ARBITRATION AND INSOLVENCY PROCEEDINGS: CLAIMS OF ORDINARY BANKRUPTCY CREDITORS ( Vesna Lazic (T.M.C. Asser Institut, The Hague Readers are reminded that this work is protected by copyright While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use Contents 2. Insolvency and arbitration: Main features and basic principles 2. 1 Insolvency law 2.2 Arbitration 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings 3. 1 France and the Netherlands 3.2 United States 4. Claims of ordinary bankruptcy creditors 4. 1 Preclusion of individual actions by ordinary creditors 41.1 france 4.1.2 The Netherlands 4.1.3 United States 4. 2 Applicability of the stay of individual actions in arbitration 4.3 Implications of the stay of individual actions in arbitration 43.1 Admitted claims 4.3.2 Contested claims 4.3. 2 1 Pending arbitral proceedings 4.3.2.2 Non-pending arbitrations 4.3.2.2. 1 Non-arbitrability of contested claims 4.3.2.2. 2 Modalities of enforcement of arbitration agreements( france) 4.3.2.2. 3 The discretion of the courts in bankruptcy(United States) 5. Conclusion 1. Introduction Insolvency and arbitration are two different types of procedures, each having its own purpos objectives and underlying policy. A very distinct nature of the two is probably the reason why the relationship between them is seldom scrutinized in the legal writings and often reduced to the
ARBITRATION AND INSOLVENCY PROCEEDINGS: CLAIMS OF ORDINARY BANKRUPTCY CREDITORS (1) Vesna Lazic (T.M.C. Asser Institut, The Hague) Readers are reminded that this work is protected by copyright. While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed, electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use. Contents 1. Introduction 2. Insolvency and arbitration: Main features and basic principles 2.1 Insolvency law 2.2 Arbitration 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings 3.1 France and the Netherlands 3.2 United States 4. Claims of ordinary bankruptcy creditors 4.1 Preclusion of individual actions by ordinary creditors 4.1.1 France 4.1.2 The Netherlands 4.1.3 United States 4.2 Applicability of the stay of individual actions in arbitration 4.3 Implications of the stay of individual actions in arbitration 4.3.1 Admitted claims 4.3.2 Contested claims 4.3.2.1 Pending arbitral proceedings 4.3.2.2 Non-pending arbitrations 4.3.2.2.1 Non-arbitrability of contested claims 4.3.2.2.2 Modalities of enforcement of arbitration agreements (France) 4.3.2.2.3 The discretion of the courts in bankruptcy (United States) 5. Conclusion Notes 1. Introduction Insolvency and arbitration are two different types of procedures, each having its own purpose, objectives and underlying policy. A very distinct nature of the two is probably the reason why the relationship between them is seldom scrutinized in the legal writings and often reduced to the
mere statement that the bankruptcy issues are not arbitrable. ( 2) Yet, there are more points of interaction between these two fields of law As rightly stated in the literature, '[]egislation on insolvency is a crossroads where elements of the Legal system in question meet (3)Insolvency laws usually provide for limitation of rights of the debtor and his creditors in order to efficiently pursue their basic principles. Furthermore, it may even limit the rights of third parties. It is outside the scope of this article to examine whether and to what extent insolvency law influences arbitration and to address various points of interaction between the two fields of law. (4) This article will rather concentrate on the claims of non-secured, non-preferred creditors against the debtor,'s estate. In particular these are the claims arising from a contractual relationship between the debtor and another party concluded before the commencement of bankruptcy proceedings, where the contract provided for the settlement of disputes by arbitration. (5) In this article, an attempt will be made to determine whether an arbitration agreement, concluded prior to the co ement of insolvency proceedings, may be successfully invoked against the trustee in bankruptcy when the dispute relates to a monetary claim against the estate. In other words. the issue of the so-called indirect enforcement will be addressed. the relevant provisions of the insolvency law relating to legal proceedings pending at the time of the commencement of insolvency will also be considered and an attempt will be made to determine their importance for pending arbitral proceedings. Accordingly, the emphasis will be on the nature of the claims of ordinary bankruptcy creditors, encompassing situations when arbitral proceedings with respect to such claims are pending and when arbitration has not yet been commenced at the time when the insolvency proceedings are embarked upon. These issues will be analysed taking consideration the relevant provisions in Dutch, French and US arbitration and insolvency law. urpose is to determine to what extent the solutions in these jurisdictions differ or converge The relevant issues will be considered, in principle, in the context of the so-called'straight bankruptcy' or bankruptcy liquidation, while the insolvency proceedings involving the arrangements with creditors(compositions, reorganizations) will be mentioned only when the provisions addressed apply to both bankruptcy liquidation and reorganization This is particularly the case in france and the United States The issues of cross-border insolvency will not be dealt with. They will be occasionally mentioned when the relevant case law involves such issues 2. Insolvency and arbitration: main features and basic principles 2. 1 Insolvency law In the most general terms, one of the basic purposes of insolvency law is to provide a framework for dealing with the competing interests and claims within a given system of ranking. The manner in which the competing interests are balanced is not necessarily identical in all insolvency laws. It
mere statement that the bankruptcy issues are not arbitrable.(2) Yet, there are more points of interaction between these two fields of law. As rightly stated in the literature, '[l]egislation on insolvency is a crossroads where all the elements of the Legal system in question meet'.(3) Insolvency laws usually provide for some limitation of rights of the debtor and his creditors in order to efficiently pursue their basic principles. Furthermore, it may even limit the rights of third parties. It is outside the scope of this article to examine whether and to what extent insolvency law influences arbitration and to address various points of interaction between the two fields of law.(4) This article will rather concentrate on the claims of non-secured, non-preferred creditors against the debtor's estate. In particular, these are the claims arising from a contractual relationship between the debtor and another party concluded before the commencement of bankruptcy proceedings, where the contract provided for the settlement of disputes by arbitration.(5) In this article, an attempt will be made to determine whether an arbitration agreement, concluded prior to the commencement of insolvency proceedings, may be successfully invoked against the trustee in bankruptcy when the dispute relates to a monetary claim against the estate. In other words, the issue of the so-called 'indirect enforcement' will be addressed. The relevant provisions of the insolvency law relating to legal proceedings pending at the time of the commencement of insolvency will also be considered and an attempt will be made to determine their importance for pending arbitral proceedings. Accordingly, the emphasis will be on the nature of the claims of ordinary bankruptcy creditors, encompassing situations when arbitral proceedings with respect to such claims are pending and when arbitration has not yet been commenced at the time when the insolvency proceedings are embarked upon. These issues will be analysed taking into consideration the relevant provisions in Dutch, French and US arbitration and insolvency law. The purpose is to determine to what extent the solutions in these jurisdictions differ or converge. The relevant issues will be considered, in principle, in the context of the so-called 'straight bankruptcy' or bankruptcy liquidation, while the insolvency proceedings involving the arrangements with creditors (compositions, reorganizations) will be mentioned only when the provisions addressed apply to both bankruptcy liquidation and reorganization. This is particularly the case in France and the United States. The issues of cross-border insolvency will not be dealt with. They will be occasionally mentioned when the relevant case law involves such issues. 2. Insolvency and arbitration: Main features and basic principles 2.1 Insolvency law In the most general terms, one of the basic purposes of insolvency law is to provide a framework for dealing with the competing interests and claims within a given system of ranking. The manner in which the competing interests are balanced is not necessarily identical in all insolvency laws. It
can be said that an insolvency statute is drafted in a manner which is, in a particular legal system regarded as the most suitable to pursue effectively the underlying policy and the prevailing purpose of the insolvency law, be it the protection of the debtor(6) or his creditors or the preservation of employment (7)Generally, and without reference to any particular legal system, it may be said that the insolvency laws provide for the following the legislative framework for the collection and distribution of the property of the debtor comprised in the estate, in an orderly manner which maximizes payment to the creditors, and the statutory scheme for compositions and arrangements with creditors or for a reorganization of the debtor in financial difficulties In pursuing the basic principles and aims, insolvency law contains the provisions of a substantive and procedural nature An analysis of all the consequences of the commencement of the procedure for bankruptcy liquidation remains outside the scope of this work. Only the issue concerning the right of the of the estate will be addressed briefly One of the effects of the commencement of bankruptcy liquidation is that a debtor is deprived of the right to manage and to dispose of the estate. This right vests in the trustee. All insolvency statutes here considered provide for such legal effect in the case of bankruptcy liquidation. (8)The consequence of dispossession is that the debtor lacks the right to undertake legal actions concerning the property forming part of the estate. The debtor's obligations undertaken after th bankruptcy order has been made do not bind the estate. Also, the debtor loses the right to sue and to be sued (locus standi) in the legal proceedings concerning the estate. ( 9)These limitations of the debtor's rights are relevant only with respect to the estate. A bankrupt individual retains the right to exercise effectively his personal rights and obligations and to undertake legal actions with respect to the property not included in the estate Consequently, after the comn ent of bankruptcy liquidation, arbitral proceedings may be, in principle, initiated or