Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-02451/USCOURTS-caed-2_07-cv-02451-6/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

IN RE WIRECOMM WIRELESS, INC., No. 2:07-cv-02451-MCE

Debtor,

NEW CINGULAR WIRELESS SERVICES, MEMORANDUM AND ORDER

INC.,

Appellant,

v.

MICHAEL F. BURKART, as

Trustee,

Appellee.

----oo0oo----

In September 2005, New Cingular Wireless Services, Inc.

(“Appellant”) and Wire Comm Wireless, Inc. (“Debtor”) entered

arbitration over unpaid commissions and residuals. Four days

before the scheduled arbitration hearing, Debtor filed for

Chapter 11 bankruptcy protection. Thereafter, by initiating an

adversary proceeding against Appellant, the appointed bankruptcy

trustee, Michael F. Burkart (“Appellee”) removed the claims from

arbitration to the bankruptcy court. 

Case 2:07-cv-02451-MCE Document 40 Filed 08/01/08 Page 1 of 14
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 Because oral argument will not be of material assistance, 1

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h). 

 Unless otherwise specified, all factual assertions in this 2

section are based on allegations in Appellant’s Memorandum in

Support of Motion to Stay Pending Appeal, and the Declaration of

Richard A. De Liberty in Support of the Motion to Stay Pending

Appeal.

2

The bankruptcy court denied Appellant’s Motion to Compel

Arbitration. Appellant appealed that decision and moved the

bankruptcy court for an order staying the adversary proceeding

pending appeal. The bankruptcy court also denied Appellant’s

stay request.

Presently before the Court is Appellant’s Motion to Stay

Pending Appeal of its Motion to Compel Arbitration. For the 1

reasons set forth below, the bankruptcy court’s decision to deny

Appellant’s Motion to Stay Pending Appeal is reversed. The

adversary proceeding is consequently stayed pending resolution of

Appellant’s request that arbitration be compelled.

BACKGROUND2

Debtor was a dealer of Appellant’s telecommunication

products. In September 2005, Debtor commenced arbitration

proceedings against Appellant, seeking to recover some

$1,225,000.00 in unpaid commissions. Appellant counterclaimed,

arguing that it was entitled to recover overpayment of

commissions and residuals dating back to 2004.

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3

Debtor’s counsel filed no response to Appellant’s

counterclaim, claiming he did not realize the arbitration rules

required him to do so. Debtor subsequently retained new counsel

and moved for leave to file a reply. The arbitrator denied that

motion and, on December 8, 2006, Debtor filed for bankruptcy. 

The arbitration hearing, scheduled to begin on December 12, was

suspended because of the bankruptcy. On February 6, 2007,

Appellant filed a proof of claim in the amount of $2,949,703.17.

As indicated above, Appellee’s initiation of an adversary

proceeding against Appellant effectively removed the claims from

arbitration to the bankruptcy court. On September 17, 2007,

Appellant moved to compel arbitration. At the October 16, 2007

hearing, the bankruptcy court denied that motion, finding that it

had discretion to deny arbitration of the state law claims

because it had “core” jurisdiction over the adversary proceeding. 

The court also stated it was not required to abstain in favor of

pending arbitration because in arbitration “the trier of fact has

to be hired by the parties,” (De Liberty Decl. Ex. D, 31:19-20),

and the trustee’s assets were “basically $13,000 plus a cause of

action” (De Liberty Decl. Ex. D 32:18-19). According to the

bankruptcy court, it was “simply not persuaded that the Federal

Arbitration Act operates as an extra exception that, de facto,

trumps 28 U.S.C. § 1334 [which grants jurisdiction to bankruptcy

courts and district courts to hear bankruptcy cases].” (De

Liberty Decl. Ex. D, 34:1-3.) 

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 “A motion for . . . other relief pending appeal must 3

ordinarily be presented to the bankruptcy judge in the first

instance. A motion for such relief, or for modification or

termination of relief granted by a bankruptcy judge, may be made

to the district court . . . but the motion shall show why the

relief, modification, or termination was not obtained from the

bankruptcy judge.”

