Slip Opinion
Bankr. M.D. Tenn.2022Background:
- On June 16, 2022 three creditors filed an involuntary Chapter 7 petition against Project Restore, LLC alleging each owed more than the $18,600 statutory minimum on defaulted construction contracts.
- The contracts with the petitioning creditors contain standard binding arbitration clauses (Todd and Barnes: AAA; Maas: JAMS).
- Debtor moved to dismiss or, alternatively, to abstain from the involuntary proceeding on the ground that the arbitration clauses require disputes to be decided by arbitrators first.
- The parties bifurcated proceedings; the court held a limited hearing on whether arbitration clauses mandate dismissal/abstention and reserved an evidentiary hearing on bona fide-dispute and other factual issues.
- Central legal question: whether arbitration agreements can prevent the bankruptcy court from deciding petition validity and the existence of a bona fide dispute under 11 U.S.C. § 303(b)(1).
- The court denied dismissal or abstention based on the arbitration agreements, without prejudice to other arguments in the motion to dismiss.
Issues:
| Issue | Petitioners' Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether arbitration clauses require dismissal or abstention of the involuntary petition | Arbitration clauses do not bar the bankruptcy court from deciding petition validity | Arbitration must resolve the contract disputes first, so the petition should be dismissed or the court should abstain | Denied — the bankruptcy court has exclusive jurisdiction to decide petition validity; arbitration cannot preclude the proceeding |
| Whether the court must defer determination of a "bona fide dispute" to an arbitrator | The court can assess whether a bona fide dispute exists without liquidating claims | Any such assessment would decide arbitrable issues and should be sent to arbitration | Held: The court may determine the bona fide-dispute issue for petition eligibility without liquidating claims |
| Whether creditors with arbitration clauses forfeit the statutory right to be petitioners unless arbitration resolves their claims | Signing an arbitration clause does not waive a creditor's right to be a petitioning creditor | Arbitration should prevent a creditor from qualifying until claims are arbitrated | Held: Creditors do not forfeit their right to be petitioning creditors; enforcing arbitration to block a petition would undermine §303 rights |
| Whether arbitration may be required later to resolve individual claims if an order for relief is entered | Arbitration can be used later to resolve claim determinations | Debtor sought arbitration first, before petition validity is decided | Court reserved the question for later — possible referral to arbitration for claim resolution not decided now |
Key Cases Cited
- Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (U.S. 1987) (FAA favors enforcement of arbitration but may be overridden by a contrary congressional command)
- Riverview Trenton R.R. Co. v. DCS, Ltd. (In re DSC, Ltd.), 486 F.3d 940 (6th Cir. 2007) (defines the "bona fide dispute" standard for involuntary petitions)
- United States Lines, Inc. v. Am. Steamship Owners Mut. Prot. & Indem. Ass'n, Inc. (In re United States Lines, Inc.), 197 F.3d 631 (2d Cir. 1999) (discusses tension between bankruptcy centralization and arbitration)
- Moses v. CashCall, Inc., 781 F.3d 63 (4th Cir. 2015) (framework for analyzing conflicts between the FAA and the Bankruptcy Code)
- In re Miller, 489 B.R. 74 (Bankr. E.D. Tenn. 2013) (interpreting §303(b)(1) as to the minimum-amount inquiry for petitioning creditors)
- In re Patriot Solar Grp., LLC, 569 B.R. 451 (Bankr. W.D. Mich. 2017) (collecting circuits that concluded the Bankruptcy Code does not broadly preclude arbitration)