflict between arbitration and the statute’s underlying purposes.”22 Put differently, the existence of an inherent conflict was sufficient to allow courts to deduce congressional intent. However, more recent Supreme Court cases, such as Mitsubishi and Epic, take the view that any conflict must be supported by “clear and manifest” congressional intent in order to be deemed irreconcilable.23 Because Epic requires a “text-first analysis” and “clear and manifest” contrary congressional command, there is reason to “doubt . . . the continued vitality of McMahon’s ‘inherent conflict’ approach.”24 In fact, the distinction between McMahon’s “deducible from the presence of inherent conflict” standard and Epic’s “clear and manifest expression of intent” standard is so great so as to be considered a completely separate test.
Even if congressional intent for statutory conflict or for the Bankruptcy Code to override the FAA is not a necessary element for proving implied repeal, arbitration agreements are enforceable because they can be reconciled with the Bankruptcy Code. The Supreme Court has not elucidated an explicit test of what constitutes irreconcilable conflict; however, several circuits have interpreted McMahon as suggesting that the distinction between core and non-core proceedings is a favorable indicator of whether a provision of the Bankruptcy Code conflicts with the FAA.25 Congress has articulated “a nonexclusive list of 16 types of proceedings” that may be considered “core” to bankruptcy law in 28 U.S.C. §157(b)(2).26 Core proceedings are those that involve “more pressing bankruptcy concerns.”27 Conversely, non-core bankruptcy matters are those that are generally only tangentially related to bankruptcy cases.28
Generally, bankruptcy courts lack discretion to preclude enforcement of arbitration clauses when a proceeding is non-core.29 Even if a proceeding is considered core, the bankruptcy court may not have discretion to override an arbitration agreement if the provisions of the Bankruptcy Code does not “inherently conflict” with the FAA and does not necessarily jeopardize the objectives of the Bankruptcy Code.30 Because the very question that the core/non-core test is designed to answer (whether the conflict is irreconcilable) requires asking an almost identical question (whether the conflict is inherent), the core/non-core distinction is unhelpful.
Thus, courts must continue to evaluate whether an irreconcilable conflict exists between the FAA and the Bankruptcy Code. In addressing this question, courts have considered the importance of the provision to the objectives of the overall statutory scheme, though the current Supreme Court has cautioned that “allowing judges to pick and choose between statutes risks transforming them from expounders of what the law is into policymakers choosing what the law should be.”31 The Supreme Court has established a high threshold to meet this test, and the automatic stay, while certainly central to the Bankruptcy Code, cannot be said to be irreconcilable with the FAA. To date, the Supreme Court has rejected every single claim of irreconcilable statutory conflict with the FAA that has come before it. 32 These cases have considered statutes ranging from the Sherman and Clayton Acts to the Age Discrimination in Employment Act, the Credit Repair Organizations Act, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Racketeer Influenced and Corrupt Organizations Act and have reconciled the FAA with each and every one of them.33
In Mitsubishi, the Court was confronted with a claimed conflict between the FAA and the Sherman Act, which contained a treble-damages provision providing a private cause of action. The Court noted that antitrust laws are of fundamental importance to the preservation of American democratic capitalism and “[w]ithout doubt, the private cause of action plays a central role in enforcing . . . [the antitrust] . . . regime.”34 The treble-damages provision of the Sherman Act was, in other words, a “chief tool” in the antitrust enforcement regime because it posed a “crucial deterrent to potential violators.”35 Thus, the role of treble damages is at least as central to the antitrust regime as the automatic stay is to the bankruptcy regime. Additionally, the private cause of action in antitrust suits and the automatic stay are both voluntary option rights that a party possesses and willingly gives up when signing an arbitration agreement.
Yet, the Mitsubishi Court refused to hold that the Sherman Act and the FAA were irreconcilable. First, the costs of judicial activism were too high. Second, the arbitrator could provide an adequate and effective remedy for the parties and ensure that the legitimate interests of the antitrust regime had been addressed. Third, judicial scrutiny of arbitration decisions, though limited, is sufficient to ensure that arbitrators comply with the countervailing statutory requirements. The McMahon Court reiterated that an agreement to arbitrate was unenforceable only because the arbitral forum proved “inadequate to enforce the statutory rights” at issue.36
In 2006, the Second Circuit addressed the question of inherent conflict with the FAA as applied specifically to the automatic stay in a bankruptcy proceeding.37 The court stated that bankruptcy courts may have discretion to override arbitration if arbitration “necessarily jeopardize[s]” objectives of the Bankruptcy Code.38 The objectives relevant to this inquiry include the goals of providing debtors with a “fresh start,” the “centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders.”39 Additionally, this inquiry required a particularized investigation “into the nature of the claim and the facts of the specific bankruptcy.”40
In MBNA American Bank, N.A. v. Hill, the debtor filed adversary proceedings against the creditor as a putative class action on behalf of herself and others similarly situated, alleging violation of the automatic stay and unjust enrichment.41 At the time of the action, the debtor’s estate had been fully administered and her debts discharged, so the automatic stay no longer provided any protection to the debtor. Additionally, the assets repossessed by the creditor were returned to the debtor prior to the commencement of the action.42
The Hill court concluded from these facts that: (1) arbitration would not affect the administration of the bankruptcy estate; (2) the debtor’s claims lacked direct connection to her own restructuring; and (3) a non-bankruptcy court would be capable of interpreting and enforcing the provisions of the stay.43 Consequently, the court ruled that the FAA did not inherently conflict with the Bankruptcy Code.