4

“[T]o require arbitration of a proof of claim after it is filed

and the trustee’s objection, the counterclaim to that proof of

claim, really runs completely counter to the whole structure and

purpose of the Bankruptcy Code.” (De Liberty Decl. Ex. D,

34:4-8.)

On December 11, 2007, Appellant filed a motion asking the

bankruptcy court to stay the adversary proceeding pending appeal. 

The bankruptcy court heard and denied that motion on January 10,

2008. The court concluded the appeal did not have enough merit

to justify a stay because the order denying arbitration was

interlocutory, and the district court had not yet granted leave

to appeal. This Court has since granted leave to appeal the

bankruptcy court’s decision denying Appellant’s Motion to Compel

Arbitration under Federal Rule of Bankruptcy Procedure 8005.3

STANDARD

Factors a court must consider when determining whether to

issue a stay pending appeal are “(1) whether the stay applicant

has made a strong showing that he is likely to succeed on the

merits; (2) whether the applicant will be irreparably injured

absent a stay; (

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3) whether issuance of the stay will substantially injure the

other parties interested in the proceeding; and (4) where the

public interest lies.” Hilton v. Braunskill, 481 U.S. 770, 776

(1987). Essentially, the party seeking the stay must demonstrate

that the injury it would sustain if the stay did not issue

outweighs the harm the stay would cause the party opposing the

stay. Autoskill Inc. v. Nat’l Educ. Support Sys., Inc., 994 F.2d

1476, 1498 (10th Cir. 1993). Where the moving party has

established irreparable harm to the movant, absence of harm to

the opposing party, and lack of injury to the public interest,

the “likelihood of success” requirement is relaxed somewhat. 

Lundgrin v. Claytor, 619 F.2d 61, 63 (10th Cir. 1980).

A bankruptcy court’s findings of fact are reviewed under a

clearly erroneous standard, while conclusions of law are reviewed

de novo. In re Jan Weilert RV, Inc., 315 F.3d 1192, 1196 (9th

Cir. 2003). “When a bankruptcy court has ruled on the issue of a

stay of its order pending appeal, the district court, sitting as

an appellate court, reviews that decision for abuse of

discretion.” In re Irwin, 338 B.R. 839, 844 (Bankr. E.D. Cal.

2006) (quoting Universal Life Church v. United States, 191 B.R.

433, 444 (E.D. Cal. 1995)). Abuse of discretion occurs “when the

judicial action is arbitrary, fanciful or unreasonable.” Id.

(citing In re Blackwell, 162 B.R. 117, 119 (E.D. Pa. 1993)). “If

reasonable men could differ as to the propriety of the action

taken by the trial court, then it cannot be said that the trial

court abused its discretion.” Id.

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ANALYSIS

1. Presence of Substantial Question Justifying Stay

The Ninth Circuit has never squarely addressed whether

appealing the denial of a motion to compel arbitration requires a

stay of core proceedings in a bankruptcy court. In Britton v.

Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir. 1991), the

Ninth Circuit held that the appeal of the denial of a motion to

compel arbitration does not divest a trial court from proceeding

with the merits of the case. In Britton, however, the Ninth

Circuit found the defendant-appellant’s motion to compel

arbitration “frivolous,” serving merely “to stall a trial.” Id. 

The defendant-appellant had moved to compel arbitration in an

attempt to avoid producing documents during discovery. Id. at

1407-09. By the time the case reached the Ninth Circuit, the

district judge had already entered a default judgment against the

defendant-appellant. Id. at 1409. In permitting the district

court to continue proceedings, the Ninth Circuit sought to

prevent defendants from bringing frivolous motions to compel

arbitration. Id. at 1412. The court noted, however, that the

outcome would not be the same under different circumstances:

The system created by the Federal Arbitration Act allows the

district court to evaluate the merits of the movant’s claim,

and if, for instance, the court finds that the motion

presents a substantial question, to stay the proceedings

pending an appeal from its refusal to compel arbitration. 