continued only by or against the trustee, with respect to the property forming part of the estate. In the same vein, arbitration agreements entered into by the debtor prior to the commencement of the bankruptcy liquidation may be attempted to be invoked against the trustee and not against the debtor However, the proceedings aiming at the reorganization and the rehabilitation of business do not necessarily have to entail dispossession. For example, in the United States, the debtor in reorganization under Chapter 11 (debtor-in-possession,), (10) in principle, retains the night of management and disposal of the estate and generally has all rights and duties of a trustee in for relief through liquidation under Chapter 7. Similarly, a commencement of the redressement judiciaire does not necessarily imply the dispossession of the debtor, who generally retains the right of management and disposal. (11) The provisions concerning the right of disposal and management in a reorganization procedure are addressed here because the provisions discussed below apply to both reorganization and bankruptcy liquidation in the United States and France
can be said that an insolvency statute is drafted in a manner which is, in a particular legal system, regarded as the most suitable to pursue effectively the underlying policy and the prevailing purpose of the insolvency law, be it the protection of the debtor(6) or his creditors or the preservation of employment.(7) Generally, and without reference to any particular legal system, it may be said that the insolvency laws provide for the following: the legislative framework for the collection and distribution of the property of the debtor comprised in the estate, in an orderly manner which maximizes payment to the creditors, and the statutory scheme for compositions and arrangements with creditors or for a reorganization of the debtor in financial difficulties. In pursuing the basic principles and aims, insolvency law contains the provisions of a substantive and procedural nature. An analysis of all the consequences of the commencement of the procedure for bankruptcy liquidation remains outside the scope of this work. Only the issue concerning the right of the management and disposal of the estate will be addressed briefly. One of the effects of the commencement of bankruptcy liquidation is that a debtor is deprived of the right to manage and to dispose of the estate. This right vests in the trustee. All insolvency statutes here considered provide for such legal effect in the case of bankruptcy liquidation.(8) The consequence of dispossession is that the debtor lacks the right to undertake legal actions concerning the property forming part of the estate. The debtor's obligations undertaken after the bankruptcy order has been made do not bind the estate. Also, the debtor loses the right to sue and to be sued (locus standi) in the legal proceedings concerning the estate.(9) These limitations of the debtor's rights are relevant only with respect to the estate. A bankrupt individual retains the right to exercise effectively his personal rights and obligations and to undertake legal actions with respect to the property not included in the estate. Consequently, after the commencement of bankruptcy liquidation, arbitral proceedings may be, in principle, initiated or continued only by or against the trustee, with respect to the property forming part of the estate. In the same vein, arbitration agreements entered into by the debtor prior to the commencement of the bankruptcy liquidation may be attempted to be invoked against the trustee, and not against the debtor. However, the proceedings aiming at the reorganization and the rehabilitation of business do not necessarily have to entail dispossession. For example, in the United States, the debtor in reorganization under Chapter 11 ('debtor-in-possession'),(10) in principle, retains the right of management and disposal of the estate and generally has all rights and duties of a trustee in proceedings for relief through liquidation under Chapter 7. Similarly, a commencement of the redressement judiciaire does not necessarily imply the dispossession of the debtor, who generally retains the right of management and disposal.(11) The provisions concerning the right of disposal and management in a reorganization procedure are addressed here because the provisions discussed below apply to both reorganization and bankruptcy liquidation in the United States and France
2. 2 Arbitration Modern arbitration laws generally recognize the right of parties to agree on arbitratio autonomy, the underlying principle of commercial arbitration, has been widely accepted. Red enacted statutes have been drafted so as to provide for an arbitration friendly' legislative framework, whereby the possibility of judicial control and interference with arbitration considerably limited. In other words, the role of the judiciary is mainly one of support and assistance to arbitration before, during and after the arbitral process, while the supervision and control over arbitration is exceptional and very limited. This is particularly so with respect to arbitrations involving international elements These principles are incorporated also in the arbitration statutes and supported by the judiciary in the legal systems here considered. Thus, the 'policy of indirect enforcement' is widely accepted. (12) The provisions on the 'enforcement' of arbitration agreements form part of the generally favourable attitude towards arbitration, expressed in national arbitration laws( 13)and i international treaties (14) The possibilities of challenge are very limited. The application for annulment or an action for setting aside is the principal and often the only means of recourse gainst the arbitral award in civil-law countries. In principle, there is only a limited number of grounds for setting aside the award, expressly provided by the arbitration statute, (15)and a limited number of grounds for refusal of the enforcement of arbitral awards. ( 16) 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings Before addressing the claims of ordinary bankruptcy creditors, the effectiveness of arbitration agreements in the context of the proceedings for bankruptcy liquidation will be first briefly addressed. It will be examined whether the trustee in bankruptcy liquidation is generally considered to be bound by a previously concluded arbitration agreement of the debtor. In other words, it will be examined whether such an agreement may be successfully invoked by or against the trustee 3. 1 France and the Netherlands proceedings is, generally, not considered to imply the invalidity of arbitration agreements concluded by the debtor in bonis. The prevailing view in Dutch literature is that the trustee is bound by an arbitration agreement entered into by the debtor prior to bankruptcy (17) A similar view has been expressed in French literature. In general, arbitration agreements are considered to be enforceable(opposable) against the liquidateur, the administrateur or the debtor in a redressement judiciaire (18)Also, the prevailing opinion in French literature is that the
2.2 Arbitration Modern arbitration laws generally recognize the right of parties to agree on arbitration. Party autonomy, the underlying principle of commercial arbitration, has been widely accepted. Recently enacted statutes have been drafted so as to provide for an 'arbitration friendly' legislative framework, whereby the possibility of judicial control and interference with arbitration is considerably limited. In other words, the role of the judiciary is mainly one of support and assistance to arbitration before, during and after the arbitral process, while the supervision and control over arbitration is exceptional and very limited. This is particularly so with respect to arbitrations involving international elements. These principles are incorporated also in the arbitration statutes and supported by the judiciary in the legal systems here considered. Thus, the 'policy of indirect enforcement' is widely accepted.(12) The provisions on the 'enforcement' of arbitration agreements form part of the generally favourable attitude towards arbitration, expressed in national arbitration laws(13) and in international treaties.(14) The possibilities of challenge are very limited. The application for annulment or an action for setting aside is the principal and often the only means of recourse against the arbitral award in civil-law countries. In principle, there is only a limited number of grounds for setting aside the award, expressly provided by the arbitration statute,(15) and a limited number of grounds for refusal of the enforcement of arbitral awards.(16) 3. Binding effect of arbitration agreements concluded prior to the commencement of bankruptcy proceedings Before addressing the claims of ordinary bankruptcy creditors, the effectiveness of arbitration agreements in the context of the proceedings for bankruptcy liquidation will be first briefly addressed. It will be examined whether the trustee in bankruptcy liquidation is generally considered to be bound by a previously concluded arbitration agreement of the debtor. In other words, it will be examined whether such an agreement may be successfully invoked by or against the trustee. 3.1 France and the Netherlands In legal theory and case law in France and the Netherlands, the commencement of bankruptcy proceedings is, generally, not considered to imply the invalidity of arbitration agreements concluded by the debtor in bonis. The prevailing view in Dutch literature is that the trustee is bound by an arbitration agreement entered into by the debtor prior to bankruptcy.(17) A similar view has been expressed in French literature. In general, arbitration agreements are considered to be enforceable (opposable) against the liquidateur, the administrateur or the debtor in a redressement judiciaire.(18) Also, the prevailing opinion in French literature is that the
conditions provided in Arts. 33(1)and 158 of the Loi du 25 janvier 1985 do not apply with respect to arbitration agreements concluded prior to redressement judiciaire or liquidation judiciaire ( 19) These provisions relate to the approval and authorization that the debtor or the administrateur in the redressement judiciaire(Art. 33(1))and the liquidateur in the liquidation judiciaire(Art 158) need to obtain in order to enter into new arbitration agreements after the commencement of insolvency proceedings It is appropriate to conclude that the debtor's lack of the right to disposal and management imply the invalidity of the pre-petition arbitration agreements. The provisions relating to the powers of the trustee, as the successor of the debtor's interest, would be a moot point However, there may be some exceptions to and limitations on the effectiveness of arbitration agreements(e.g, non-arbitrability of the subject matter) 3.2 United States In contrast to the situation in France and the Netherlands, where the question of the enforcement of arbitration agreements after the commencement of bankruptcy proceedings has not been much discussed. it has been a rather controversial issue in the United