By: Scott B. Riddle, Esq.
In The Whiting-Turner Contracting Co. v. Electric Machinery Enterprises, Inc. (In re Electric Machinery Enterprises, Inc.), No. 06-13733 (11th Cir. February 23, 2007) (appeal from MD Fla), the debtor was a sub-contractor that performed services for Whiting-Turner, the general contractor of a project called "Suess Landing." A dispute arose on the project, leading to the execution of a tolling agreement between Debtor and Whiting-Turner, for the purpose of allowing Whiting-Turner the opportunity to seek damages against the owner. The tolling agreement contained an arbitration clause. Debtor subsequently filed a Chapter 11 petition and filed an adversary against Whiting-Turner to recover payment from Whiting-Turner for services performed on the project.
The bankruptcy court denied [Debtor] EME’s motion for summary judgment and found that this case is not a “turnover” action because it involves a disputed and unliquidated claim. The bankruptcy court also found that this case presents a constructive trust situation, because Whiting-Turner collected money in settlement for itself and for EME, and if Whiting-Turner does not distribute the proportion of the settlement owed to EME, Whiting-Turner will be unjustly enriched. However, the bankruptcy court acknowledged that the amount of money that Whiting-Turner owes to EME is a “hotly disputed” factual issue. Having determined that a constructive trust existed, the bankruptcy court determined that it had jurisdiction over the res of the constructive trust, and that the determination of the amount of res in the constructive trust was a “core” bankruptcy proceeding. Therefore, the bankruptcy court found that arbitration under these circumstances was not appropriate and denied Whiting-Turner’s motion to compel arbitration. The district court affirmed, and Whiting-Turner appealed.
The Eleventh Circuit reversed. It was undisputed that the Arbitration Clause in the tolling agreement was valid and enforceable —
In McMahon, [482 U.S. 220, 226, 107 S. Ct. 2332, 2337, 96 L. Ed. 2d 185 (1987)], the United States Supreme Court promulgated a three factor test in order to determine Congress’ intent: “(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]’ exists." Davis, 305 F.3d at 1273 … Applying the McMahon factors to the Bankruptcy Code, we find no evidence within the text or in the legislative history that Congress intended to create an exception to the FAA in the Bankruptcy Code. …Therefore, we look to the third factor of the McMahon test and examine whether an inherent conflict exists between arbitration and the underlying purposes of the Bankruptcy Code.
The Court concluded that the proceeding was not a core proceeding (which seemed rather clear) –
A determination of whether Whiting-Turner owes EME money under their contractual agreement does not involve a right created by federal bankruptcy law, and it is not a proceeding that would arise only in bankruptcy. See In re Toledo, 170 F.3d at 1348. EME could have bought this claim against Whiting-Turner irrespective of whether EME had filed for bankruptcy. EME’s claim against Whiting-Turner does not involve the traditional purpose of the bankruptcy court – modifying the rights of creditors who make claims against the
bankruptcy debtor’s estate.
The Court then held that the arbitration clause was enforceable and the lower courts erred in not so holding –
In general, bankruptcy courts do not have the discretion to decline to enforce an arbitration agreement relating to a non-core proceeding. See Crysen/Montenay Energy Co. v. Shell Oil Co. (In re Crysen/Montenay Energy Co.), 226 F.3d 160, 166 (2d Cir. 2000). However, even if a proceeding is determined to be a core proceeding, the bankruptcy court must still analyze whether enforcing a valid arbitration agreement would inherently conflict with the underlying purposes of the Bankruptcy Code. See Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re National Gypsum), 118 F.3d 1056, 1067 (5th Cir. 1997). As explained [above], we find that the proceeding in this case is not a core proceeding. Moreover, and even if it is a core proceeding, there is no evidence that arbitrating EME’s claim against Whiting- Turner would inherently conflict with the underlying purposes of the Bankruptcy Code. Therefore, the dispute between EME and Whiting-Turner is subject to arbitration under the terms of the arbitration agreement.