See, e.g., Pearce v. E.F. Hutton Group, Inc., 828 F.2d 826,

829 (D.C. Cir. 1987) (district court, after denying

appellant’s motion to compel arbitration, granted its motion

for stay pending appeal because appellant’s claim raised

issues of first impression appellant [sic] would suffer

substantial harm if action were not stayed). . .

Id.

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The facts of Appellant’s case closely resemble those of the

Pearce case, which the Ninth Circuit recognized as presenting

circumstances justifying a stay pending appeal. First, Appellant

would suffer “substantial harm” through potentially unnecessary

litigation in the adversary proceeding if this Court reverses the

bankruptcy court’s decision to deny Appellant’s Motion to Compel

Arbitration. Second, Appellant raises an issue of first

impression: whether a bankruptcy court must abstain from hearing

a core adversary proceeding between parties that had entered into

a pre-petition agreement to arbitrate. Even the bankruptcy court

noted that Appellant’s motion presented a substantial question as

to the competing objectives of the Federal Arbitration Act and

the Bankruptcy Code. It acknowledged that the issue had not

“been definitively resolved in the Ninth Circuit” (De Liberty

Decl. Ex. D, 11:4-5.), and stated it would “be interested in

seeing what the appellate courts eventually say on this question,

because the interplay of the Federal Arbitration Act and the

Bankruptcy Code is an important question.” (De Liberty Decl. Ex.

D, 37:18-21.).

Because the motion presented a substantial question, the

Federal Arbitration Act “allow[ed]” the bankruptcy court to “stay

the proceedings pending an appeal from its refusal to compel

arbitration.” Britton, 916 F.2d at 1412. We now move to a

consideration of the four factors which must be addressed in

considering whether a stay is in fact warranted. Hilton v.

Braunskill, 481 U.S. at 776.

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8

2. Likelihood of Success

 In determining whether to grant a stay pending appeal, the

first step is to decide if the stay applicant has made a showing

of likely success on the merits. It is thus necessary to

consider whether Appellant has demonstrated a likelihood of

prevailing on the request to compel arbitration that is the

subject of his appeal.

Under the Federal Arbitration Act (FAA), a party may

immediately appeal a court order denying a motion to compel

arbitration. 9 U.S.C. § 16(a)(1)(B). The Act establishes a

“federal policy favoring arbitration agreements.” Moses H. Cone

Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). The

Act provides that written agreements to arbitrate “shall be

valid, irrevocable, and enforceable, save upon such grounds as

exist at law or in equity for the revocation of any contract.” 9

U.S.C. § 2. “Any doubts concerning the scope of arbitrable

issues should be resolved in favor of arbitration.” Moses, 460

U.S. at 24-25.

A Chapter 11 bankruptcy filing imposes an automatic stay of

all litigation against the debtor. 11 U.S.C. § 362(a). A

bankruptcy court “shall” lift the automatic stay “for cause.” §

362(d)(1). “[A] desire to permit an action to proceed to

completion in another tribunal may provide . . . cause.” 11

U.S.C. § 362 historical and statutory notes.

Core proceedings are those “arising under” Title 11 that

would not exist but for bankruptcy laws. In re Harris Pine

Mills, 44 F.3d 1431, 1435-37 (9th Cir. 1995). 

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Cases “related to” Title 11 are non-core proceedings that could

exist independently of bankruptcy laws. Id. The bankruptcy

judge determined that this case involves a core proceeding under

28 U.S.C. § 157(b)(2)(B) and (C). (De Liberty Decl. Ex. D

33:17-18.)

