How to Reconcile the Federal Arbitration Act With the Bankruptcy Code?
The threshold issue that the Ninth Circuit had to resolve In the Matter of: Jose Eber, Case Nos. 10-56772 and 11-55341 (9th Cir. July 9, 2012) (for publication) was “how to reconcile the FAA with the Bankruptcy Code, and, more specifically, a bankruptcy court’s jurisdiction to determine dischargeability pursuant to sections 523(a)(2), (4) and (6).” Those subsections are the bases for nondischargeability of a debt in bankruptcy: fraud or deception ((a)(2)), fiduciary fraud, embezzlement, or larceny ((a)(4)); and willful and malicious injury to person or property ((a)(6)). The debtor in the bankruptcy, Jose Eber, is the well-known celebrity hairstylist (i.e., a celebrity himself, as well as a stylist for celebrities), and author of the books “Shake Your Head, Darling,” and “Beyond Hair: The Ultimate Makeover Book.” Mr. Eber earns a Wikipedia entry.
The appellants, Ackerman and Kuriloff, had sought to compel arbitration with with Jose Eber, based on an arbitration agreement. The problem, according to the Bankruptcy Court, was that the arbitration, which had not yet commenced, could result in findings to which collateral estoppel applied -- “for all practical purposes” the arbitrator would end up determining the issue of nondischargeability. The district court agreed, and the appeal followed.
The Ninth Circuit noted 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.” (quoting In re United States Lines, 197 F.3d 631, 640 (2d Cir. 1999).
Polar extremes. 1924. Library of Congress.
Here, there is “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.” But that is not the sole test of preemption here. “The relevant inquiry then becomes ‘whether there is an inherent conflict between arbitration and the underlying purposes of the Bankruptcy Code.’” Ins. Co. v. Thorpe Insulation Co., 671 F.3d 1011, 1020 (9th cir. 2012). And because dischargeability is especially within the purview of the Bankruptcy Court, here, the Ninth Circuit found that there was no abuse in denying the motion to compel arbitration because it would have conflicted with the underlying purpose of the Bankruptcy Code.
The opinion, authored by District Judge Marbley, invites future examination. Why? Because: “Our holding in no way extends beyond the particular facts of this case or to all cases in which a bankruptcy judge makes this determination prior to the commencement of an arbitration.”
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