States. abundant case law has quite often been addressed in the literature. (20)Frequently, the question of the enforcement of arbitration agreements after the commencement of bankruptcy liquidation or reorganization has been considered to have triggered the question of the conflict or conflicting policies between the Federal Arbitration Act and the United States Bankruptcy Code (21)It exceeds the scope of this article to deal with this subject in detail. Instead, an attempt will be made to summarize the decisions of various bankruptcy, district and circuit courts in the United States. To the knowledge of this author, the United States Supreme Court has not yet ruled on the question of the enforcement of arbitration agreements in bankruptcy proceedings. The purpose of this summary is to present the source of the 'conflict, as the relationship between the two Acts has often been characterized in the literature and the US case law. The analysis of this issue in the following text is necessary for an understanding of the legal framework and the context in which the enforcement of arbitration agreements with respect to creditors claims arises. Since the provisions on the jurisdiction of the bankruptcy courts have presented the main source of the conflict between the Arbitration Act and the Bankruptcy Court, they need to be addressed briefl The Bankruptcy Reform Act of 1978 further strengthened the traditional notion that bankruptcy ours relinquish their jurisdiction only exceptionally. The 1978 Act provided for a very broad jurisdiction of bankruptcy courts. The district court was conferred with original and exclusive jurisdiction over bankruptcy cases(22) and original, but not exclusive jurisdiction over all civil proceedings under, in or related to bankruptcy cases. (23) The bankruptcy courts were given the power to 'exercise all of the jurisdiction conferred.. on the district courts (24)The reason for introducing such a jurisdictional framework was to overcome disadvantages that had existed under the previous bankruptcy statutory law, (25)so as to provide conditions for all matters arising connection with a bankruptcy case to be dealt with in one proceeding (26)
conditions provided in Arts. 33(1) and 158 of the Loi du 25 janvier 1985 do not apply with respect to arbitration agreements concluded prior to redressement judiciaire or liquidation judiciaire.(19) These provisions relate to the approval and authorization that the debtor or the administrateur in the redressement judiciaire (Art. 33(1)) and the liquidateur in the liquidation judiciaire (Art. 158) need to obtain in order to enter into new arbitration agreements after the commencement of insolvency proceedings. It is appropriate to conclude that the debtor's lack of the right to disposal and management imply the invalidity of the pre-petition arbitration agreements. The provisions relating to the powers of the trustee, as the successor of the debtor's interest, would be a moot point. However, there may be some exceptions to and limitations on the effectiveness of arbitration agreements (e.g., non-arbitrability of the subject matter). 3.2 United States In contrast to the situation in France and the Netherlands, where the question of the enforcement of arbitration agreements after the commencement of bankruptcy proceedings has not been much discussed, it has been a rather controversial issue in the United States. Abundant case law has quite often been addressed in the literature.(20) Frequently, the question of the enforcement of arbitration agreements after the commencement of bankruptcy liquidation or reorganization has been considered to have triggered the question of the 'conflict' or 'conflicting policies' between the Federal Arbitration Act and the United States Bankruptcy Code.(21) It exceeds the scope of this article to deal with this subject in detail. Instead, an attempt will be made to summarize the decisions of various bankruptcy, district and circuit courts in the United States. To the knowledge of this author, the United States Supreme Court has not yet ruled on the question of the enforcement of arbitration agreements in bankruptcy proceedings. The purpose of this summary is to present the source of the 'conflict', as the relationship between the two Acts has often been characterized in the literature and the US case law. The analysis of this issue in the following text is necessary for an understanding of the legal framework and the context in which the enforcement of arbitration agreements with respect to creditors' claims arises. Since the provisions on the jurisdiction of the bankruptcy courts have presented the main source of the 'conflict' between the Arbitration Act and the Bankruptcy Court, they need to be addressed briefly. The Bankruptcy Reform Act of 1978 further strengthened the traditional notion that bankruptcy courts relinquish their jurisdiction only exceptionally. The 1978 Act provided for a very broad jurisdiction of bankruptcy courts. The district court was conferred with original and exclusive jurisdiction over bankruptcy cases(22) and original, but not exclusive jurisdiction over all civil proceedings under, in or related to bankruptcy cases.(23) The bankruptcy courts were given the power to 'exercise all of the jurisdiction conferred . . . on the district courts'.(24) The reason for introducing such a jurisdictional framework was to overcome disadvantages that had existed under the previous bankruptcy statutory law,(25) so as to provide conditions for all matters arising in connection with a bankruptcy case to be dealt with in one proceeding.(26)