ARBITRATION AND INSOLVENCY PROCEEDINGS: CLAIMS OF ORDINARY BANKRUPTCY CREDITORS ( Vesna Lazic (T.M.C. Asser Institut, The Hague Readers are reminded that this work is protected by copyright While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use Contents 2. Insolvency and arbitration: Main features and basic principles 2. 1 Insolvency law 2.2 Arbitration 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings 3. 1 France and the Netherlands 3.2 United States 4. Claims of ordinary bankruptcy creditors 4. 1 Preclusion of individual actions by ordinary creditors 41.1 france 4.1.2 The Netherlands 4.1.3 United States 4. 2 Applicability of the stay of individual actions in arbitration 4.3 Implications of the stay of individual actions in arbitration 43.1 Admitted claims 4.3.2 Contested claims 4.3. 2 1 Pending arbitral proceedings 4.3.2.2 Non-pending arbitrations 4.3.2.2. 1 Non-arbitrability of contested claims 4.3.2.2. 2 Modalities of enforcement of arbitration agreements( france) 4.3.2.2. 3 The discretion of the courts in bankruptcy(United States) 5. Conclusion 1. Introduction Insolvency and arbitration are two different types of procedures, each having its own purpos objectives and underlying policy. A very distinct nature of the two is probably the reason why the relationship between them is seldom scrutinized in the legal writings and often reduced to the
ARBITRATION AND INSOLVENCY PROCEEDINGS: CLAIMS OF ORDINARY BANKRUPTCY CREDITORS (1) Vesna Lazic (T.M.C. Asser Institut, The Hague) Readers are reminded that this work is protected by copyright. While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed, electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use. Contents 1. Introduction 2. Insolvency and arbitration: Main features and basic principles 2.1 Insolvency law 2.2 Arbitration 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings 3.1 France and the Netherlands 3.2 United States 4. Claims of ordinary bankruptcy creditors 4.1 Preclusion of individual actions by ordinary creditors 4.1.1 France 4.1.2 The Netherlands 4.1.3 United States 4.2 Applicability of the stay of individual actions in arbitration 4.3 Implications of the stay of individual actions in arbitration 4.3.1 Admitted claims 4.3.2 Contested claims 4.3.2.1 Pending arbitral proceedings 4.3.2.2 Non-pending arbitrations 4.3.2.2.1 Non-arbitrability of contested claims 4.3.2.2.2 Modalities of enforcement of arbitration agreements (France) 4.3.2.2.3 The discretion of the courts in bankruptcy (United States) 5. Conclusion Notes 1. Introduction Insolvency and arbitration are two different types of procedures, each having its own purpose, objectives and underlying policy. A very distinct nature of the two is probably the reason why the relationship between them is seldom scrutinized in the legal writings and often reduced to the
mere statement that the bankruptcy issues are not arbitrable. ( 2) Yet, there are more points of interaction between these two fields of law As rightly stated in the literature, '[]egislation on insolvency is a crossroads where elements of the Legal system in question meet (3)Insolvency laws usually provide for limitation of rights of the debtor and his creditors in order to efficiently pursue their basic principles. Furthermore, it may even limit the rights of third parties. It is outside the scope of this article to examine whether and to what extent insolvency law influences arbitration and to address various points of interaction between the two fields of law. (4) This article will rather concentrate on the claims of non-secured, non-preferred creditors against the debtor,'s estate. In particular these are the claims arising from a contractual relationship between the debtor and another party concluded before the commencement of bankruptcy proceedings, where the contract provided for the settlement of disputes by arbitration. (5) In this article, an attempt will be made to determine whether an arbitration agreement, concluded prior to the co ement of insolvency proceedings, may be successfully invoked against the trustee in bankruptcy when the dispute relates to a monetary claim against the estate. In other words. the issue of the so-called indirect enforcement will be addressed. the relevant provisions of the insolvency law relating to legal proceedings pending at the time of the commencement of insolvency will also be considered and an attempt will be made to determine their importance for pending arbitral proceedings. Accordingly, the emphasis will be on the nature of the claims of ordinary bankruptcy creditors, encompassing situations when arbitral proceedings with respect to such claims are pending and when arbitration has not yet been commenced at the time when the insolvency proceedings are embarked upon. These issues will be analysed taking consideration the relevant provisions in Dutch, French and US arbitration and insolvency law. urpose is to determine to what extent the solutions in these jurisdictions differ or converge The relevant issues will be considered, in principle, in the context of the so-called'straight bankruptcy' or bankruptcy liquidation, while the insolvency proceedings involving the arrangements with creditors(compositions, reorganizations) will be mentioned only when the provisions addressed apply to both bankruptcy liquidation and reorganization This is particularly the case in france and the United States The issues of cross-border insolvency will not be dealt with. They will be occasionally mentioned when the relevant case law involves such issues 2. Insolvency and arbitration: main features and basic principles 2. 1 Insolvency law In the most general terms, one of the basic purposes of insolvency law is to provide a framework for dealing with the competing interests and claims within a given system of ranking. The manner in which the competing interests are balanced is not necessarily identical in all insolvency laws. It
mere statement that the bankruptcy issues are not arbitrable.(2) Yet, there are more points of interaction between these two fields of law. As rightly stated in the literature, '[l]egislation on insolvency is a crossroads where all the elements of the Legal system in question meet'.(3) Insolvency laws usually provide for some limitation of rights of the debtor and his creditors in order to efficiently pursue their basic principles. Furthermore, it may even limit the rights of third parties. It is outside the scope of this article to examine whether and to what extent insolvency law influences arbitration and to address various points of interaction between the two fields of law.(4) This article will rather concentrate on the claims of non-secured, non-preferred creditors against the debtor's estate. In particular, these are the claims arising from a contractual relationship between the debtor and another party concluded before the commencement of bankruptcy proceedings, where the contract provided for the settlement of disputes by arbitration.