There are two interesting issues today on the interface between the Federal Arbitration Act and other statutes as District Courts consider issues related to the Bankruptcy Code and that bane of all law students – Article 2 of the U.C.C. Also, as seems to be a weekly event, there is some more action in the Supreme Court on discovery under 28 U.S.C. § 1782.
Arbitration clauses in bankruptcy
What happens if a bankruptcy trustee, on behalf of the bankruptcy estate, commences an action against a defendant with whom the Debtor has an arbitration agreement? McCollum v. Donald Norris & Associates, PLLC (In re: McCollum), 2021 Bankr LEXIS 2883 (N.D. Miss. October 19, 2021), provides some guidance.
McCollum filed for relief under Chapter 13. The Trustee commenced this action against Stonepoint, which she had engaged for debt relief services before filing for bankruptcy. Her agreement with Stonepoint contained a very broad arbitration clause covering “any dispute between the parties.” The parties agreed that they executed the arbitration clause, but disagreed about whether the claims fell within the scope thereof.
The complaint contained twelve counts. Bankruptcy Judge Woodard bifurcates those claims into two packets – core claims, which arise under the Bankruptcy Code, and non-core claims. The former category, the court holds, includes the Trustee’s claims for the turnover of estate property; an accounting; the setting aside of a fraudulent transfer; the return of payments made by the debtor; and claims under 11 U.S.C. 526, which regulates debt relief agencies. As to such core claims, the court holds that it has “discretion to decline arbitration,” as they are not rooted in the parties’ contract. Exercising that discretion, Judge Woodard denies defendant’s motion to compel. However, he holds that the non-core claims, which “do not invoke any right created by federal bankruptcy law and could exist outside of bankruptcy,” must be arbitrated. Therefore, he compels arbitration of claims of breach of fiduciary duty, breach of contract, violation of the duty of good faith and fair dealing, negligence, civil conspiracy, and unjust enrichment.
Preemption of state statutory limits on arbitration
Priebe v. Advanced Structural Technologies, Inc., 2021 U.S. Dist. LEXIS 201959 (E.D. La. October 20, 2021), reaffirms the principle that the Federal Arbitration Act trumps state laws purporting to limit enforcement of the parties’ agreement to arbitrate.
Plaintiff sued to rescind his Employment Agreement with Advanced and to invalidate a non-competition clause contained therein. Defendant sought to dismiss the action and compel arbitration under a provision requiring arbitration of “any dispute or controversy arising out of or relating to [the employment agreement] or the relationship between Employee and the Company. . . .” The Employment Agreement mandated that the arbitration take place in Hennepin County, Minnesota. Priebe claimed that the arbitration clause, therefore, violated a Louisiana statute invalidating choice of law provisions in an employment contract unless such agreement was made after the occurrence of the incident which is the subject of the action, La. R.S. 23:921(A)(2). Quoting the U.S. Supreme Court in Southland Corp. v. Keating, 465 U.S. 1 (1984), the court, Vitter, J., holds that the FAA preempts “state legislative attempts to undercut the enforceability of arbitration agreement.” She, therefore, grants the defendant’s motion to compel. However, she declines to dismiss the case; rather, she stays it under provisions of the FAA, 9 U.S.C. § 3.
Arbitration and Uniform Commercial Code
Nu-X Ventures v. SBL, LLC, 2021 U.S. Dist. LEXIS 203128 (W.D. Ken. October 21, 2021), addresses the effect of an arbitration provision on a typical “battle of the forms” under Article 2 of the U.C.C.
Nu-X issued a purchase order for 1,000 cases of CBD gummies and 1,000 cases of CBD capsules. The purchase order did not contain an arbitration provision. SBL responded with Sales Orders for each transaction. The orders confirmed the provisions of the purchase orders as to the volume and price; however, each Sales Order incorporated SBL’s “terms and conditions,” which it indicated by a URL link at the bottom of the Order. Those terms included an arbitration provision. When SLB allegedly failed to deliver acceptable product in a timely fashion, Nu-X brought this action. SLB moved to compel arbitration. The issue for the court, Stivers, J., was whether the arbitration clause was a part of the parties’ agreement.
Section 2-207 of the U.C.C., incorporated at Section 355.2-207 of the Kentucky Revised Statutes, provides that additional terms added by a party in response to an offer become part of the contract unless “they materially alter it.” The court holds that a “material alteration is one that would ‘result in surprise or hardship if incorporated without express awareness by the other party. . . ,’” quoting U.C.C. § 2-207, comment 4. Judge Stivers joins other courts to which he cites in holding that “the arbitration clause does not materially alter the contract and therefore is a part of the contract under U.C.C. § 2-207(2).” He opines that, since Nu-X could have learned of the arbitration clause by reading the conditions referenced in SBL’s sales order and does not claim that the provision would cause undue hardship, there is a presumption of arbitrability. Finding that Nu-X has not overcome that presumption, the court stays the action and compels arbitration.
There are two recent developments in the Supreme Court regarding the applicability of 28 U.S.C. § 1782 discovery to foreign, private arbitrations. The petitioner in ZF Automotive US v. Luxshare, Ltd., Dkt. No. 21-401, applied to Justice Kavanaugh for a stay of the District Court’s order compelling discovery. The final brief on the issue was filed last Friday. As of this writing, there has not been a decision on the application. If Justice Kavanaugh or the full court denies the application and discovery goes forward, might the issue, again, be mooted? Even if that happens, however, there is another actor waiting in the wings. In Alix Partners, LLC v. Fund for Protection of Investor Rights in Foreign States, Dkt. No. 21-518, the petitioner raises the Servotronics issue as it relates to discovery in an arbitration pending in Lithuania between a Russian investment fund and a U.S. consulting firm.
Be safe. More on Friday.
David A. Reif