Opinion ID: 803883
Heading Depth: 3
Heading Rank: 2

Heading: The McMahon Framework

Text: [2] As noted, the threshold issue on this appeal is how to reconcile the FAA with the Bankruptcy Code, and, more specifically, a bankruptcy court’s jurisdiction to determine dischargeability pursuant to §§ 523(a)(2), (4) and (6). See In re United States Lines, 197 F.3d at 640 (explaining that disputes involving the Bankruptcy Code and the FAA often “present a conflict of near polar extremes: bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution.”). The FAA provides, in relevant part, that an arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” and that a court must stay a proceeding if it is satisfied that an issue in the proceeding is arbitratable section (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.” 7898 IN THE MATTER OF EBER under such an agreement. 9 U.S.C. §§ 2-3; see Thorpe Insulation, 671 F.3d at 1020 (quoting the FAA). While the FAA establishes a federal policy of favoring arbitration, “[l]ike any statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional command.” Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987). The party that is opposing arbitration has the burden of proving “that Congress intended to preclude a waiver of judicial remedies for [the particular claim] at issue.” Id. at 227. The Supreme Court has constructed a framework under which courts can analyze how the FAA and a particular statute interact. See id. To determine if Congress intended to override the FAA’s policy favoring arbitration in a particular statute, courts must examine: (1) the text of the statute; (2) its legislative history; and (3) whether an inherent conflict between arbitration and the underlying purposes of the statute exist. Id. Our Circuit recently addressed “whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code” as an issue of first impression under McMahon, in Thorpe Insulation, 671 F.3d at 1020. This Circuit and sister circuits applying the McMahon factors to the Bankruptcy Code have found no evidence in the text of the Bankruptcy Code or in the legislative history suggesting that Congress intended to create an exception to the FAA in the Bankruptcy Code. Thorpe Insulation, 671 F.3d at 1020 (“Neither the text nor the legislative history of the Bankruptcy Code reflects a congressional intent to preclude arbitration in the bankruptcy setting.”); The Whiting-Turner Contracting Co. v. Elec. Mach. Enter., Inc. (In re Elec. Mach. Enter., Inc.), 479 F.3d 791, 796 (11th Cir. 2007) (same); Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 231 (3d Cir. 2006) (same). The relevant inquiry then becomes “whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.” Thorpe Insulation, 671 F.3d at 1020. IN THE MATTER OF EBER 7899 [3] In Thorpe Insulation, an insurance company pursued a breach of contract claim related to the terms of a settlement agreement against an insulation company that was in asbestos-related, Chapter 11 bankruptcy. Id. at 1014-16. Upon the insulation company’s filing for Chapter 11 bankruptcy, an automatic stay was entered pursuant to § 362, and the insurance company moved to compel arbitration pursuant to the terms of the settlement agreement. Id. at 1016. The bankruptcy court denied the motion to compel arbitration, holding that the allowance or disallowance of the insurance company’s claim was a core matter, and that it was exercising its discretion to prevent arbitration because: “[a]lthough the conduct of which [the insurance company] complains may have commenced prepetition, the acts of which [it] complain[s], if true, are inextricably intertwined with the manner” in which the insulation company completes its reorganization. Id. at 1017. The district court affirmed the bankruptcy court’s holding, and the insurance company appealed. Id. at 1018-19. The Thorpe Insulation Court held that the core versus noncore distinction made by other circuit courts6 “though rele- 6 The core versus non-core distinction has been articulated by our sister circuits as follows: generally, bankruptcy judges do not have discretion to refuse to compel arbitration of non-core matters because they are generally only tangentially related to a bankruptcy case. MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 108 (2d Cir. 2006) (citing Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy Co.), 226 F.3d 160, 166 (2d Cir. 2000)); see MCI Telecomms. Corp. v. Gurga (In re Gurga), 176 B.R. 196, 199 (9th Cir. B.A.P. 1994) (holding that a bankruptcy court did not have discretion to refuse to enforce an arbitration clause in a prepetition agreement where the underlying action was based on a non-core breach of contract claim). Bankruptcy courts may, however, exercise discretion to refuse to compel arbitration of core bankruptcy matters, which implicate “more pressing bankruptcy concerns.” MBNA Am. Bank, 436 F.3d at 108 (citing In re United States Lines, Inc., 197 F.3d at 640). Yet, even as to core proceedings, “the bankruptcy court will not have discretion to override an arbitration agreement unless it finds that the proceedings are based on provisions of the Bankruptcy Code that ‘inherently conflict’ with the Arbitration Act or that arbitration of the claim would ‘necessarily jeop7900 IN THE MATTER OF EBER vant, is not alone dispositive,” and explained that it would “join our sister circuits in holding that, even in a core proceeding, the McMahon standard must be met—that is, a bankruptcy court has discretion to decline to enforce an otherwise applicable arbitration provision only if arbitration would conflict with the underlying purposes of the Bankruptcy Code.” Id. at 1021 (citations omitted). The Thorpe Insulation Court went on to adopt the bankruptcy court’s rationale that the resolution of the insurance company’s claim was a core proceeding, regardless of the fact that the insurance company was attempting to characterize it as a “state law breach of contract claim,” because ultimately the insurance company had filed a claim, and under 28 U.S.C. § 157(b)(2)(B), the allowance or disallowance of that claim was a core proceeding. Id. The bankruptcy court had discretion to deny the motion to compel because “the nature of the allegations were such that adjudication of [the insurance company’s] claim in any forum other than a bankruptcy court would conflict with fundamental bankruptcy policy.” Id. at 1022.