United States: Bankruptcy Court Refuses To Send Cash Collateral Dispute To Arbitration

Last Updated: March 5 2013
Article by Michael A. Stevens and Michele C. Maman

Most Read Contributor in United States, October 2018

U.S. Bankruptcy Court Judge Robert Drain's decision in the Hostess case demonstrates that even if a dispute between a debtor and a third party is arguably subject to a pre-petition arbitration clause, that dispute may not be subject to arbitration if it is considered a "substantially" core aspect of the bankruptcy process.

On January 7, 2013, the Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that a dispute concerning the debtors' use of cash collateral was not subject to arbitration, notwithstanding a broad arbitration clause in the parties' underlying agreement, because the decision to allow a debtor to use cash collateral constituted a "core" issue and was a fundamental aspect of the bankruptcy process. In re Hostess Brands, Inc., No. 12-22052 (RDD), 2013 WL 82914 (Bankr. S.D.N.Y. Jan. 7, 2013).

Background

On November 5, 2012, the debtors, Hostess Brands, Inc. and certain affiliates, filed a motion for authority to use the cash collateral of ACE American Insurance Company (ACE), pursuant to §363, §361 and §105 of the Bankruptcy Code. Previously, the debtors had assumed certain insurance agreements with ACE and agreed to provide ACE with cash collateral to secure the debtors' obligations to ACE pursuant to a collateral agreement. While the debtors' cash collateral motion was pending, ACE filed a motion to compel arbitration of what it termed a contract dispute underlying the cash collateral motion. In its motion to compel, ACE alleged that the debtors' request to use ACE's cash collateral contemplates a breach of the collateral agreement, and that the

EYES

dispute over this breach must be arbitrated pursuant to the collateral agreement's arbitration clause. The arbitration clause in question is very broad, providing that any dispute relating to the collateral agreement, including any breach of the agreement, is exclusively subject to arbitration. In addition, the clause provides that the selected arbitrators "may abstain from the strict rule of law" and will consider the "custom and usage of insurance business" when adjudicating the dispute. While ACE contended that arbitration is required to resolve this alleged breach of contract issue, the debtors argued that the dispute concerned the non-arbitrable issue of whether the debtors had the right to use the cash collateral pursuant to §363(c)(2) of the Bankruptcy Code.

Analysis

When considering whether to compel arbitration in bankruptcy cases, bankruptcy courts in the Second Circuit consider four factors: 1.) whether the parties agreed to arbitrate; 2.) the scope of the arbitration agreement; 3.) whether, if federal statutory claims are at issue, Congress intended those claims to be non-arbitrable; and 4.) whether the entire proceeding should be stayed pending arbitration if only some of the claims at issue are arbitrable. Courts applying this analysis, and particularly when considering the first and third factors, are swayed by whether the matter in question is "substantially core," or, in other words, a central function of the multi-party bankruptcy process. Further, even if a core matter is arbitrable under this analysis, bankruptcy courts may exercise their discretion to deny an arbitration demand if the matter is unique to bankruptcy cases, and the proceedings are a core bankruptcy function invoking substantial rights under the Bankruptcy Code and conflict with resolution by arbitration.

Judge Drain first found that the question of whether a debtor may use cash collateral is a "clearly substantially core" matter that "is central to the bankruptcy process that Congress contemplated as substantially altering otherwise existing and enforceable rights under applicable non-bankruptcy law. . ." Id. at *3. As a substantially core matter, Judge Drain also concluded that a debtor's rights to use cash collateral under the Bankruptcy Code are not derivative of the pre-petition debtor's rights. There is a distinction between the pre-petition debtor and the post-petition trustee or debtor in possession and, therefore, the parties here did not, despite the arbitration provision's breadth, necessarily agree to arbitrate the use of cash collateral.

Next, Judge Drain determined that Congress likely intended a request to use cash collateral to be non-arbitrable. Although Congress did not explicitly state in the Bankruptcy Code that a dispute over the use of cash collateral is not subject to arbitration, Congress did provide that "the court" will adjudicate the use of cash collateral under §363(e) of the Bankruptcy Code, which Judge Drain also noted applies to a trustee or debtor-in-possession, as opposed to the pre-petition debtor. Furthermore, since the use of cash collateral is a "substantially" core matter, Judge Drain found it "hard to see how Congress would have meant to turn over this particular type of determination, in which, . . . other parties in interest would have the right to intervene if they wanted to an arbitration panel in a two party dispute, which may abstain from following with rules of law and 'shall make their decision with regard to the custom and usage in the insurance business.'" Id. at *4 (citation omitted).

Finally, because of the fundamentally core nature of the cash collateral dispute, Judge Drain held that he had the authority to exercise his discretion and deny ACE's arbitration demand. In so holding, Judge Drain also found that even assuming arguendo that Congress intended cash collateral disputes to be arbitrable and that the parties agreed to arbitrate the cash collateral issue at hand, the entire dispute was not something that should be sent to arbitration, as doing so "would seriously jeopardize the objectives of the Bankruptcy Code as expressed in §363(c) and (e) and conflict with the integrity of the bankruptcy process in this case." Id. at *6.

Conclusion

Judge Drain's decision in Hostess demonstrates that even if a dispute between a debtor and a third party is arguably subject to a pre-petition arbitration clause, that dispute may not be subject to arbitration if it is considered "substantially" core i.e., a matter "central to the bankruptcy process." While the Hostess decision concerned only the use of cash collateral, Judge Drain explicitly cited a law review article listing several bankruptcy matters that "'are arguably inconsistent with resolution through arbitration,'" because they require the bankruptcy court to make particular findings (i.e., plan confirmation, the sale of assets outside of the ordinary course of business and the assumption and rejection of executory contracts). Id. at *4 (quoting Randall G. Block, "Bound in Bankruptcy," 29 Los Angeles Lawyer (2007)). Thus, in the aftermath of Hostess, a bankruptcy court in the Southern District of New York may not submit a matter to arbitration if it involves a central bankruptcy function arising under the Bankruptcy Code, notwithstanding a broad arbitration clause in the underlying agreement between the pre-petition debtor and the third party.

Previously published in Legal Eyes

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions