Restructure This! Podcast Ep. 14
The Intersection of Bankruptcy and Arbitration with Professor Robert M. Lawless
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Sheppard Mullin's Restructure THIS! podcast explores the latest trends and controversies in chapter 11 bankruptcy, commercial insolvency and distressed investing. In this week's episode, Professor Robert Lawless of the University of Illinois College of Law joins us to discuss the intersection of bankruptcy and arbitration, including the enforceability of arbitration agreements in bankruptcy and the frameworks bankruptcy courts should use to determine when such an agreement is enforceable.
Guest:
Professor Robert M. Lawless:
Professor Lawless is the Max L. Rowe Professor of Law and co-director of the Program on Law, Behavior and Social Science at the University of Illinois College of Law. He specializes in bankruptcy, consumer finance and business law.
Professor Lawless also co-authored the ninth edition of Secured Transactions: A Systems Approach, a leading textbook on secured transactions, as well as Empirical Methods in Law, a textbook on empirical methodologies. He administers and contributes to the blog Credit Slips, participates in the Consumer Bankruptcy Project, and serves as an associate editor for the Law & Society Review. Professor Lawless has testified before Congress, and his work has been featured in major media outlets such as C-SPAN, CNN, CNBC, NPR, The New York Times, the Wall Street Journal, Last Week Tonight with John Oliver, ABC News and the Financial Times.
Transcript:
Justin Bernbrock
On this installment of Restructure This!, we welcome Professor Bob Lawless of the University of Illinois College of Law. Professor Lawless is the Max L. Rowe Professor of Law and co-director of the Program on Law, Behavior and Social Science. Professor Lawless specializes in bankruptcy, consumer finance and business law, and he is the co-author for the ninth edition of Secured Transactions: A Systems Approach, a leading textbook on secured transactions. Today, Professor Lawless joins us to discuss the intersection of bankruptcy and arbitration. As always, stay tuned after the interview for a rundown of current restructuring news and notable stories.
Welcome back to another episode of Restructure This! Today, we have the great pleasure and honor of being back in Champaign, Illinois for our second live recording here at the University of Illinois College of Law, and we're joined by Professor Bob Lawless. Mr. Lawless, thank you for being here. We're excited to hear some of the interesting things you've been up to recently. Before diving into that, I think that folks would find it interesting to hear a bit about your background, how you got interested in bankruptcy law.
We did record an episode with your colleague Professor Brubaker, and he shared at the time that the two of you were classmates in law school. I always find it interesting to sort of start there and hear about that experience.
Bob Lawless
Sure. Well, first, thanks for inviting me to do this. It's always a great honor and pleasure to have you back on campus, Justin. You're right. Ralph and I have known each other for quite a while now. Really he and I together, I think, decided to start teaching and start going into bankruptcy back in our days as law students. It was Professor Charles Tabb. I'd guess many listeners to this podcast probably know Professor Tabb's work. Professor Tabb taught bankruptcy here for many years, inspired a generation of bankruptcy lawyers, and that included Ralph and me. We were classmates and we're talking about our career interests and things.
We both were interested in bankruptcy, both worked on law review together. That's where I started getting interested in kind of the academic life and working with academics and law review articles. Pretty much during law school started thinking about that. After law school, I clerked for the Seventh Circuit, and then practiced for a bit, and actually came back to Illinois and did a fellowship that got me on the career path back into academia. I've taught at the University of Missouri and the University of Nevada Las Vegas and came back to Illinois in 2006. That brings us here today for you and me to talk.
Justin Bernbrock
People like me who are familiar with the University of Illinois know, I think, your areas of focus and your credits. But for those who don't and not wanting to pigeonhole you into any particular areas, what do you commonly teach, what are your areas of interest in terms of research and things like that?
Bob Lawless
I'm a bankruptcy scholar. I teach secured transactions. I teach a course in consumer finance. I actually teach also a course, empirical research methods, and then kind of as needed, teach other courses. I teach the bankruptcy class often. In the spring, I'm going to be teaching a bankruptcy seminar. As you know, Justin, we're very fortunate here at the University of Illinois to be able to offer a wide array of bankruptcy classes. Probably more bankruptcy classes than any other law school in the country. I'm responsible often for staffing those. In terms of what my research is, my main area of research is in household finance and consumer bankruptcy.
I work on something called the Consumer Bankruptcy Project, which collects data on bankruptcy filers. Every three months, we collect a random sample of 200 bankruptcy filers. We survey them. That's how we know demographic information. A lot of information we know about bankruptcy filers that's nowhere else. We collect their court records. We've been at that for now nine years. We have 7,200 records of bankruptcy filers. Actually we've just signed a book contract with the University of California Press to write about the experiences of bankruptcy filers.
Justin Bernbrock
Turning to some of your activity this past summer and really the focus of what our discussion will be today, as I understand, you'll be presenting to the NCBJ. I understand you've spent a bunch of time thinking about the Federal Arbitration Act and its intersection with the Federal Bankruptcy Code. What prompted that? Will you be speaking on that or doing more work in that regard this year or thereafter?
Bob Lawless
The NCBJ, I think most listeners will know, the National Conference of Bankruptcy Judges, has their annual meeting. They invited me along with three other academics to be part of a symposium that's going to be published in the American Bankruptcy Law Journal. There's a panel for those who are going to be at the NCBJ annual meeting in Orlando this coming October 20th, 10:15 AM. Come and listen to us. Talk about arbitration and bankruptcy. I think the reason I got invited was that there was an amicus brief we submitted a number of years ago in a Second Circuit case called Credit One versus Anderson that the court cited.
That was probably my first brush with the issues of arbitration and bankruptcy. The article that I'm writing to be talked about at this panel is kind of an outgrowth and elaboration on a lot of the ideas in that amicus brief.
Justin Bernbrock
Substantively, and please correct me if I get off the path here because it's been a while since I've dealt with arbitration in bankruptcy, but as I understand, bankruptcy courts will not enforce an arbitration agreement with respect to core bankruptcy matters, but they will respect the agreements as to non-core matters. To me, that seems reasonable. Is that correct and should it be?
Bob Lawless
The first part, is it correct, more or less. That's what the courts say. They talk about core versus non-core in terms of whether the arbitration agreement will be enforced. If you read the cases, carefully though they'll say, "Well, usually we enforce arbitration agreements in non-core matters and usually we don't in core matters," which means that sometimes that rule's not followed, which really makes it not much of a rule. One of the things that I say in my article is that the core, non-core distinction is really irrelevant to the arbitrability issue, the question of whether an arbitration agreement should be enforced.
The core, non-core distinction is about dividing up jurisdiction between the bankruptcy court and the district court. What matters can a bankruptcy court hear? Now, there's no reason to think that that should have any connection to the arbitrability question. The nugget of truth is in the core, non-core inquiry is whether Congress has put something kind of within the exclusive jurisdiction of the bankruptcy court such that somebody else shouldn't hear it.
Justin Bernbrock
Which is interesting, and I'm becoming persuaded, we'll see where we end up here, but the core, non-core distinction does seem a bit irrelevant as to matters which, as you say, the non-Article III bankruptcy court and the Article III district court can enter a final order on. I understand those very important jurisdictional distinctions. What about the notion that an arbitration agreement is a private agreement as among parties and why should there even be a question as to whether this is something to enforce or not enforce? I mean, what's the distinction between this type of agreement and any other executory contract to which a putative debtor is a party?
I mean, courts and Congress don't step into those agreements and say which are not enforceable in the context of bankruptcy with certain limited exceptions that are obviously necessary for the implementation of the bankruptcy system, for example, the prohibition against ipso facto clauses. But why is this even an issue?
Bob Lawless
Courts and Congress do step in and require people to participate in a bankruptcy case or for be ever barred from asserting their claim. Bankruptcy is a collective proceeding. The court has jurisdiction over the estate, and anyone with claims to that estate has to come forward into the case. What arbitration agreement can do is, as you say, it's a private agreement. It's a private agreement among a subset of those claimants. And that private agreement can't bind the other claimants, and that private agreement can't deprive the other claimants of their ability to appear and be heard and have their rights adjudicated by the court.
One of the big messages here is that the issues around arbitrability and bankruptcy are not monolithic. You can't just do an analysis to say, "Oh, core, non-core," and that takes care of all the issues. Right now I think you and I are talking about claim allowance. With claim allowance, the bankruptcy court takes jurisdiction over the estate. They decide how that estate gets divided up. To use the old metaphor, there's a pie. Claim allowance is about dividing up the pie. You can't have two decision makers make that decision. The pie cannot be divided both in seven ways and in eight ways.
For the bankruptcy system, there's an inherent conflict with the arbitration act to say, "Okay, we're going to descend that issue about how many ways the claims get divided up. We're going to send that to a private party as to those who have private agreements, and we're going to leave it to the bankruptcy court for everyone else." That doesn't work. Those processes both can't work together. What the Supreme Court has directed on many occasions is that when the other statute inherently conflicts with the Federal Arbitration Act, well, you have to use the other statute. Here in this claim allowance is an example where you can't both comply with the Arbitration Act and the Bankruptcy Code simultaneously.
Justin Bernbrock
Would critics argue that, sure, bankruptcy judges should preside over the estate and the claims allowance process. However, bankruptcy judges know nothing about complex induction boiler systems and the manufacturing thereof. And if there is a dispute among perhaps a power facility and the manufacturer or multiple manufacturers who constructed things in connection with that power facility, really that that is beyond the expertise of the bankruptcy court, which is not to suggest that any bankruptcy judges do not possess the capacity to learn these things, but there are clear examples of why parties elect arbitrators that are experienced and that are perhaps experts in certain fields because the issues are so complex.
Is there a potential solution where you bifurcate the damages portion from the liability portion of the proceeding, and then there's some time allowance for the arbitration to proceed, and whatever the net result of that is, is brought back into the bankruptcy court and fed into the claims allowance process. Is there anything...
Bob Lawless
No, I think there's several things packed in there, so let's unpack them. Again, an arbitration agreement is an agreement between A and B that they're going to settle their dispute privately. That's great as long as the dispute is only between A and B. But bankruptcy brings in not only party C, but party C, D, and the rest of the alphabet several times over, right? It's a collective proceeding. That determination, that private agreement between A and B cannot bind the rest of them. Indeed, I think there's a certain constitutional dimension to this, right?
That you can't let A and B have a private agreement that decides how the dispute's going to be resolved that deprives everyone else of their ability to appear and be heard on how to divide up the bankruptcy res, how to divide up the bankruptcy estate. You I think are also raising a separate issue, which is, can the parties agree to arbitrate something in bankruptcy? The answer to that is clearly yes, but the arbitrability question is whether a pre-dispute arbitration agreement can deprive the court and deprive claimants to that bankruptcy estate of their day in court. You deprive the court of jurisdiction, you can deprive people of their day in court.
That's the arbitrability issue. It's a different issue to come and say, "Okay, bankruptcy's been filed. Both the debtor and the creditor here agree that this dispute is best resolved through arbitration," either because it's cheaper or the arbitrator is more expert or whatever. That suggestion will have to be done through motion. All parties get a chance to appear and be heard on whether that this particular matter should be referred to arbitration. The bankruptcy court remains in control, because whether to allow that to go to arbitration post-dispute, post-bankruptcy is within the control of the bankruptcy court.
The court will, again, have to hear that motion, but that's a fundamentally different assertion than walking into court and saying, "Your honor, A and B have agreed to something," and that agreement deprived everyone else in the bankruptcy case of their ability to be heard on how this matter is going to influence the bankruptcy estate.
Justin Bernbrock
Where does the absent consensus caveat sort of play into this? How does that work? Is that the term of art for what I was describing, which is the parties approach the court and say, "Listen, we want to arbitrate this and everyone agrees with it," so I guess I think I understand your objection to this. But I'm wondering if there is anything inherent in the Federal Arbitration Act that courts have raised or pointed to that would cut against the argument that you've raised that would justify this removal of jurisdiction.
Bob Lawless
I think it's not so much consent, which is the issue. Because after all right, A and B have consented. I think the issue is whether the consent happens within the bankruptcy case or whether it's happened before the bankruptcy case. If it's after the bankruptcy case, that's essentially a settlement. You can settle all sorts of matters, but you have to get the approval of the bankruptcy judge to do that. If somebody has an objection to the settlement, they can appear and be heard and explain to the court why the court shouldn't approve that settlement. Going to the court and saying, "We want to settle this matter by arbitration," is exactly that, it's a settlement.
Again, what the issues are here is whether a pre-bankruptcy arbitration agreement can deprive the court of the jurisdiction to hear something that otherwise would've been able to hear. That's the issue. The settlement issue, going to the court and saying, "We're going to settle this by arbitration," it's a completely separate concept.