(5) In this article, an attempt will be made to determine whether an arbitration agreement, concluded prior to the commencement of insolvency proceedings, may be successfully invoked against the trustee in bankruptcy when the dispute relates to a monetary claim against the estate. In other words, the issue of the so-called 'indirect enforcement' will be addressed. The relevant provisions of the insolvency law relating to legal proceedings pending at the time of the commencement of insolvency will also be considered and an attempt will be made to determine their importance for pending arbitral proceedings. Accordingly, the emphasis will be on the nature of the claims of ordinary bankruptcy creditors, encompassing situations when arbitral proceedings with respect to such claims are pending and when arbitration has not yet been commenced at the time when the insolvency proceedings are embarked upon. These issues will be analysed taking into consideration the relevant provisions in Dutch, French and US arbitration and insolvency law. The purpose is to determine to what extent the solutions in these jurisdictions differ or converge. The relevant issues will be considered, in principle, in the context of the so-called 'straight bankruptcy' or bankruptcy liquidation, while the insolvency proceedings involving the arrangements with creditors (compositions, reorganizations) will be mentioned only when the provisions addressed apply to both bankruptcy liquidation and reorganization. This is particularly the case in France and the United States. The issues of cross-border insolvency will not be dealt with. They will be occasionally mentioned when the relevant case law involves such issues. 2. Insolvency and arbitration: Main features and basic principles 2.1 Insolvency law In the most general terms, one of the basic purposes of insolvency law is to provide a framework for dealing with the competing interests and claims within a given system of ranking. The manner in which the competing interests are balanced is not necessarily identical in all insolvency laws. It
can be said that an insolvency statute is drafted in a manner which is, in a particular legal system regarded as the most suitable to pursue effectively the underlying policy and the prevailing purpose of the insolvency law, be it the protection of the debtor(6) or his creditors or the preservation of employment (7)Generally, and without reference to any particular legal system, it may be said that the insolvency laws provide for the following the legislative framework for the collection and distribution of the property of the debtor comprised in the estate, in an orderly manner which maximizes payment to the creditors, and the statutory scheme for compositions and arrangements with creditors or for a reorganization of the debtor in financial difficulties In pursuing the basic principles and aims, insolvency law contains the provisions of a substantive and procedural nature An analysis of all the consequences of the commencement of the procedure for bankruptcy liquidation remains outside the scope of this work. Only the issue concerning the right of the of the estate will be addressed briefly One of the effects of the commencement of bankruptcy liquidation is that a debtor is deprived of the right to manage and to dispose of the estate. This right vests in the trustee. All insolvency statutes here considered provide for such legal effect in the case of bankruptcy liquidation. (8)The consequence of dispossession is that the debtor lacks the right to undertake legal actions concerning the property forming part of the estate. The debtor's obligations undertaken after th bankruptcy order has been made do not bind the estate. Also, the debtor loses the right to sue and to be sued (locus standi) in the legal proceedings concerning the estate. ( 9)These limitations of the debtor's rights are relevant only with respect to the estate. A bankrupt individual retains the right to exercise effectively his personal rights and obligations and to undertake legal actions with respect to the property not included in the estate Consequently, after the comn ent of bankruptcy liquidation, arbitral proceedings may be, in principle, initiated or continued only by or against the trustee, with respect to the property forming part of the estate. In the same vein, arbitration agreements entered into by the debtor prior to the commencement of the bankruptcy liquidation may be attempted to be invoked against the trustee and not against the debtor However, the proceedings aiming at the reorganization and the rehabilitation of business do not necessarily have to entail dispossession. For example, in the United States, the debtor in reorganization under Chapter 11 (debtor-in-possession,), (10) in principle, retains the night of management and disposal of the estate and generally has all rights and duties of a trustee in for relief through liquidation under Chapter 7. Similarly, a commencement of the redressement judiciaire does not necessarily imply the dispossession of the debtor, who generally retains the right of management and disposal. (11) The provisions concerning the right of disposal and management in a reorganization procedure are addressed here because the provisions discussed below apply to both reorganization and bankruptcy liquidation in the United States and France
can be said that an insolvency statute is drafted in a manner which is, in a particular legal system, regarded as the most suitable to pursue effectively the underlying policy and the prevailing purpose of the insolvency law, be it the protection of the debtor(6) or his creditors or the preservation of employment.(7) Generally, and without reference to any particular legal system, it may be said that the insolvency laws provide for the following: the legislative framework for the collection and distribution of the property of the debtor comprised in the estate, in an orderly manner which maximizes payment to the creditors, and the statutory scheme for compositions and arrangements with creditors or for a reorganization of the debtor in financial difficulties. In pursuing the basic principles and aims, insolvency law contains the provisions of a substantive and procedural nature. An analysis of all the consequences of the commencement of the procedure for bankruptcy liquidation remains outside the scope of this work. Only the issue concerning the right of the management and disposal of the estate will be addressed briefly. One of the effects of the commencement of bankruptcy liquidation is that a debtor is deprived of the right to manage and to dispose of the estate. This right vests in the trustee. All insolvency statutes here considered provide for such legal effect in the case of bankruptcy liquidation.(8) The consequence of dispossession is that the debtor lacks the right to undertake legal actions concerning the property forming part of the estate. The debtor's obligations undertaken after the bankruptcy order has been made do not bind the estate. Also, the debtor loses the right to sue and to be sued (locus standi) in the legal proceedings concerning the estate.(9) These limitations of the debtor's rights are relevant only with respect to the estate. A bankrupt individual retains the right to exercise effectively his personal rights and obligations and to undertake legal actions with respect to the property not included in the estate. Consequently, after the commencement of bankruptcy liquidation, arbitral proceedings may be, in principle, initiated or continued only by or against the trustee, with respect to the property forming part of the estate. In the same vein, arbitration agreements entered into by the debtor prior to the commencement of the bankruptcy liquidation may be attempted to be invoked against the trustee, and not against the debtor. However, the proceedings aiming at the reorganization and the rehabilitation of business do not necessarily have to entail dispossession. For example, in the United States, the debtor in reorganization under Chapter 11 ('debtor-in-possession'),(10) in principle, retains the right of management and disposal of the estate and generally has all rights and duties of a trustee in proceedings for relief through liquidation under Chapter 7. Similarly, a commencement of the redressement judiciaire does not necessarily imply the dispossession of the debtor, who generally retains the right of management and disposal.(11) The provisions concerning the right of disposal and management in a reorganization procedure are addressed here because the provisions discussed below apply to both reorganization and bankruptcy liquidation in the United States and France
2. 2 Arbitration Modern arbitration laws generally recognize the right of parties to agree on arbitratio autonomy, the underlying principle of commercial arbitration, has been widely accepted. Red enacted statutes have been drafted so as to provide for an arbitration friendly' legislative framework, whereby the possibility of judicial control and interference with arbitration considerably limited. In other words, the role of the judiciary is mainly one of support and assistance to arbitration before, during and after the arbitral process, while the supervision and control over arbitration is exceptional and very limited. This is particularly so with respect to arbitrations involving international elements These principles are incorporated also in the arbitration statutes and supported by the judiciary in the legal systems here considered. Thus, the 'policy of indirect enforcement' is widely accepted. (12) The provisions on the 'enforcement' of arbitration agreements form part of the generally favourable attitude towards arbitration, expressed in national arbitration laws( 13)and i international treaties (14) The possibilities of challenge are very limited. The application for annulment or an action for setting aside is the principal and often the only means of recourse gainst the arbitral award in civil-law countries. In principle, there is only a limited number of grounds for setting aside the award, expressly provided by the arbitration statute, (15)and a limited number of grounds for refusal of the enforcement of arbitral awards. ( 16) 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings Before addressing the claims of ordinary bankruptcy creditors, the effectiveness of arbitration agreements in the context of the proceedings for bankruptcy liquidation will be first briefly addressed. It will be examined whether the trustee in bankruptcy liquidation is generally considered to be bound by a previously concluded arbitration agreement of the debtor. In other words, it will be examined whether such an agreement may be successfully invoked by or against the trustee 3. 1 France and the Netherlands proceedings is, generally, not considered to imply the invalidity of arbitration agreements concluded by the debtor in bonis. The prevailing view in Dutch literature is that the trustee is bound by an arbitration agreement entered into by the debtor prior to bankruptcy (17) A similar view has been expressed in French literature. In general, arbitration agreements are considered to be enforceable(opposable) against the liquidateur, the administrateur or the debtor in a redressement judiciaire (18)Also, the prevailing opinion in French literature is that the
2.2 Arbitration Modern arbitration laws generally recognize the right of parties to agree on arbitration. Party autonomy, the underlying principle of commercial arbitration, has been widely accepted. Recently enacted statutes have been drafted so as to provide for an 'arbitration friendly' legislative framework, whereby the possibility of judicial control and interference with arbitration is considerably limited. In other words, the role of the judiciary is mainly one of support and assistance to arbitration before, during and after the arbitral process, while the supervision and control over arbitration is exceptional and very limited. This is particularly so with respect to arbitrations involving international elements. These principles are incorporated also in the arbitration statutes and supported by the judiciary in the legal systems here considered. Thus, the 'policy of indirect enforcement' is widely accepted.(12) The provisions on the 'enforcement' of arbitration agreements form part of the generally favourable attitude towards arbitration, expressed in national arbitration laws(13) and in international treaties.(14) The possibilities of challenge are very limited. The application for annulment or an action for setting aside is the principal and often the only means of recourse against the arbitral award in civil-law countries. In principle, there is only a limited number of grounds for setting aside the award, expressly provided by the arbitration statute,(15) and a limited number of grounds for refusal of the enforcement of arbitral awards.(16) 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings Before addressing the claims of ordinary bankruptcy creditors, the effectiveness of arbitration agreements in the context of the proceedings for bankruptcy liquidation will be first briefly addressed. It will be examined whether the trustee in bankruptcy liquidation is generally considered to be bound by a previously concluded arbitration agreement of the debtor. In other words, it will be examined whether such an agreement may be successfully invoked by or against the trustee. 3.1 France and the Netherlands In legal theory and case law in France and the Netherlands, the commencement of bankruptcy proceedings is, generally, not considered to imply the invalidity of arbitration agreements concluded by the debtor in bonis. The prevailing view in Dutch literature is that the trustee is bound by an arbitration agreement entered into by the debtor prior to bankruptcy.(17) A similar view has been expressed in French literature. In general, arbitration agreements are considered to be enforceable (opposable) against the liquidateur, the administrateur or the debtor in a redressement judiciaire.(18) Also, the prevailing opinion in French literature is that the
conditions provided in Arts. 33(1)and 158 of the Loi du 25 janvier 1985 do not apply with respect to arbitration agreements concluded prior to redressement judiciaire or liquidation judiciaire ( 19) These provisions relate to the approval and authorization that the debtor or the administrateur in the redressement judiciaire(Art. 33(1))and the liquidateur in the liquidation judiciaire(Art 158) need to obtain in order to enter into new arbitration agreements after the commencement of insolvency proceedings It is appropriate to conclude that the debtor's lack of the right to disposal and management imply the invalidity of the pre-petition arbitration agreements. The provisions relating to the powers of the trustee, as the successor of the debtor's interest, would be a moot point However, there may be some exceptions to and limitations on the effectiveness of arbitration agreements(e.g, non-arbitrability of the subject matter) 3.2 United States In contrast to the situation in France and the Netherlands, where the question of the enforcement of arbitration agreements after the commencement of bankruptcy proceedings has not been much discussed. it has been a rather controversial issue in the United States. abundant case law has quite often been addressed in the literature. (20)Frequently, the question of the enforcement of arbitration agreements after the commencement of bankruptcy liquidation or reorganization has been considered to have triggered the question of the conflict or conflicting policies between the Federal Arbitration Act and the United States Bankruptcy Code (21)It exceeds the scope of this article to deal with this subject in detail. Instead, an attempt will be made to summarize the decisions of various