In the latest opinion arising from a coverage dispute following MF Global Holdings’s bankruptcy, the Bankruptcy Court in the Southern District of New York sent the dispute to arbitration in Bermuda pursuant to the underlying E&O insurance policy’s binding arbitration provision. To begin, the court laid out the four step process by which bankruptcy courts decide motions to compel arbitration: (1) whether the parties agreed to arbitrate; (2) how broad the arbitration agreement is; (3) if federal statutory claims are involved, did Congress intend those claims to be non-arbitrable; and (4) if not all claims are arbitrable, should the balance of proceedings be stayed pending arbitration?
First, the court interpreted the E&O policy as requiring the parties to arbitrate the coverage dispute in Bermuda. Second, the court read the arbitration clause broadly, covering “any and all” disputes arising under the policy. Third, the court undertook a comprehensive analysis to conclude that Congress did not intend to exclude the dispute from arbitration. In determining whether the policy presumption in favor of arbitration was outweighed by federal interests embodied in the Bankruptcy Code, the court considered whether the disputed issue was “core” or “non-core” to the bankruptcy proceeding. “Core” issues are those arising under the Bankruptcy Code or arising in bankruptcy cases, while “non-core” issues are those merely related to bankruptcy cases. Core issues can override the arbitration presumption, but non-core issues do not and the Bankruptcy Court must refer the claims to arbitration. For core issues, courts should enforce arbitration provisions unless doing so would seriously jeopardize the objectives of the Bankruptcy Code.
Here, the court found the coverage dispute at issue was non-core. Recovery under the E&O policy is not the most important asset of the estate, nor is it the sole source of recovery, and there is no pay-first provision at issue. And, contrary to the plaintiff’s assertions, resolution of the dispute does not require interpretation of the court’s previous orders and thus does not impact the arbitral panel’s ability to accurately decide the issues. Furthermore, arbitration does not conflict with the Bankruptcy Code’s objectives or overarching policy; the dispute relates to the parties’ pre-petition relationship and does not depend on rights created under the Code. Thus, the court found the strong federal policy in favor of arbitration outweighs the federal interests in the Bankruptcy Code.
Finally, the court stayed the proceedings pending the arbitration. Because the insurer has , the court found plaintiff’s ability to recover against that bond mandates a stay of proceedings rather than dismissal pending the arbitral outcome. , Case No. 11-15059 (Bankr. S.D.N.Y. Aug. 24, 2017).