Justin Bernbrock
With these pre-bankruptcy I'll just call them just existing arbitration agreements, what framework should the courts be using to determine whether this is something that's enforceable?
Bob Lawless
Again, I don't think it's a one size fits all analysis, right? Again, this is why I think we got to throw away the core versus non-core distinction. With claim allowance, we've discussed that, right? That has to do with the bankruptcy estate. There can only be one master of the bankruptcy estate. Sometimes courts will say that the bankruptcy court jurisdiction over the estate is not merely exclusive, it's paramount. And that explains why claim allowance is not something that can be controlled by a pre-dispute arbitration agreement. On the other hand, there are other sorts of bankruptcy matters where a different sort of analysis would come up.
I mentioned the Credit One versus Anderson case in the Second Circuit and the issue there was a discharge. In that case, a consumer debtor had gotten a discharge and then alleged a violation of the discharge injunction in the way that a credit card company was doing post-bankruptcy credit reporting. They brought a motion in bankruptcy court. The credit card company said, "You have an arbitration agreement with me that you'll arbitrate any dispute." The issue was whether that arbitration agreement eliminated the ability of the court to police its own statutory injunction. Once you ask that question, the answer is obviously not, right?
You and I cannot agree that the court can’t enforce its own orders. But that's a different analysis. That does not rest on the exclusive jurisdiction over the estate. That rather rest on the idea that a bankruptcy court, like any court, has the inherent power to enforce its own orders and to do so through contempt.
Justin Bernbrock
Thinking about another example I think of where this has come up, the Hostess bankruptcy case. As I understand, there was an insurance company, insurer, filed a motion arguing that the debtor was obliged to arbitrate its cash collateral motion with respect to certain deposit accounts that served as surety in connection with the insurance contract.
Bob Lawless
Yes, this is what's going on. Right.
Justin Bernbrock
What about that one? I mean, I have a pretty strong view on how I think that audit turned out, but I'm curious to hear what... As we're trying to map the contours of something that is not the core, non-core distinction, which clearly a motion under 363 is a core matter, where does this one fall in the call it the Lawless test?
Bob Lawless
Yeah, there you go. That will go well, the Lawless test. I'll tell you my opinion, but then I want to hear your strong opinion on this one as well. It's a good example, as you point out, is why core, non-core doesn't really I think work. It's core. Everyone would agree with that right? But in some ways, I kind of give the creditor's lawyers a lot of credit here for coming up with a very creative argument, which I think not many people would've thought of, which is you have to arbitrate this cash collateral motion. First of all, the Bankruptcy Code says the court can approve debtor in possession financing.
The court can approve the use of estate assets. The Bankruptcy Code expressly gives that authority to the bankruptcy court. But again, this is one where we come back to the bankruptcy estate. Cash collateral is essentially about the use of estate property. That does not just affect the debtor and the creditor who had that particular agreement, that affects everyone involved in the bankruptcy case. To allow a private party to resolve that dispute deprives everyone else with a claim in the bankruptcy case of their ability to appear and be heard on that issue. I think the court quite correctly, almost out of hand, said, "Yes, we're not going to arbitrate a cash collateral motion." Is that your opinion?
Justin Bernbrock
I think that that is the right result. Yeah, I mean, as a principally debtor lawyer, there's virtually no world in which I would want my cash collateral order subject to an arbitration for a whole host of reasons. These things I think are... There's clearly a market for them as they've been developed over the last three decades. Bankruptcy judges are very familiar with them. They provide very important protections for not only secured parties, but all sorts of parties involved in the case. I want bankruptcy judges to preside over those, and I want them out in the open.
It's critically important, I think, that they be cleansed by the sunlight of the spirit, so to speak, and I think that that provides a lot of stability to being able to take... Because presumably an arbitration determination could be confidential if the terms of the agreement provide that.
Bob Lawless
Yeah, I guess I'm not as sure on the cash collateral matter, but also put yourself in the position of a junior claimant. Maybe their best possibility of recovery is continued operation of the business or something. And now you're going to say, "Wait a second. Whether the viability of this business often will depend on the cash collateral motion, and somebody other than the judge is going to decide that? My interests are affected here. Where do I get to go in and argue or make an appearance? Where are my interests protected? Why should this private agreement between the parties control my stake in the case?"