bankruptcy, district and circuit courts in the United States. To the knowledge of this author, the United States Supreme Court has not yet ruled on the question of the enforcement of arbitration agreements in bankruptcy proceedings. The purpose of this summary is to present the source of the 'conflict, as the relationship between the two Acts has often been characterized in the literature and the US case law. The analysis of this issue in the following text is necessary for an understanding of the legal framework and the context in which the enforcement of arbitration agreements with respect to creditors claims arises. Since the provisions on the jurisdiction of the bankruptcy courts have presented the main source of the conflict between the Arbitration Act and the Bankruptcy Court, they need to be addressed briefl The Bankruptcy Reform Act of 1978 further strengthened the traditional notion that bankruptcy ours relinquish their jurisdiction only exceptionally. The 1978 Act provided for a very broad jurisdiction of bankruptcy courts. The district court was conferred with original and exclusive jurisdiction over bankruptcy cases(22) and original, but not exclusive jurisdiction over all civil proceedings under, in or related to bankruptcy cases. (23) The bankruptcy courts were given the power to 'exercise all of the jurisdiction conferred.. on the district courts (24)The reason for introducing such a jurisdictional framework was to overcome disadvantages that had existed under the previous bankruptcy statutory law, (25)so as to provide conditions for all matters arising connection with a bankruptcy case to be dealt with in one proceeding (26)
conditions provided in Arts. 33(1) and 158 of the Loi du 25 janvier 1985 do not apply with respect to arbitration agreements concluded prior to redressement judiciaire or liquidation judiciaire.(19) These provisions relate to the approval and authorization that the debtor or the administrateur in the redressement judiciaire (Art. 33(1)) and the liquidateur in the liquidation judiciaire (Art. 158) need to obtain in order to enter into new arbitration agreements after the commencement of insolvency proceedings. It is appropriate to conclude that the debtor's lack of the right to disposal and management imply the invalidity of the pre-petition arbitration agreements. The provisions relating to the powers of the trustee, as the successor of the debtor's interest, would be a moot point. However, there may be some exceptions to and limitations on the effectiveness of arbitration agreements (e.g., non-arbitrability of the subject matter). 3.2 United States In contrast to the situation in France and the Netherlands, where the question of the enforcement of arbitration agreements after the commencement of bankruptcy proceedings has not been much discussed, it has been a rather controversial issue in the United States. Abundant case law has quite often been addressed in the literature.(20) Frequently, the question of the enforcement of arbitration agreements after the commencement of bankruptcy liquidation or reorganization has been considered to have triggered the question of the 'conflict' or 'conflicting policies' between the Federal Arbitration Act and the United States Bankruptcy Code.(21) It exceeds the scope of this article to deal with this subject in detail. Instead, an attempt will be made to summarize the decisions of various bankruptcy, district and circuit courts in the United States. To the knowledge of this author, the United States Supreme Court has not yet ruled on the question of the enforcement of arbitration agreements in bankruptcy proceedings. The purpose of this summary is to present the source of the 'conflict', as the relationship between the two Acts has often been characterized in the literature and the US case law. The analysis of this issue in the following text is necessary for an understanding of the legal framework and the context in which the enforcement of arbitration agreements with respect to creditors' claims arises. Since the provisions on the jurisdiction of the bankruptcy courts have presented the main source of the 'conflict' between the Arbitration Act and the Bankruptcy Court, they need to be addressed briefly. The Bankruptcy Reform Act of 1978 further strengthened the traditional notion that bankruptcy courts relinquish their jurisdiction only exceptionally. The 1978 Act provided for a very broad jurisdiction of bankruptcy courts. The district court was conferred with original and exclusive jurisdiction over bankruptcy cases(22) and original, but not exclusive jurisdiction over all civil proceedings under, in or related to bankruptcy cases.(23) The bankruptcy courts were given the power to 'exercise all of the jurisdiction conferred . . . on the district courts'.(24) The reason for introducing such a jurisdictional framework was to overcome disadvantages that had existed under the previous bankruptcy statutory law,(25) so as to provide conditions for all matters arising in connection with a bankruptcy case to be dealt with in one proceeding.(26)
Relying strongly on such a broad grant of jurisdiction and the Congressional intent expressed in the legislative history of the Bankruptcy Code, the vast majority of bankruptcy courts used to hold that they had discretion when deciding on the enforcement of ar bitration agreements concluded by the debtor before the commencement of bankruptcy, liquidation or reorganization proceedings When exercising their discretion, various US bankruptcy, district and circuit courts sometimes enforced such arbitration agreements, and sometimes refused to give effect to them. In deciding on this issue, they employed various approaches and different lines of reasoning. Some examples will ven Some courts held that the claims on behalf of the estate should be distinguished from the claims against the estate, whereby in the former cases there was no competing bankruptcy policy (27) Sometimes a number of factors were su on when aec iding on enforcement of arbitration agreements, such as the degree to which a judicial forum preferable to arbitration, the need for special expertise and the identity of persons comprising the arbitral tribunal. (28)Occasionally, the argument that a trustee is a different legal entity than the debtor was relied upon to deny the enforcement of arbitration agreements (29) The 'conflict' between the two Acts was extensively discussed in Zimmerman v. Continental Airlines, Inc (30) where the relevant provisions and underlying policies of the two Acts were carefully examined. After such an examination, the Court concluded that the underlying purposes of the Bankruptcy Code 'impliedly modify'the policies of the Federal Arbitration Act and that the enforcement of arbitration agreements in a bankruptcy procedure was to be left to the sound discretion of the bankruptcy judge (31) This decision was often relied upon by the Us courts when refusing to enforce arbitration agreements in the context of bankruptcy proceedings. (32) Even after the broad grant of jurisdiction to bankruptcy judges had been found to be unconstitutional in Northern Pipeline Construction Co. V. Marathon Pipe Line Co. (33)the decision on the discretion of the bankruptcy courts remained the dominant rule for a number of years. The Bankruptcy Amendments and Federal Judgeship Act of 1984 was the response of Congress to the Supreme Court's decision in Marathon. A rather complicated set of rules was introduced in Section 1334, supplemented by Sections 157 and 158(as codified in 28 U.S.C.A. ) whereby the jurisdiction of the bankruptcy courts was considerably limited. The scope of jurisdiction of the district court remained virtually unchanged, so that the provisions contained in the newly enacted Section 1334(a)and(b) are identical to the repealed Section 1471(a)and(b). However, the provision conferring the power to bankruptcy courts to exercise all powers conferred upon the district court, previously contained in Section 1471(c), was omitted from the text of Section 133 Instead, the provision in Section 157 was introduced, containing the non-exclusive list of the SO-called core matters- matters arising in or under bankruptcy cases(Sect. 157(b)(2)). The bankruptcy judges were competent to adjudicate bankruptcy cases and to issue final orders oncerning the 'core matters. However, their jurisdiction is lim the bankruptcy courts are competent to hear these disputes and to issue findings of fact, but they lack the competence to enter final orders. These are to be issued by the district court, unless the