Appellant argues, in its opening papers, that Ninth Circuit

case law supports granting a motion to compel arbitration under

these circumstances. As Appellant points out, a Ninth Circuit

bankruptcy court and a Ninth Circuit Bankruptcy Appellate Panel

(“BAP”) have both held that in a core adversary proceeding, the

contest between two parties to an arbitration agreement should

continue in arbitration. In re Mor-Ben Insurance Markets Corp.,

73 B.R. 644 (B.A.P. 9th Cir. 1987); In re Snake River Dairyman’s

Ass’n, Inc., No. 03-41124, 2004 WL 4960361 (Bankr. D. Idaho filed

Mar. 1, 2004).

In Snake River, a dispute arose between two business

cooperatives regarding a milk purchase agreement. 2004 WL

4960361, at *1. The eventual Creditor initiated an arbitration

proceeding. Id. The parties engaged in some discovery and

pre-arbitration hearings. Id. at *2. The debtor filed for

Chapter 11 relief just two months before the date of the

arbitration hearing. Id. The Ninth Circuit BAP recognized that 

in core proceedings, a court “must exercise discretion concerning

the enforcement of an arbitration clause to decide if an

underlying purpose of the Bankruptcy Code would be adversely

affected by enforcing it.” Id. at *4. 

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Before a bankruptcy court excuses parties from their agreement to

arbitrate, that court “must” find that the “potential adverse

impact on core proceedings – resulting in inefficient delay,

duplicate proceedings, or collateral estoppel effect - [is]

substantial enough to override the federal policy favoring

arbitration.” Id. (citing In re Phico Group, Inc., 304 B.R. 170,

174 (Bankr. M.D. Pa. 2003)).

The Snake River court found that the creditor’s claims were

based solely on state law and could be resolved without resort to

interpreting the Bankruptcy Code or Rules. After noting that the

parties had already made substantial progress towards preparing

for an arbitration hearing, and further noting that the debtor

had not established that arbitration would be any slower or more

inefficient, the bankruptcy court ordered the parties to continue

to resolve their dispute in arbitration.

In Mor-Ben, the Debtor and several companies based in Great

Britain had entered into an insurance agreement requiring that 

any disputes arising out of the agreement be submitted to a court

of arbitration in London. 73 B.R. at 646. After the eventual

debtor filed for bankruptcy, several creditors filed proofs of

claim. Id. The Bankruptcy Appellate Panel recognized that

filing a proof of claim does not necessarily subject a creditor

to a bankruptcy court’s jurisdiction. Id. at 647 (citing In re

Castlerock Props., 781 F.2d 159 (9th Cir. 1986)). The court

further noted that a creditor may file a claim to secure a right

to partake in distribution of the debtor’s estate without waiving

the right to arbitration. Id. 

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11

(citing In re Hart Ski Mfg. Co., 18 B.R. 154 (Bankr. D. Minn.

1982), aff’d, 22 B.R. 763 (D. Minn. 1982), aff’d, 711 F.2d 845

(8th Cir. 1983)). The court held that “[a]bsent a Congressional

mandate to preclude arbitration in the bankruptcy context, or a

compelling situation seriously affecting the rights of creditors

in a bankruptcy,” the parties should be held to their agreement

to arbitrate. Id. at 649.

Appellant also points to other circuits that have adopted a

rule of automatic divestiture where a party appeals a

non-frivolous court order denying a motion to compel arbitration. 

See, e.g., Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 215

n.6 (3d Cir. 2007) (adopting “the majority rule of automatic

divestiture where the Section 16(a) appeal is neither frivolous

nor forfeited”); McCauley v. Halliburton Energy Servs., Inc., 413

F.3d 1158, 1162-63 (10th Cir. 2005) (holding that “[i]f . . . the

appeal is not frivolous, [the court] will stay the litigation in

the district court pending the appeal of the denial of the motion

to compel arbitration”); Blinco v. Green Tree Servicing, LLC, 366

F.3d 1249, 1253 (11th Cir. 2004) (finding that “[w]hen a

non-frivolous appeal involves the denial of a motion to compel

arbitration, it makes little sense for the litigation to continue

in the district court while the appeal is pending”). None of

these cases, however, involve bankruptcy proceedings.