I think there's a natural tendency here to think about the consequences of the arbitration or not, or arbitrators are better decision makers or not. None of this analysis depends on that. It's about courts at the end of the day bind us all through the fact that they're a part of the sovereign. They're part of the government. We have to obey them. The protection for that is due process, the right to appear and be heard on issues that are going to affect you. Bankruptcy's complicated, right? There's a lot of parties. There's a lot of moving parts.
But fundamentally what's at stake in the arbitrability issue with bankruptcy is the potential to deprive somebody of that day in court on a bankruptcy matter because of a private agreement to which they're not a party.
Justin Bernbrock
Right. I've had this experience where representing debtors, bankruptcy judges take seriously their obligation, to borrow a phrase, to protect and defend the estate. Where I've represented creditors, in some instances, argued against the use of cash collateral. I've had judges say, "So you want me to shut down this company right now? That is what you are asking for, right?" The notion that a bankruptcy judge... And we're talking about cash collateral or any financing order, which I think are among the most important orders very early on in a case and often set the path for the case generally.
Well, certainly you would want to have some interim relief the first day of hearing, and then final relief within 30 days or less. Short time frame, critical, essential components to a successful restructuring or reorganization. I really like this concept where the bankruptcy judge has taken ownership of the situation of the debtor, of the estate and is going to protect and preserve the assets. Had this come out any other way, sort of been net bad.
Bob Lawless
As far my research, this is the only time a creditor has asserted that they could arbitrate a cash collateral motion.
Justin Bernbrock
I have another question about this because presumably arbitration agreements, whether they're part of or they are standalone, they are executory by definition. What right does a creditor have to demand or insist on performance by the debtor before a decision has been made with respect to assumption or rejection?
Bob Lawless
Well, everybody should come to the symposium at NCBJ. One of my co-panelists, that's exactly their topic, is to talk about the effect of assumption or rejection and executory contracts. My personal view on that is that this is not hard. Even if an executory contract is rejected, it's merely breach of the contract. 365 makes that clear. It's not a nullification of the arbitration clause. Even outside of bankruptcy, the reason you often have arbitration is somebody's breached the contract. That doesn't forgive the arbitration clause or make it go away. I don't think assumption or rejection really plays a role here in whether or not the contract's executory. I think those issues or arbitrability are not really on the table.
Justin Bernbrock
Even though during the pendency of the case, to take action to enforce that provision of an agreement would presumably violate the automatic stay.
Bob Lawless
But that's an automatic stay issue. We're talking about cash collateral. I think for the same reasons that you can't arbitrate a cash collateral motion, you can't arbitrate a stay violation issue. That affects everyone in the estate. Everyone to claims to the estate, turnover if somebody's holding an estate property, similarly. That's within the control of the bankruptcy court whether somebody has estate property is essentially should turn it over. That's an issue that affects everyone with a claim to the estate.
Justin Bernbrock
Again, we're trying to map the contours of this new test. What about avoidance actions? Where do those fall for you?
Bob Lawless
Avoidance actions also, I think, actually are quite easy. They're non-arbitrable because the trustee is not a party to the arbitration agreement. The trustee is coming in enforcing Section 547, 548, whatever preference. Fraudulent transfer, this is a cause of action given to the trustee. This is very simple, right? A trustee versus so and so, and so and so says, "Well, I have an arbitration agreement." The trustee says, "Yeah, but not with me." They're different analysis, right? This doesn't go back to exclusive control of the estate. This goes back to why say I think we got to get rid of this core, non-core, because fraudulent transfer preferences are core.
Justin Bernbrock
Not always.
Bob Lawless
Well that’s, as I was about to say, if you haven’t filed a claim, right, and all this. But that doesn't help us. Again, there's a great quote in a Supreme Court case, the Waffle House case, it has nothing to do with bankruptcy. It's an arbitration case. The Supreme Court says it's about whether EOC was bound by the arbitration agreement between the employer and the employee and the Supreme Court says no. It goes without saying that if somebody's not a party to a contract is not bound by it. I think the same analysis here. I think this is very easy, right? The trustee is not a party to the arbitration agreement.
Justin Bernbrock
I want to pull on that thread a little harder, because the moment I file a bankruptcy petition, I have created a new entity over which the debtor in possession as trustee arises like the phoenix. Can that theory also apply to any arbitration agreement?
