Arbitration and Actions Relating to Discharge

In a recent decision, the Ninth Circuit held that a question relating to dischargeability of a debt cannot be resolved through arbitration proceedings.

The case that brought up this issue was Matter of Eber, 2012 WL 2690744 (9th Cir. 2012) where there was an agreement relating to the construction and management of a beauty salon between creditors and debtors. The agreement had a clause stipulating that all disputes arising out of it will be subject to arbitration proceedings in New York. Accordingly, when disputes arose, the creditors initiated arbitration proceedings against the debtors in New York. In the meanwhile, the debtors also moved for bankruptcy and sought discharge of claims alleged against them. The creditors argued that the question whether the debtors could be discharged should be subject to arbitration proceedings and not to be decided by the bankruptcy court.

Now here, since the matters were so intricately interconnected, The Bankruptcy Code seemed to be at war with The Federal Arbitration Act. This led to the Ninth Circuit going behind Congressional intention in framing the two Acts to resolve the conflict. The court found no evidence that seemed to show that The Bankruptcy Code was created as an exception to The Federal Arbitration Act. In fact, the court further held that in case an arbitration provision would affect the purposes of The Bankruptcy Code, the bankruptcy court had the discretion to not uphold an arbitration clause. In Matter of Eber, it was certain that if left for arbitration, the arbitrators would end up ruling on the question of dischargeability which is a core Bankruptcy Code issue.


Inside Arbitration and Actions Relating to Discharge