Six affiliated corporations (the “debtors”) filed for chapter 11 bankruptcy. The corporations were holding companies for various residential real estate properties. Under the confirmed bankruptcy plan, the liquidating trustee sold the physical assets of the debtors. The proceeds of the sale, remaining causes of action, and insurance claims were held in a liquidating trust, which would be distributed in accordance with the chapter 11 plan. Before the plan had been confirmed, the debtors had sued their insurers “seeking coverage under a commercial property insurance policy and asserting state-law claims associated with damage resulting from Hurricane Ida including breach of contract and bad faith.” The commercial property insurance policy contained an arbitration clause. The insurers moved to compel arbitration and to stay or, alternatively, dismiss the proceedings, arguing that the arbitration clause had to be enforced. The liquidating trust opposed the motion and claimed that arbitration would interfere with the liquidation proceedings.
In In re Westbank Holdings, 658 B.R. 879 (Bankr. E.D. La. 2024), the court granted the insurers' motion to compel arbitration. First, the court stated that generally, federal courts will uphold arbitration clauses “unless the party opposing arbitration can show that its position is supported by a congressional command that supersedes the direction of the Federal Arbitration Act (FAA).” In re Mirant Corp., 316 B.R. 234, 237 (Bankr. N.D. Tex. 2004). Notably, “fulfilling the purpose of the Bankruptcy Code” is such a congressional command when the claims are considered “core” under 28 U.S.C. § 157(b). A “core” claim “invokes a substantive right provided by title 11 or… could arise only in the context of a bankruptcy case.” Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987). Here, the court found that the debtor’s claims were not “core” claims because its causes of action originated before the bankruptcy case and, thus, would have arisen without the bankruptcy proceedings. The fact that the claims were significant to the creditors does not make them “core.” Second, under equitable estoppel, the court held that the liquidating trustee must arbitrate all claims alleged in the initial petition with the insurers in a single arbitration proceeding and that the current proceeding would be stayed until the arbitration was completed. The court reasoned that all claims made were “inextricably tied” by identical language in all documents, so separate arbitration proceedings would waste resources and potentially render inconsistent results.
By Joel Durham: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]