Relying strongly on such a broad grant of jurisdiction and the Congressional intent expressed in the legislative history of the Bankruptcy Code, the vast majority of bankruptcy courts used to hold that they had discretion when deciding on the enforcement of arbitration agreements concluded by the debtor before the commencement of bankruptcy, liquidation or reorganization proceedings. When exercising their discretion, various US bankruptcy, district and circuit courts sometimes enforced such arbitration agreements, and sometimes refused to give effect to them. In deciding on this issue, they employed various approaches and different lines of reasoning. Some examples will be given. Some courts held that the claims on behalf of the estate should be distinguished from the claims against the estate, whereby in the former cases there was no competing bankruptcy policy.(27) Sometimes a number of factors were suggested for consideration when deciding on the enforcement of arbitration agreements, such as the degree to which a judicial forum was preferable to arbitration, the need for special expertise and the identity of persons comprising the arbitral tribunal.(28) Occasionally, the argument that a trustee is a different legal entity than the debtor was relied upon to deny the enforcement of arbitration agreements.(29) The 'conflict' between the two Acts was extensively discussed in Zimmerman v. Continental Airlines, Inc.,(30) where the relevant provisions and underlying policies of the two Acts were carefully examined. After such an examination, the Court concluded that the underlying purposes of the Bankruptcy Code 'impliedly modify' the policies of the Federal Arbitration Act and that the enforcement of arbitration agreements in a bankruptcy procedure was to be 'left to the sound discretion of the bankruptcy judge'.(31) This decision was often relied upon by the US courts when refusing to enforce arbitration agreements in the context of bankruptcy proceedings.(32) Even after the broad grant of jurisdiction to bankruptcy judges had been found to be unconstitutional in Northern Pipeline Construction Co. v. Marathon Pipe Line Co.,(33) the decision on the discretion of the bankruptcy courts remained the dominant rule for a number of years. The Bankruptcy Amendments and Federal Judgeship Act of 1984 was the response of Congress to the Supreme Court's decision in Marathon. A rather complicated set of rules was introduced in Section 1334, supplemented by Sections 157 and 158 (as codified in 28 U.S.C.A.), whereby the jurisdiction of the bankruptcy courts was considerably limited. The scope of jurisdiction of the district court remained virtually unchanged, so that the provisions contained in the newly enacted Section 1334(a) and (b) are identical to the repealed Section 1471(a) and (b). However, the provision conferring the power to bankruptcy courts to exercise all powers conferred upon the district court, previously contained in Section 1471(c), was omitted from the text of Section 1334. Instead, the provision in Section 157 was introduced, containing the non-exclusive list of the so-called 'core' matters - matters arising in or under bankruptcy cases (Sect. 157(b)(2)). The bankruptcy judges were competent to adjudicate bankruptcy cases and to issue final orders concerning the 'core' matters. However, their jurisdiction is limited in non-core or related matters: the bankruptcy courts are competent to hear these disputes and to issue findings of fact, but they lack the competence to enter final orders. These are to be issued by the district court, unless the
agreement of the parties expressly provides for the jurisdiction of the bankruptcy court. In addition to that, deciding on personal injury and wrongful-death actions have remained outside the jurisdiction of bankruptcy courts ( 34) After such an allocation of jurisdiction between the district courts and bankruptcy courts it seems to have been rather difficult to maintain the argument relying on the need to 'centralize all disputes arising in bankruptcy before one court. Yet the rule on the discretion of bankruptcy courts remained the prevailing one until the Court of Appeals for the Third Circuit in Hays and Co v. Merrill Lynch, Pierce, Fenner and Smith, Inc., (35)overruled its decision in Zimmerman. The Court in Hays, held, inter alia, that there was no discretion for the bankruptcy courts when deciding on the enforcement of arbitration agreements in non-core matters, unless it is proved that the text, legislative history, or the purpose of the Bankruptcy Code conflicts with the enforcement of an arbitration clause (36) Although often considered in the subsequent decisions of the US courts, it can hardly be said that a uniformity of approaches followed after the decision of the Third Circuit in Hays. The reasoning in Hays was subject to various interpretations(37)and does not seem to be accepted in all circuits However, in more recent decisions it has been more frequently followed. In any case, although far from being abandoned, the rule on discretion has ceased to be absolute and the most prevailing one, at least with respect to the non-core matters, such as when a third party -a party outside the bankruptcy proceedings-has attempted to invoke an arbitration agreement. However, the discretion rule seems to have retained its importance with respect to creditors claims although it has been more often questioned in some recent decisions ( 38)Indeed, the creditors claims will always fall under the core category: they will be considered either as a matter of allowance or disallowance of claims or as a cause for relief from an automatic stay under Sect 362. Both issues are expressly indicated to be core proceedings under Sect. 157(Sect 57(b)(2X B)and Sect 157(b)(2)G)of the Bankruptcy Code). As will be seen, the enforcement of arbitration agreements with respect to creditors claims have usually been decided within the lifting of the automatic stay. This issue will be addressed infra(see 4.3.2. 2.3) 4. Claims of ordinary bankrup It is almost undisputed in the legal literature that 'pure' bankruptcy issues are not arbitrable Sometimes it is even considered that the question of arbitrability of insolvency matters has no or little practical relevance (39) This is so when one thinks of issues such as the orders opening and closing the bankruptcy proceedings and other measures of conduct and surveillance, nominating the trustee, verification, inventorization, collection and distribution of the estate and reorganization of the business. These are so obviously issues of bankruptcy law, raising no doubts as to their non-arbitrability. It is, however, more difficult to determine the actual scope of (non- )arbitrable matters in insolvency. In other words, there are certain issues, such as a dispute arising from the contractual relationship between the parties, which might be considered to be a
