This document summarizes arbitration agreements in bankruptcy. It discusses how the Federal Arbitration Act generally requires enforcement of pre-dispute arbitration agreements, even for federal statutory claims like those arising in bankruptcy. However, courts have discretion to not enforce agreements to arbitrate "core" bankruptcy proceedings if doing so would conflict with the purposes of the Bankruptcy Code. The document outlines cases where courts have and have not enforced arbitration of core bankruptcy matters, which remains an unsettled area of law that depends on the specific claims and facts of each case. It also discusses how rejection of an executory contract does not invalidate its arbitration clause.

1. Arbitration Agreements
in Bankruptcy
Stephen J. Ware
Professor of Law
University of Kansas
ware@ku.edu
785.864.9209

2. Arbitration Law Basics
Arbitration = private-sector court
Courts enforce:
•pre-dispute agreements to arbitrate, and
•arbitrators’ decisions (“awards”)

3. Federal Arbitration Act § 2
“A written provision…to settle by
arbitration a controversy thereafter
arising out of such contract or
transaction…shall be valid,
irrevocable, and enforceable, save
upon such grounds as exist at law or
in equity for the revocation of any
contract.”

4. If transaction involves interstate commerce,
FAA § 2 preempts
inconsistent state law,
unless employment or insurance.
So FAA preempts state laws prohibiting
enforcement of arbitration agreements or
holding them to higher standards of assent
(e.g., page 1, bold typeface).

5. Contract Law Basics Apply to Arbitration
Agreements Under FAA § 2:
1.Formation of Contract
a. Manifestations of assent, consideration
b. Defenses (see below)
2.Terms of Contract (scope of arbitration
clause)
3.Performance or Breach of Contract
4.Remedies for Breach (Specific Performance)

6. FAA § 2 Preempts Inconsistent State
Law
When FAA applies, the only state law
available to prevent enforcement of an
agreement to arbitrate is a (contract law)
ground “for the revocation of any
contract.” Examples: duress,
misrepresentation, and unconscionability.
But separability doctrine often sends
these arguments to arbitrator.

7. What if a state statute says pre-dispute
agreements to arbitrate claims arising
under the statute are unenforceable?
FAA § 2 preempts. Southland Corp. v.
Keating, 465 U.S. 1 (1984).

8. U.S. Constitution’s Supremacy Clause:
FAA § 2 > state law
FAA § 2 = other federal law

9. Before the 1980’s, courts refused to enforce
pre-dispute agreements to arbitrate a wide
variety of federal statutory claims, such as,
antitrust, bankruptcy, securities, RICO,
patent, copyright, Title VII, ADEA, and
ERISA.
With such a long list of inarbitrable claims,
arbitration was basically confined to resolving
breach-of-contract claims.

10. The 1980’s Supreme Court revolutionized
arbitration law to require enforcement of
agreements to arbitrate regardless of the claims
asserted. The Court drastically increased the
variety of claims that are arbitrable.
The Court now holds that the FAA “mandates
enforcement of agreements to arbitrate
statutory claims.” Shearson/American Express
Inc. v. McMahon, 482 U.S. 220, 226–27
(1987).

11. SCT in McMahon: “Like any statutory
directive, the [FAA]’s mandate may be
overridden by a contrary congressional
command. The burden is on the party opposing
arbitration, however, to show that Congress
intended to preclude a waiver of judicial
remedies for the statutory rights at issue.”
Since first making a statement to this effect in
1985, SCT has yet to discover a single instance
in which Congress intended to do this.

12. Possible example?
Dodd–Frank Wall Street Reform and
Consumer Protection Act of 2010, 15 U.S.C. §
1639c (“No residential mortgage loan and no
extension of credit under an open end
consumer credit plan secured by the principal
dwelling of the consumer may include terms
which require arbitration or any other
nonjudicial procedure as the method for
resolving any controversy or settling any
claims arising out of the transaction.”).

13. What about the Bankruptcy Code vs. the
FAA?
In re U.S. Lines, Inc., 197 F.3d 631, 640
(2d Cir.1999)(“there will be occasions where a
dispute involving both the Bankruptcy Code
and the Arbitration Act presents a conflict of
near polar extremes: bankruptcy policy exerts
an inexorable pull towards centralization
while arbitration policy advocates a
decentralized approach towards dispute
resolution.”)

14. What about the Bankruptcy Code vs. the
FAA?
Following SCT’s 1980’s arbitration cases
involving enforcing agreements to arbitrate
federal claims unrelated to bankruptcy, lower
courts generally started to enforce agreements
to arbitrate non-core (“related to”) bankruptcy
claims.

15. Hays and Co. v. Merrill Lynch, 885 F.2d 1149
(3d Cir.1989) (Bankruptcy Code “does not
conflict with the Arbitration Act so as to
permit a district court to deny enforcement of
an arbitration clause in a non-core adversary
proceeding brought by the trustee”),
overruling Zimmerman v. Continental
Airlines, 712 F.2d 55 (3d Cir.1983)(“we hold
that the intentions of Congress will be better
realized if the Bankruptcy Reform Act is read
to impliedly modify the Arbitration Act.”)

