Phelan v. Highland Capital Mgmt., L.P. (In re Acis Capital Mgmt., L.P.)
600 B.R. 541
Bankr. N.D. Tex.2019Background
- Parties executed a series of Sub‑Advisory and Shared Services Agreements; earlier versions included identical arbitration clauses, which were omitted in the March 17, 2017 restatements that expressly provided Texas courts have exclusive jurisdiction and stated they "amended, restated and replaced the existing agreements in [their] entirety" and "supersede[d] all prior agreements."
- Reorganized Debtors (the plaintiffs) brought an adversary proceeding asserting Counts 1–8 (including avoidance and turnover claims) based on conduct occurring before March 17, 2017 and seeking offsets to proofs of claim filed by Highland.
- Highland moved to compel arbitration, arguing the earlier arbitration clauses govern disputes that accrued prior to March 17, 2017. Reorganized Debtors argued the March 17, 2017 agreements supersede prior arbitration clauses and, alternatively, that the bankruptcy court should decline to compel arbitration because the disputes are core bankruptcy matters and arbitration would conflict with the Bankruptcy Code.
- The Fifth Circuit framework applies: (1) state contract law determines validity/formation of arbitration agreements (Texas law governs here); (2) federal law governs the scope of arbitration. FAA presumes arbitration is favored, but the bankruptcy court has discretion to deny arbitration in core bankruptcy proceedings when arbitration would conflict with the Code’s purposes.
- Court compared precedent: found Coffman (E.D. Tex.) analogous—when agreements are amendments/restatements, arbitration clauses do not retroactively reach claims that accrued under earlier agreements that lacked arbitration. But In re Gandy and In re National Gypsum permit refusal to enforce arbitration in adversary proceedings predominated by avoidance/core bankruptcy claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the March 17, 2017 restatements eliminated any agreement to arbitrate all disputes | March 17, 2017 agreements superseded prior versions, omitted arbitration, and thus no operative arbitration clause exists | Prior arbitration clauses govern disputes that accrued before March 17, 2017 regardless of later restatement | Court: March 17, 2017 restatements do not retroactively impose litigation-only forum on disputes that accrued earlier; pre‑March 17 contracts with arbitration govern disputes arising before that date |
| Whether claims based on pre‑March 17, 2017 conduct must be arbitrated | Claims arise from conduct governed by earlier agreements that contained arbitration clauses, so Counts 1–8 should be arbitrated | Counts 1–8 involve pre‑March 17 conduct and thus fall within the pre‑restatement arbitration clauses | Court: Valid arbitration agreements existed for disputes arising before March 17, 2017; Counts 1–8 fall within their scope |
| Whether bankruptcy/core nature of the adversary allows the court to refuse to compel arbitration despite an otherwise valid clause | Bankruptcy forum is required because claims are core, intertwined with proofs of claim, and arbitration would jeopardize centralized resolution and equitable distribution | Arbitration statute and FAA favor enforcement; arbitration should proceed for arbitrable disputes | Court: Exercising Fifth Circuit discretion (In re Gandy/Nat'l Gypsum), denied arbitration because avoidance/core bankruptcy claims predominate, are intertwined with proofs of claim, and arbitration would conflict with Bankruptcy Code purposes |
Key Cases Cited
- Coffman v. Provost & Umphrey Law Firm, L.L.P., 161 F. Supp. 2d 720 (E.D. Tex. 2001) (arbitration clauses in later restatements do not retroactively cover claims that accrued under earlier agreements without arbitration)
- Gandy v. Gandy (In re Gandy), 299 F.3d 489 (5th Cir. 2002) (bankruptcy court may decline arbitration when proceeding derives from Bankruptcy Code and arbitration would conflict with its purposes)
- Nat'l Gypsum Co. v. Ins. Co. of N. Am. (In re Nat'l Gypsum Co.), 118 F.3d 1056 (5th Cir. 1997) (nonenforcement of arbitration provision depends on whether the proceeding derives exclusively from Bankruptcy Code and would conflict with Code goals)
- Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (Tex. App. 1999) (contract interpretation governs whether a later agreement supersedes earlier arbitration provisions; no automatic novation unless intended)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (U.S. 2011) (FAA reflects a strong federal policy favoring enforcement of arbitration agreements)