Enforcing Arbitration Agreements in Bankruptcy

Reno Fernandez

Reno Fernandez is a partner with Macdonald Fernandez LLP, focusing on commercial bankruptcy and litigation throughout California. Mr. Fernandez is a member of the Executive Committee of the Business Law Section.

Boston Herald, Sungevity, and RadioShack all have in common that their bankruptcy cases were filed in Delaware, not where the bulk of their creditors or operations were located. The prevailing trend is to file and prosecute large bankruptcy cases in Delaware, New York, and other distant fora. The collapse of brick-and-mortar retail stores already underway will see more large cases filed far away. Litigation involving such debtors may potentially be brought back home pursuant to an applicable arbitration clause, if there is one, but only if that issue is carefully and timely raised in the bankruptcy case. This is one reason among many why it is important to understand the intersection of arbitration and bankruptcy.

Debtors and trustees typically favor litigating claims in bankruptcy court. If the debtor commences a bankruptcy case in the midst of arbitration or before arbitration has begun, the creditor will be faced with the challenge of obtaining relief from the automatic stay (or using another procedural avenue, such as abstention) to allow the arbitration to proceed or obtaining an order compelling arbitration in the first instance and, if necessary, obtaining an order staying any related proceedings in the bankruptcy court pending arbitration. Scenarios in which requests for arbitration are common include: consumer protection litigation (often combined with stay violation claims), rescission claims under the Truth in Lending Act ("TILA"),¹ and insurance disputes.