16. Gandy v. Gandy (In re Gandy), 299 F.3d
489 (5th Cir. 2002) (“it is generally accepted
that a bankruptcy court has no discretion to
refuse to compel the arbitration of matters not
involving ‘core’ bankruptcy proceedings”).

17. Courts may even enforce agreement to
arbitrate core proceeding. In re Mintze, 434
F.3d 222, 231 (3rd Cir.2006) (“We find that
the standard we articulated in Hays applies
equally to core and non-core proceedings. [So
even in core proceedings, bankruptcy courts
must enforce agreement to arbitrate] unless the
party opposing arbitration can establish
congressional intent, under the McMahon
standard, to preclude waiver of judicial
remedies for the statutory rights at issue.”)

18. Enforcing agreement to arbitrate:
In re Electric Machinery Enterprises, Inc., 479
F.3d 791, 799 (11th Cir.2007) (debtor’s claim
non-core, but even assuming it was core,
bankruptcy court could not, solely on that
basis, decline to enforce contractual arbitration
agreement between parties, unless court also
found that enforcing this arbitration agreement
would inherently conflict with the Bankruptcy
Code).

19. OTOH, “Core bankruptcy proceedings are
sometimes inarbitrable as federal appellate
courts generally hold that bankruptcy courts
may decline to enforce arbitration agreements
if enforcement would conflict with a purpose
of the Bankruptcy Code, such as its purpose of
coordinating in a single forum resolution of all
of the debtor’s disputes with its various
creditors.” Stephen J. Ware & Ariana R.
Levinson, Principles of Arbitration Law
§10(a)(3) (2017).

20. Not enforcing agreement to arbitrate:
Moses v. CashCall, Inc., 781 F.3d 63, 88 (4th
Cir. 2015) (resolution of debtor’s
constitutionally-core claim against creditor
for declaratory judgment that loan was illegal
“could directly impact the claims against” the
estate and “sending this claim to tribal
arbitration would substantially interfere with
[the debtor’s Ch. 13] efforts to reorganize.”)

21. Not enforcing agreement to arbitrate:
Gandy v. Gandy (In re Gandy), 299 F.3d
489 (5th Cir. 2002) (“Debtor [in possession]
asserts bankruptcy causes of actions under
sections 544, 548 and 550 that are in essence
created by the Bankruptcy Code for the
benefit of creditors of the estate” and these
claims “appear to represent very nearly the
entirety of Debtor's bankruptcy estate.”)

22. Not enforcing agreement to arbitrate:
In re White Mountain Mining Co., L.L.C., 403
F.3d 164, 169–70 (4th Cir. 2005)(resolution of
“core issue of whether Phillips's advances to
the debtor were debt or equity…was critical to
the debtor's ability to formulate a plan of
reorganization,” so the bankruptcy court
“resolve [it] on an expedited basis.”)

23. Not enforcing agreement to arbitrate:
In re Thorpe Insulation Co., 671 F.3d 1011,
1022 (9th Cir. 2012)(“Because Congress
intended that the bankruptcy court oversee all
aspects of a § 524(g) reorganization, only the
bankruptcy court should decide whether the
debtor’s conduct in the bankruptcy gives rise
to a claim for breach of contract. Arbitration
in this case would conflict with congressional
intent.”)

24. Not enforcing agreement to arbitrate:
Anderson v. Credit One Bank, N.A., (2d Cir.
March 7, 2018) (core proceeding: after
discharge debtor filed class action alleging
creditor’s refusal to remove charge off‐
notation on debtor’s credit reports violated §
524(a)(2), as an attempt to coerce debtors to
pay a discharged debt).
Discharge injunction central to bankruptcy.

25. My impression:
Case law on arbitrability of core proceedings
is not even close to settled. Lots of judicial
discretion and significant factual variations
among the cases and claims at issue.
May be awhile before enough cases start
falling into predictable categories of when to
enforce, and when not to enforce, agreement
to arbitrate.

26. Executory contracts. If the contract containing
the arbitration clause is non-executory, then
neither the container contract nor the
arbitration clause can be rejected. Arbitration
clause does not make executory an otherwise
non-executory contract.
In re Farmland Indus., Inc., 309 B.R. 14 (Bankr.
W.D. Mo. 2004); Hays, 885 F.2d at 1153 (3d
Cir.1989) (“no reason to make an exception for
arbitration agreements to the general rule binding
trustees to pre-petition non-executory contracts”).

27. OTOH, Rejecting executory contract does not
render its arbitration clause unenforceable.
Madison Foods, Inc. v. Fleming Cos., Inc. (In
re Fleming Companies, Inc., 325 B.R. 687,
693-94 (Bankr. D. Del. 2005) (“rejection of a
contract, or even breach of it, will not void an
arbitration clause.”); In re CIT Group Inc.,
2012 WL 831095 (Bankr. S.D.N.Y., March 9,
2012) (same)

28. Stephen J. Ware
Professor of Law
University of Kansas
ware@ku.edu
785-864-9209