agreement of the parties expressly provides for the jurisdiction of the bankruptcy court. In addition to that, deciding on personal injury and wrongful-death actions have remained outside the jurisdiction of bankruptcy courts.(34) After such an allocation of jurisdiction between the district courts and bankruptcy courts it seems to have been rather difficult to maintain the argument relying on the need to 'centralize' all disputes arising in bankruptcy before one court. Yet, the rule on the discretion of bankruptcy courts remained the prevailing one until the Court of Appeals for the Third Circuit in Hays and Co. v. Merrill Lynch, Pierce, Fenner and Smith, Inc.,(35) overruled its decision in Zimmerman. The Court in Hays, held, inter alia, that there was no discretion for the bankruptcy courts when deciding on the enforcement of arbitration agreements in non-core matters, unless it is proved that 'the text, legislative history, or the purpose of the Bankruptcy Code conflicts with the enforcement of an arbitration clause'.(36) Although often considered in the subsequent decisions of the US courts, it can hardly be said that a uniformity of approaches followed after the decision of the Third Circuit in Hays. The reasoning in Hays was subject to various interpretations(37) and does not seem to be accepted in all circuits. However, in more recent decisions it has been more frequently followed. In any case, although far from being abandoned, the rule on discretion has ceased to be absolute and the most prevailing one, at least with respect to the non-core matters, such as when a third party - a party outside the bankruptcy proceedings - has attempted to invoke an arbitration agreement. However, the discretion rule seems to have retained its importance with respect to creditors' claims, although it has been more often questioned in some recent decisions.(38) Indeed, the creditors' claims will always fall under the 'core' category: they will be considered either as a matter of allowance or disallowance of claims or as a cause for relief from an automatic stay under Sect. 362. Both issues are expressly indicated to be 'core' proceedings under Sect. 157 (Sect. 157(b)(2)(B) and Sect. 157(b)(2)(G) of the Bankruptcy Code). As will be seen, the enforcement of arbitration agreements with respect to creditors' claims have usually been decided within the lifting of the automatic stay. This issue will be addressed infra (see 4.3.2.2.3). 4. Claims of ordinary bankruptcy creditors It is almost undisputed in the legal literature that 'pure' bankruptcy issues are not arbitrable. Sometimes it is even considered that the question of arbitrability of insolvency matters has no or little practical relevance.(39) This is so when one thinks of issues such as the orders opening and closing the bankruptcy proceedings and other measures of conduct and surveillance, nominating the trustee, verification, inventorization, collection and distribution of the estate and reorganization of the business. These are so obviously issues of bankruptcy law, raising no doubts as to their non-arbitrability. It is, however, more difficult to determine the actual scope of (non-)arbitrable matters in insolvency. In other words, there are certain issues, such as a dispute arising from the contractual relationship between the parties, which might be considered to be a
bankruptcy' matter after the commencement of insolvency proceedings under some laws Non-monetary claims against the estate present an appropriate example for this and illustrate the complexity of the interaction between arbitration and insolvency law. It can well illustrate how the provisions of insolvency law might limit the domain of arbitration or might require it to be respected by the parties and arbitrators. It also illustrates the importance of the nature of claims arising in insolvency and how an ordinary contractual dispute, a kind of dispute that is most frequently decided in arbitration, might become a bankruptcy issue after the commencement of an insolvency procedure. In some published arbitral awards, (40)it can be seen that arbitrators have decided on a claim of an ordinary creditor for payment against the debtor without raising the arbitrability issue, although the determination of these claims could be regarded as a typical bankruptcy issue In the text that follows an attempt will be made to answer the question whether the claims of ordinary bankruptcy creditors are considered to be typical bankruptcy issues in all the legal systems analysed and, if so, whether they are consequently considered to be non-arbitrable and, as such, excluded from arbitration Non-arbitrability may be a reason for refusing to give effect to an arbitration agreement and a reason for setting the award aside or for the refusal of its enforcement If they are not considered to be outside the domain of arbitration, it will be examined whether the relevant provisions of the insolvency law may have any further influence on arbitration In other words, are there some provisions of the insolvency law concerning this type of claim which require them to be respected by arbitrators in order not to jeopardize enforceability of the award and its acceptance in the bankruptcy liquidation 4. 1 Preclusion of individual actions by ordinary creditors One of the basic principles of the bankruptcy procedure is the preclusion of individual actions by creditors. After the commencement of bankruptcy liquidation, non-secured claims for payment against the estate may be pursued only by filing in bankruptcy proceedings. Any ordinary non-secured, non-preferred creditor must file his claim for verification or proof if he wishes to participate in the distribution of the bankruptcy estate. The creditors, whose claims are not secured or preferred, obtain payments pro rata. The purpose is to deal with such claims in one, collective procedure, (41) in accordance with the provisions of the insolvency law The insolvency statutes in all the jurisdictions here analysed contain the provisions on preclusion of individual actions of creditors, at least in the case of bankruptcy liquidation. The relevant provisions of the insolvency law in the United States and France apply both in the bankruptcy (liquidation judiciaire in France) and reorganization (redressement judiciaire in France). (42) 411. france In France the relevant provisions are contained in Arts. 47 and 48 of the Loi du 25 janvier 1885 The principle of preclusion of individual actions by creditors(arret des poursuites individuelles)is primarily expressed in Art. 47. Creditors are prevented from taking any legal action intended for