In fact, courts have routinely held that bankruptcy and non-bankruptcy courts have concurrent jurisdiction to interpret the scope of the automatic stay.44 It logically follows that an arbitrator can address the scope of the automatic stay with the same degree of aptitude as a bankruptcy court. The Mitsubishi Court implied as much when it stated that parties that agree to arbitration do not “forgo the substantive rights afforded by the statute.”45 Rather, their agreement merely “trades the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.”46 As stated in McMahon, the question of jurisdiction to interpret the scope of the automatic stay is answered by determining whether a plaintiff would be able to “vindicate . . . [their] . . . statutory cause of action in the arbitral forum.”47 As the Mitsubishi Court astutely observed, arbitration might, in fact, be uniquely well-equipped to address the certain bankruptcy-related disputes because it offers flexibility, expediency, and cost savings to the participants.48
A serious policy concern arises out of the tension between the multiparty nature of bankruptcy proceedings and the two-party nature of arbitration agreements. For example, two parties might agree to an arbitration agreement, enter into a bankruptcy proceeding with multiple creditors, and subsequently attempt to resolve a dispute through arbitration. It is possible that one creditor in the proceeding who did not enter an arbitration agreement may nonetheless find their recovery contingent upon an arbitrator’s ruling regarding the debtor and another creditor. This has the potential to transform the creditor-versus-debtor conflict into a creditor-versus-creditor competition.
One problem is that the potential for a multiparty proceeding is present at almost any intersection between bankruptcy and arbitration, regardless of how significant the conflict is. If the mere possibility of implicating multiple parties can suffice to dispel arbitration, then no bankruptcy proceeding can ever be waived by arbitration. It seems unlikely that Congress intended such a result, so courts must evaluate the particular bankruptcy provision at issue and the facts of the specific bankruptcy.49
One factor that might be considered is the sophistication of the parties and their capacity to contract freely. In Hill and Anderson v. Credit One Bank, N.A., the debtors were a student and a private credit card holder, respectively. The students’ ability to understand the consequences of an arbitration clause or leverage to negotiate is less than that of a multinational corporation or commercial lender. Under basic contract principles, an agreement between more sophisticated parties should be given effect, while an agreement between less sophisticated parties might be considered less binding.50
Another factor might be whether the resolution of the dispute in arbitration would disrupt the administration or disposition of the bankruptcy estate. Where the creditor party to the arbitration has a first priority lien on substantially all of the debtor’s asset’s there is no real concern about the race to the courthouse. The priority lienholder is the predetermined winner. Arbitration would not, therefore, disrupt the collective or multiparty nature of a bankruptcy proceeding when it concerns the debtor and a creditor with a first priority lien on the assets in question.
A final factor might be whether the choice is between enforcement of a bankruptcy right or arbitration, or between the different fora in which the applicability of the bankruptcy right is adjudicated. The nature of the dispute may be such that the debtor is not relinquishing substantive rights in favor of arbitration, but rather vindicating their statutory rights in the arbitral, rather than bankruptcy, forum.51 Because the rights of the debtor remain the same, there is not a substantial impact on third-party creditors. Thus, arbitration of such cases can provide an adequate and effective remedy for the parties without jeopardizing the objectives of the Bankruptcy Code.
The text and legislative history, countervailing interests in favor of arbitration, and availability of factors to conduct case-by-case analysis all favor the enforcement of certain arbitration agreements within the bankruptcy context. Furthermore, the Supreme Court, through its consistent application of the FAA to a variety of statutory schemes and through the logic espoused in cases like Epic, has demonstrated that it is possible and often necessary to enforce arbitration agreements in the bankruptcy context.
* Lorenzo Antonio Hoppe Villegas is a J.D. Candidate (2022) at New York University School of Law. This contribution arose from the problem presented at the 2021 Duberstein Bankruptcy Moot Court Competition at St. John’s University School of Law. The question presented asked whether 11 U.S.C. § 362 and related judicial code provisions impliedly repealed the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. The views expressed in this contribution do not necessarily represent the views of the author. The article is a distillation of one side of the argument assigned to the team.
1. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1621 (2018) (citation omitted).
2. 9 U.S.C. § 2.
3. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
4. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987).