Bob Lawless
Again, I don't want to make statements about arbitration agreements across the board in all sorts of different bankruptcy proceedings. The issue here is whether a preference action or fraudulent transfer action is subject to that. I think that the debtor in possession is no more bound by the arbitration clause than the trustee. The arbitration clause was signed in a different capacity. This is agency law 101, right? Sign agreement in one capacity, you're not liable for it in other capacities. The debtor in possession is a fiduciary, so I think that analysis is pretty straightforward also for the debtor in possession.
Justin Bernbrock
The subject of what is to be arbitrated, does the analysis turn on the subject matter of whatever is set forth in the party's arbitration agreement?
Bob Lawless
Well, I think I'm seeing something a little bit different. Obviously yes, the scope of the agreement determines what's subject to arbitration. The analysis as to whether the Bankruptcy Code and the Federal Arbitration Act conflict depends upon what the bankruptcy proceeding is. I actually don't think that all bankruptcy proceedings can't be arbitrated. There are many that can, because that'll illustrate some of the differences. What the Supreme Court has told us, again, is you look for an inherent conflict between the Arbitration Act and the other law here, the Bankruptcy Code. There are lots of times that there is no inherent conflict.
I think a great example is an individual's action for a violation of the automatic stay. Individuals can sue for damages for a willful violation of the automatic stay. Those damages don't go to the estate. They go to the individual. They go to the debtor themselves. Those are subject to an arbitration agreement. It doesn't implicate the estate. It doesn't implicate third parties. It implicates only the debtor and whosoever violated the automatic stay. Another example would be actions that are derivative of the debtor. What I mean by that, contrast that with the fraudulent transfer or preference lawsuit where that action is given to the trustee.
Now, the trustee, however, says, "I'm going to sue because..." Maybe just probably the basic thing, you had a contractual obligation to the debtor and you didn't perform, and so you owe the debtor money or whatever. That action the trustee takes derivative of the debtor. We can look at this in two ways. One way we can say is the arbitration clause in that agreement and the agreement in question is merely the forum in which that issue gets decided. And now we go back to if the trustee's right or debtor in possession is right and this claim is valid, then that's property of the estate and the bankruptcy court should hear it.
We also have a competing vision, which is the trustee takes everything into the bankruptcy estate subject to what the debtor has. Which one of those versions is right? Is this something that's property of the bankruptcy estate and the bankruptcy court decides because if it's a valid claim, it's property of the estate, or is the trustee's rights merely just subject to that arbitration clause? Look, the answer to that is yes. These are not laws of nature. We can say that either of those concepts is perfectly logical and perfectly consistent. I think it's probably better to conclude that that dispute has to be arbitrated, going back to the principles that the arbitrator generally decides what's arbitrable.
You have a chicken and the egg problem here, right? If there's liability, it's estate property. If not, then it's not estate property, so what do we do? I think that's very analogous to the issue of, is this something within the arbitration clause? Arbitrators usually decide that. I think a claim like that where it's the trustee or the debtor in possession is taking something that's derivative of the pre-bankruptcy debtor, that is something that's subject to arbitration. There's not the inherent conflict with the Bankruptcy Code.
Justin Bernbrock
There's a body of law that suggests that the director's and officer's insurance policies are property of the estate, but that the proceeds thereunder may be exempt from the estate, although the common practices to get comfort orders lifting the automatic stay to allow D&O carriers to advance defense costs for Ds and Os. How about a dispute among an insurance carrier, certain Ds and OS, and the debtor with an arbitration clause?
Bob Lawless
What's the dispute?
Justin Bernbrock
Let's say the carrier declines coverage and has in its policy... I'm not an insurance lawyer, so I don't know if arbitration clauses in the context of an insurance policy are void for any reason, but let's assume that they are not. The policy says that any disputes hereunder shall be arbitrated, blah, blah, blah. What result on that one if this comes up in the context of bankruptcy and say the debtor in the Ds and Os say, "No, no, no, this is going to be decided by the bankruptcy court," insurance carrier says, "Nah, Section 17 says otherwise."
Bob Lawless
If the insurance carrier is wrong, that money is property of the estate. You could also in theory bring this as a turnover action. Go back. You can point at me and say, "Okay, Lawless, but you said turnover action shouldn't be arbitrated. This looks like a garden variety contract dispute." I agree with you. At that point, it is a garden variety contract dispute that I would characterize this as a lawsuit that's derivative of the debtor and would be subject to arbitration. How is this all consistent? Well, it is true that you can dress up almost any contract claim as a turnover action. You breached the contract since the money you owe is property of the estate.