'bankruptcy' matter after the commencement of insolvency proceedings under some laws. Non-monetary claims against the estate present an appropriate example for this and illustrate the complexity of the interaction between arbitration and insolvency law. It can well illustrate how the provisions of insolvency law might limit the domain of arbitration or might require it to be respected by the parties and arbitrators. It also illustrates the importance of the nature of claims arising in insolvency and how an ordinary contractual dispute, a kind of dispute that is most frequently decided in arbitration, might become a 'bankruptcy' issue after the commencement of an insolvency procedure. In some published arbitral awards,(40) it can be seen that arbitrators have decided on a claim of an ordinary creditor for payment against the debtor without raising the arbitrability issue, although the determination of these claims could be regarded as a typical bankruptcy issue. In the text that follows an attempt will be made to answer the question whether the claims of ordinary bankruptcy creditors are considered to be typical bankruptcy issues in all the legal systems analysed and, if so, whether they are consequently considered to be non-arbitrable and, as such, excluded from arbitration. Non-arbitrability may be a reason for refusing to give effect to an arbitration agreement and a reason for setting the award aside or for the refusal of its enforcement. If they are not considered to be outside the domain of arbitration, it will be examined whether the relevant provisions of the insolvency law may have any further influence on arbitration. In other words, are there some provisions of the insolvency law concerning this type of claim which require them to be respected by arbitrators in order not to jeopardize enforceability of the award and its acceptance in the bankruptcy liquidation. 4.1 Preclusion of individual actions by ordinary creditors One of the basic principles of the bankruptcy procedure is the preclusion of individual actions by creditors. After the commencement of bankruptcy liquidation, non-secured claims for payment against the estate may be pursued only by filing in bankruptcy proceedings. Any ordinary, non-secured, non-preferred creditor must file his claim for verification or proof if he wishes to participate in the distribution of the bankruptcy estate. The creditors, whose claims are not secured or preferred, obtain payments pro rata. The purpose is to deal with such claims in one, collective procedure,(41) in accordance with the provisions of the insolvency law. The insolvency statutes in all the jurisdictions here analysed contain the provisions on preclusion of individual actions of creditors, at least in the case of bankruptcy liquidation. The relevant provisions of the insolvency law in the United States and France apply both in the bankruptcy liquidation (liquidation judiciaire in France) and reorganization (redressement judiciaire in France).(42) 4.1.1. France In France the relevant provisions are contained in Arts. 47 and 48 of the Loi du 25 janvier 1885. The principle of preclusion of individual actions by creditors (arrêt des poursuites individuelles) is primarily expressed in Art. 47. Creditors are prevented from taking any legal action intended for
condemning the debtor to pay an amount of money, with respect to the debts emanating prior to the order opening the redressement judiciaire or liquidation judiciaire (43) The actions to terminate contracts due to the default in the payment of an amount of money are also suspended or precluded (44) The same is true for all executions on the real estate and movable assets of the debtor (45)The provision of Art. 47 is deemed to be a part of public policy (46) If there are legal proceedings pending with respect to such claims, they will be suspended until the claim is declared in verification proceedings. They may be resumed without any authorization or approval, (47) provided that the representative of the creditors and, if necessary, the administrateur in redressement judiciaire are duly notified. However, the French judiciary seems to have developed the rule that the decisions rendered in such proceedings may not be of a condemnatory nature. In other words, the claim may be only declared and the amount determined in the decision but without condemning the debtor to pay (48) In addition to the provision contained in Art 48 of the Loi du 25 janvier 1985, there is a provision on interruption of pending proceedings contained in Arts. 369-372 of the French Code of Civil Procedure. Article 369 provides that the pending proceedings are interrupted by the effect of an order opening insolvency proceedings when there is a dispossession of the debtor or when assistance to the debtor is needed With the exception of employees, all the creditors have to submit their claims to the creditors representatives within a period of two months from the day on which the opening order has been published (49) The representative of the creditors establishes the list of declared claims, within the time limit determined by the court and after having considered the observations of the debtor. The list also includes the proposals to admit or reject a particular claim or to refer it to the competent authority(Art 100). A juge-commissaire, to whom the list is submitted, decides whether to admit or to reject a particular claim or declares that there are proceedings pending with respect to it or that the claim is not within his competence(Art. 101(1) If the juge-commissaire declares his incompetence, the claimant has to initiate proceedings before the competent authority within two months after the notification of the declaration of incompetence(Art. 101(3)) The provisions of Arts. 47, 48 (50)and 101(51)also apply in the case of liquidation judiciaire 4.1.2 The Netherlands he preclusion of individual actions by creditors is also incorporated in Dutch insolvency law. In ccordance with Art. 26 of the Dutch Faillissementswet (Fw), after the commencement of bankruptcy proceedings all claims against the debtor for payment from the estate may only be asserted in verification proceedings. All claims concerning the rights and obligations of the estate must be filed by or against the trustee in bankruptcy(curator) after the bankruptcy order has been issued (52) Claims submitted by or against the debtor will have no effect with regard to the estate (53) The verification procedure is determined by Arts. 108-137 Fw( Chapter V). The claims
condemning the debtor to pay an amount of money, with respect to the debts emanating prior to the order opening the redressement judiciaire or liquidation judiciaire.(43) The actions to terminate contracts due to the default in the payment of an amount of money are also suspended or precluded.(44) The same is true for all executions on the real estate and movable assets of the debtor.(45) The provision of Art. 47 is deemed to be a part of public policy.(46) If there are legal proceedings pending with respect to such claims, they will be suspended until the claim is declared in verification proceedings. They may be resumed without any authorization or approval,(47) provided that the representative of the creditors and, if necessary, the administrateur in redressement judiciaire are duly notified. However, the French judiciary seems to have developed the rule that the decisions rendered in such proceedings may not be of a condemnatory nature. In other words, the claim may be only declared and the amount determined in the decision, but without condemning the debtor to pay.(48) In addition to the provision contained in Art. 48 of the Loi du 25 janvier 1985, there is a provision on interruption of pending proceedings contained in Arts. 369-372 of the French Code of Civil Procedure. Article 369 provides that the pending proceedings are interrupted by the effect of an order opening insolvency proceedings when there is a dispossession of the debtor or when assistance to the debtor is needed. With the exception of employees, all the creditors have to submit their claims to the creditors' representatives within a period of two months from the day on which the opening order has been published.