Given 1) the Ninth Circuit’s requirement that courts should

grant a stay pending appeal where a motion to compel arbitration

raises a “substantial question”; 2) Ninth Circuit authority

favoring arbitration even as to bankruptcy core proceedings; 

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and 3) the rule, adopted by most circuits, of automatic

divestiture where a party appeals a non-frivolous court order

denying a motion to compel arbitration, Appellant has

demonstrated a substantial likelihood of prevailing on its appeal

seeking an order to compel arbitration in this matter.

3. Irreparable Injury to Appellant

Parties agree to arbitrate in order to avoid more formal,

and frequently far more expensive, proceedings in state or

federal court. If parties are required to endure court

proceedings before arbitration, the potential savings from

arbitration are permanently lost. “[D]enying the parties

arbitration deprives them of an inexpensive and expeditious means

of resolving disputes.” Int’l Ass’n of Machinists & Aerospace

Workers v. Aloha Airlines, 776 F.2d 812, 815 (9th Cir. 1985).

If Appellant is forced to proceed with the bankruptcy

adversary action while its appeal to compel arbitration is

pending, and the bankruptcy court’s decision to deny Appellant’s

Motion is reversed on appeal, Appellant would have wasted money

litigating the adversary action in the bankruptcy court. Those

losses, under the circumstances, would constitute irreparable

injury.

4. Substantial Injury to Appellee

In the Opposition to Motion to Stay Bankruptcy Court

Adversary Proceeding, Appellee does not argue that any

substantial injury would result if Appellant’s Motion to Stay

Pending Appeal is granted. 

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This Court will likely resolve the appeal of the denial of the

Motion to Compel Arbitration within the next few months. Thus,

granting the Motion to Stay Pending Appeal would cause no

substantial injury to Appellee.

5. The Public Interest

Granting the Motion to Stay Pending Appeal is in the public

interest. Staying a potentially unnecessary adversary action in

a bankruptcy court conserves judicial resources.

CONCLUSION

The issue this case presents – whether appealing the denial

of a motion to compel arbitration requires a stay of core

proceedings in a bankruptcy court – is one of first impression in

the Ninth Circuit. Appellant’s circumstances, however, are

identical to those of a case which the Ninth Circuit determined

“allow[s]” a court “to stay the proceedings pending an appeal”

“if . . . the court finds that the motion [to compel arbitration]

presents a substantial question.” Britton, 916 F.2d at 1412

(citing Pearce v. E.F. Hutton Group, Inc., 828 F.2d 826, 829

(D.C. Cir. 1987)). The bankruptcy court acknowledged the

substantial question this case raises, noting that “the interplay

of the Federal Arbitration Act and the Bankruptcy Code is an

important question.” (De Liberty Decl. Ex. D. 37:18-21.) The

bankruptcy court’s recognition of an “important question,” while

at the same time failing to stay the adversary proceeding before

it, was misplaced.

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Had it applied the test set forth in Hilton v. Braunskill,

481 U.S. 770, 776 (1987) to determine whether to issue a stay

pending appeal, the bankruptcy court would have found that the

circumstances definitively favor granting Appellant’s Motion to

Stay Pending Appeal. Given Appellant’s strong showing that its

appeal seeking an order compelling arbitration has merit, the

irreparable injury to Appellant, the lack of any injury to the

Appellee, and the public interest favoring a stay, the bankruptcy

court’s denial of Appellant’s Motion to Stay Pending Appeal was

“unreasonable,” thereby constituting an abuse of discretion. In

re Irwin, 338 B.R. 839, 844 (Bankr. E.D. Cal. 2006) (citing In re

Blackwell, 162 B.R. 117, 119 (E.D. Pa. 1993)). This Court

therefore reverses that decision and grants Appellant’s Motion. 

 Accordingly, the bankruptcy court adversary proceeding is

stayed pending this Court’s resolution of Appellant’s request

that arbitration be compelled.

IT IS SO ORDERED.

Dated: August 1, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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