That's been true going back to the Bankruptcy Act of 1898. There was the distinction made between what I call in the article true turnover actions versus kind of dressed up turnover actions. You're going to want to push me on, okay, so where's the line? Yes. Courts are going to have to draw that line in making the arbitrability determination. If there's no dispute as to amount and liability and there's really no contest... There actually are some cases like this, where a creditor says or a party says, "Yeah, I'm holding estate property, but I just want to arbitrate as leverage."
The court's correctly I think say, "In that instance, look, you're not really contesting anything. You're just exercising your rights to have the trustee bring this proceeding. That's a true turnover proceeding. That's not subject to arbitration. You admit you hold estate property." Where there's a substantial dispute as to whether there is liability, then in those instances, that's not a true turnover action, then I think the arbitration clause needs to be enforced. Now we're back to core, non-core, right? These actions are all non-core. I think the core, non-core distinction probably gets the right result 90% of the time.
I'm just kind of making that number up. It'll get you to the right result. The core, non-core distinction is on the cusp of the underlying insight, because core things are things that the court generally are about the estate and like that, but that's not what's really doing the work in the analysis. It's different things that are doing the work and the analysis.
Justin Bernbrock
I think that we've mapped some contours of the Lawless test. I'll be very curious to see the paper when it comes out, because this is a very interesting and fascinating topic. We have kind of talked about this throughout the discussion, but let's assume there is no kind of pre-dispute or pre-bankruptcy arbitration agreement in place, and yet parties can and do agree to submit to arbitration should that continue. You've already said...
Bob Lawless
Absolutely. Not my article though. Because again, my article is about the claim that something that happened pre-bankruptcy can strip the court of the power to hear the dispute. If parties believe the best resolution of a particular dispute is to go to arbitration, you filed a motion. We're going to arbitrate this. That gets docketed. Presumably if somebody wants to object, they will. If not, the court will approve. Everybody goes on their way. But again, there's that opportunity for both the court to exercise its jurisdiction to approve or not. There's no rule the court has to approve and no one objects.
The court can still decide that for whatever reason, the court should hear this. It also preserves third party rights to appear and be heard and say no. This needs to be resolved not in arbitration. And they can state their reasons and the court can decide whether those are good reasons or not.
Justin Bernbrock
Does analysis change at all? This just occurred to me. I actually dealt with this about a year ago where there was a pending arbitration. How does that affect the analysis?
Bob Lawless
That's a great question. The parallel here is you might have a pending lawsuit and the court says, "Okay, you're almost at the finish line in this lawsuit. Rather than go through the claim allowance," and I think we're back on claim allowance now for the most part.
Justin Bernbrock
I guess I always have the general understanding that a trial court or an arbitrator, assuming there's like an abstention decision or abstention analysis or there's a lift stay proceeding as to proceed solely with respect to reducing the claim to judgment and then bringing that piece of paper back. The bankruptcy court say, "Judge, here we go. We've got this now. Let me know where I am in line." If you assume that the arbitration or, in this case, the civil lawsuit has no ability to affect the rest of the estate, but merely has the ability to adjudicate as between the parties, is that workable?
Bob Lawless
I just want to push back a little bit on the idea that you're not affecting the estate. You're not affecting the pie. You are affecting how the pie gets divided up. The more to one creditor, the less to others.
Justin Bernbrock
But what right do other creditors have even in the context of a bankruptcy proceeding? What standing do they have to inject themselves in a let's say it's a substantive claim dispute as to claims and counterclaims? We can make them as complex as we want. But the folks that mow the lawn don't have any, from my perspective, standing to intervene in the one vs. one dispute about semiconductors, even though the outcome of that dispute could meaningfully alter the lawnmower's recovery.
Bob Lawless
First, I think you're wrong about that.
Justin Bernbrock
Really?
Bob Lawless
Section 502 gives the right of any party to object to a claim. The people that mow the lawn are a party. Now, I think practice is that they don't get to object, but I'm not sure that that comports with the language of the code.
Justin Bernbrock
I don't have the Bankruptcy Code in front of me, which is disappointing. Does it say party in interest?
Bob Lawless
I think it does say party in interest.