(49) The representative of the creditors establishes the list of declared claims, within the time limit determined by the court and after having considered the observations of the debtor. The list also includes the proposals to admit or reject a particular claim or to refer it to the competent authority (Art. 100). A juge-commissaire, to whom the list is submitted, decides whether to admit or to reject a particular claim or declares that there are proceedings pending with respect to it or that the claim is not within his competence (Art. 101(1)). If the juge-commissaire declares his incompetence, the claimant has to initiate proceedings before the competent authority within two months after the notification of the declaration of incompetence (Art. 101(3)). The provisions of Arts. 47, 48(50) and 101(51) also apply in the case of liquidation judiciaire. 4.1.2 The Netherlands The preclusion of individual actions by creditors is also incorporated in Dutch insolvency law. In accordance with Art. 26 of the Dutch Faillissementswet (Fw), after the commencement of bankruptcy proceedings all claims against the debtor for payment from the estate may only be asserted in verification proceedings. All claims concerning the rights and obligations of the estate must be filed by or against the trustee in bankruptcy (curator) after the bankruptcy order has been issued.(52) Claims submitted by or against the debtor will have no effect with regard to the estate.(53) The verification procedure is determined by Arts. 108-137 Fw (Chapter V). The claims
admitted in verification are final in bankruptcy proceedings. Only in the case of fraud may the trustee assert the nullity of an admitted claim(Art. 121(4)Fw) If there are legal proceedings pending against the debtor for payment from the estate, such the commencement of ankruptcy procedure and the claim will have to be filed for verification. If the claim is contested in the verification procedure, the pending legal proceedings will be continued against the party that has contested the claim, be it the trustee or a third-party creditor (54) If a claim is contested in verification and no legal proceedings are pending at the time of the declaration of bankr dings, the rechter-commissaris will refer the parties to the court if he is not able to reconcile the parties. The matter will be settled in the So-called renvooiprocedure (claim validation proceedings), whereby no writ of summons is required to be served(Art. 122 Fw). The renvooiprocedure is, in principle, conducted in accordance with the general rules of civil procedure, with some exceptions. In Dutch literature, (55) it has been suggested that the court aving jurisdiction in bankruptcy will be competent to adjudicate such contested claims even if the jurisdiction of another court or arbitrators was agreed prior to the declaration of bankruptcy. (56) 4.1.3 United States Filing a petition for relief in bankruptcy operates so as to prevent the execution and prosecution of almost all claims against the debtor or the estate under Sect. 362 of the Bankruptcy Code (57) Such claims have to be filed before the court having jurisdiction over bankruptcy cases. (58)The Bankruptcy Code in Sect. 362(a) provides for an automatic stay of the commencement or continuation of any action or proceedings against the debtor and the estate that was or could have been initiated before the filing for a relief in bankruptcy procedure. The actions and proceedings to be stayed are listed in Sect. 362(a), whereby a judicial, administrative and other proceeding against the debtor are included(Sect. 362(a)(1)of the Bankruptcy Code). In the legislative history to the Bankruptcy Code it is stated, inter alia that all proceedings are stayed, including arbitration and the stay extends toall proceedings even if they are not before governmental tribunals (59) The automatic stay is considered to be the fundamental protection of the debtor and the estate provided by the Bankruptcy Code (60)It is also said that it operates so as to protect creditors and to provide for their treatment in an orderly manner. (61) The stay is only temporary and may be either terminated automatically under Sect. 362(c)or lifted by the court at the request of the interested party, as provided in Sect. 362(d )to(g).(62) 4.2 Applicability of the stay of individual actions in arbitration From the analysis of the relevant provisions of the insolvency laws considered it can be concluded that they do not differ substantially with respect to the objective they intend to achieve Notwithstanding the differences in the wording or the context in which they are placed in a
admitted in verification are final in bankruptcy proceedings. Only in the case of fraud may the trustee assert the nullity of an admitted claim (Art. 121(4) Fw). If there are legal proceedings pending against the debtor for payment from the estate, such proceedings will be suspended after the commencement of the bankruptcy procedure and the claim will have to be filed for verification. If the claim is contested in the verification procedure, the pending legal proceedings will be continued against the party that has contested the claim, be it the trustee or a third-party creditor.(54) If a claim is contested in verification and no legal proceedings are pending at the time of the declaration of bankruptcy proceedings, the rechter-commissaris will refer the parties to the court if he is not able to reconcile the parties. The matter will be settled in the so-called 'renvooiprocedure' (claim validation proceedings), whereby no writ of summons is required to be served (Art. 122 Fw). The renvooiprocedure is, in principle, conducted in accordance with the general rules of civil procedure, with some exceptions. In Dutch literature,(55) it has been suggested that the court having jurisdiction in bankruptcy will be competent to adjudicate such contested claims even if the jurisdiction of another court or arbitrators was agreed prior to the declaration of bankruptcy.(56) 4.1.3 United States Filing a petition for relief in bankruptcy operates so as to prevent the execution and prosecution of almost all claims against the debtor or the estate under Sect. 362 of the Bankruptcy Code.(57) Such claims have to be filed before the court having jurisdiction over bankruptcy cases.(58) The Bankruptcy Code in Sect. 362(a) provides for an automatic stay of the commencement or continuation of any action or proceedings against the debtor and the estate that was or could have been initiated before the filing for a relief in bankruptcy procedure. The actions and proceedings to be stayed are listed in Sect. 362(a), whereby a 'judicial, administrative and other proceeding against the debtor' are included (Sect. 362(a)(1) of the Bankruptcy Code). In the legislative history to the Bankruptcy Code it is stated, inter alia, that '[a]ll proceedings are stayed, including arbitration' and the stay extends to 'all proceedings even if they are not before governmental tribunals'.(59) The automatic stay is considered to be the fundamental protection of the debtor and the estate provided by the Bankruptcy Code.(60) It is also said that it operates so as to protect creditors and to provide for their treatment in an orderly manner.(61) The stay is only temporary and may be either terminated automatically under Sect. 362(c) or lifted by the court at the request of the interested party, as provided in Sect. 362(d) to (g).(62) 4.2 Applicability of the stay of individual actions in arbitration From the analysis of the relevant provisions of the insolvency laws considered it can be concluded that they do not differ substantially with respect to the objective they intend to achieve. Notwithstanding the differences in the wording or the context in which they are placed in a