5. Epic, 138 S. Ct. at 1624.
6. Morton v. Mancari, 417 U.S. 535, 551 (1974) (internal citation and quotations omitted).
7. McMahon, 482 U.S. at 226.
8. Epic, 138 S. Ct. at 1624 (citing United States v. Fausto, 484 U.S. 439, 452–53 (1988)).
9. McMahon, 482 U.S. at 227 (emphasis added) (internal citation and quotations omitted).
10. The Senate Report states only: “The scope of . . . Section 362(a)(1) is broad. All proceedings are stayed, including arbitration, administrative, and judicial proceedings.” S. Rep. No. 989, 95th Cong., 2d Sess. 50 (1978). Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1129 (9th Cir. 2012) (finding “no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code”); Cont’l Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1020 (9th Cir. 2012) (“Neither the text nor the legislative history of the Bankruptcy Code reflects a congressional intent to preclude arbitration in the bankruptcy setting.”); Whiting-Turner Contracting Co. v. Elec. Mach. Enters. (In re Elec. Mach. Enters.), 479 F.3d 791, 796 (11th Cir. 2007) (“[W]e find no evidence within the text or in the legislative history that Congress intended to create an exception to the FAA in the Bankruptcy Code.”); Mintze v. Am. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 231 (3d Cir. 2006) (“We find no evidence of such intent [to override the FAA] in either the statutory text or the legislative history of the Bankruptcy Code.”).
11. Milner v. Dep’t of the Navy, 562 U.S. 562, 572, (2011).
12. 15 U.S.C. § 1226(a)(2).
13. 7 U.S.C. § 26(n)(2).
14. 12 U.S.C. § 5567(d)(2).
15. 10 U.S.C. § 987(e)(3).
16. See, e.g., MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006).
17. See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991).
18. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018) (internal citations omitted).
19 Morton v. Mancari, 417 U.S. 535, 551 (1974) (internal citations and quotations omitted).
20. 473 U.S. 614, 628 (1985) (evaluating whether the policy underlying the treble damages provision of the Sherman Act was inherently in conflict with the FAA).
21. 138 S. Ct. at 1624.
22. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987).
23. Epic, 138 S. Ct. at 1624; see Mitsubishi, 473 U.S. at 628 (stating arbitration agreements are enforceable unless “Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue”).
24. Leslie A. Berkoff & Theresa A. Driscoll, In the Wake of the U.S. Supreme Court’s Decision in Epic Systems, Should Core Bankruptcy Matters Be Deemed a “Clear and Manifest” Exception to the Federal Arbitration Act? 29 No. 2 Norton J. Bankr. L. & Prac. 1, 1 (2020).
25. See, e.g., Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382, 387 (2d Cir. 2018), cert. denied sub nom. 139 S. Ct. 144 (2018); Whiting-Turner Contracting Co. v. Elec. Mach. Enters. (In re Elec. Mach. Enters.), 479 F.3d 791, 796 (11th Cir. 2007); Phillips v. Congelton, L.L.C. (In re White Mountain Mining Co., L.L.C.), 403 F.3d 164, 169 (4th Cir. 2005); In re Hermoyian, 435 B.R. 456, 463–64 (Bankr. E.D. Mich. 2010).
26. Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1940 (2015).
27. In re United States Lines, Inc., 197 F.3d 631, 640 (2d Cir. 1999).
28. Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy Co.), 226 F.3d 160, 166 (2d Cir. 2000).
29. See, e.g., Anderson, 884 F.3d at 388.
30. Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re Nat’l Gypsum Co.), 118 F.3d 1056, 1067 (5th Cir. 1997).
31. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1624 (2018) (emphasis in original).
32. Id. at 1627.
34. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 635 (1985).
36. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 229 (1987).
37. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006).
38. Id. at 108.
39. Ins. Co. of N. Am. v. NGC Settlement Tr. & Asbestos Claims Mgmt. Corp. (In re Nat’l Gypsum Co.), 118 F.3d 1056, 1069 (5th Cir. 1997).
40. Anderson v. Credit One Bank, N.A. (In re Anderson), 884 F.3d 382, 389 (2d Cir. 2018), cert. denied subnom. 139 S. Ct. 144 (2018) (internal citation omitted).
41. Hill, 436 F.3d at 106.
42. Id. at 109.
44. See, e.g., Dominic’s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757, 760 (6th Cir. 2012) (“The court in which [a non-bankruptcy] proceeding is pending . . . has jurisdiction to decide whether the proceeding is subject to the stay.”); Erti v. Paine Webber Jackson & Curtis, Inc. (In re Baldwin-United Corp. Lit.), 765 F.2d 343, 347 (2d Cir. 1985) (“Whether the stay applies to litigation otherwise within the jurisdiction of . . . [a federal court] . . . is an issue of law within the competence of both the court within which the litigation is pending . . . and the bankruptcy court . . . .”).
45. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985).
47. Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 240 (1987).
48. Mitsubishi, 473 U.S. at 628.
49. Id. at 626; MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006).
50. Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 9 (1972) (stating that “[t]he expansion of American business and industry will hardly be encouraged if, notwithstanding solemn contracts, we insist on a parochial concept that all disputes must be resolved under our laws and in our courts”).
51. Mitsubishi, 473 U.S. at 628; McMahon, 482 U.S. at 240.