Justin Bernbrock
And don't courts say party in interest means a pecuniary interest in the outcome of the proceeding? I suppose, yeah, lawnmower gets there that way.
Bob Lawless
There are decisions that say that creditors can't intervene in other objections, somebody else's objection. In theory, that creditor could make their own objection, and then the court could use its discretion to police its own docket and join those proceeding or what have you. But I think creditors do have the ability to appear and be heard on a claim objection that affects their pecuniary interest.
Justin Bernbrock
This is interesting. I think I could think about this or talk about it for a long, long time. Final question, which is unrelated to arbitration or bankruptcy or anything. Ooh, I think I may know the answer to this. I have a guess, but something we ask all of our guests on the podcast, which is, if you were not a professor of law at the University of Illinois, doing what you do, and assuming no monetary, physical, temporal limitations, what would you do?
Bob Lawless
This is a great question. I don't know, what would I do? One thing that I said, I practiced for a while and I missed practice. The answer to if I was not a legal academic, what would I do, I'd be a lawyer. I love being a lawyer, but I don't think that's the spirit of the question exactly.
Justin Bernbrock
People have given that answer before, but it's your answer.
Bob Lawless
A childhood friend of mine was a Major League Baseball player. I remember I was watching him with my wife. She's looked at me and says, "You love what you do. Would you really give it up just to play Major League Ball for a year or two?" I looked at her and said, "What are you crazy? Of course, I would."
Justin Bernbrock
See, I would've assumed F1 racing.
Bob Lawless
I'm a big fan of Formula One motor sports. I like to say, yes, I would be a Formula One driver if I could go 50 miles an hour and screaming, "I want my mommy," as I do it. The people that do that have courage beyond my capacity.
Justin Bernbrock
It's remarkable. Well, Professor Lawless, thank you very, very much. This has been very interesting. I think that certainly we and hopefully the folks that listen will pick up the article when it comes out or follow it even by attending NCBJ. Thank you.
Bob Lawless
Thanks, again.
Justin Bernbrock
Bye, bye.
Bryan Uelk
Hello, again, everyone. This is Bryan Uelk of Sheppard Mullin for Restructured This! with this week's restructuring news. In case you haven't heard, stock prices are falling. The S&P is down 19% this year, and bond yields are rising. It doesn't seem like that's going to change anytime soon. The Federal Reserve is likely to raise rates once again later this month in its continuing fight against inflation. The Wall Street Journal reports that gurus at Goldman Sachs believe that the Federal Reserve will raise interest rates four more times between now and the end of next year, after which Goldman believes rates will remain steady at somewhere between four and a quarter to four and a half percent until 2024.
We'll see. Sustained rate hikes of that nature may mean a lot of pain for a lot of people. And at some point, I would imagine inflation becomes the lesser of the two evils as between it and high interest rates. But even as equity markets continue to tank, not all retail investors have taken the circumstantial approach you might have thought they would. Avaya Holdings, a company who has hired a gazillion restructuring professionals, has been downgraded several times, went through Chapter 11 only a few years back and whose debt is currently trading in the mid-fifties, has seen its share price shoot up approximately 200% over the last month as mean traders have rushed to buy the stock.
To me, the most amazing thing about the situation is not that Avaya may well be in bankruptcy in the next six months and people are still buying its stock, but at least some percentage of these investors are probably going to make a lot of money if they don't plan to hold the shares beyond the near term. It's a crazy time to be alive. It really is. In other news, after filing for Chapter 11 with less than four million bucks of cash on hand, Cineworld secured approximately $2 billion of DIP financing, $785 million of which is new money that became immediately available after entry of the interim order, and approximately a billion dollars of which will be used to refinance pre-petition debt.
Congratulations to the company and its advisors for a pretty darn good result. I have to believe that other players in the cinema space, some of whom have debt that is currently trading at distress levels after difficult couple of years, see this result as an example of a way in which Chapter 11 can be used successfully to make lemonade out of lemons. After all, it seems to me, at least that putting aside competition from streaming services, people aren't going to stop going to the movies merely because cinema companies may get themselves in bankruptcy, in much the same way that folks won't stop flying on airplanes if an airline uses Chapter 11 to reorganize.
In such circumstances, therefore, sometimes Chapter 11 is simply the best play. Well, that's all I've got for this week. This has been Bryan Uelk of Sheppard Mullin for Restructure This!
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