Abstention In Favor Of Arbitration Warranted Where State Law Issues Predominate
In re Loewen Group Int'l, 344 B.R. 727 (Bankr. D. Del. 2006) (Judge Peter J. Walsh)
The reorganized debtor sued the buyer of certain real estate when the buyer refused to close. When the buyer counter-claimed, the debtor moved the Bankruptcy Court to abstain in favor of arbitration. The Court held that the factors that favored abstention were substantive. Specifically, the actions were state law issues, their resolution would not have an effect on the efficient administration of the estate, and the claims in the adversary proceeding were extremely remote from the underlying Chapter 11 case. The Court granted the abstention motion and referred the case to arbitration.
Certain of the debtors entered into an asset purchase agreement with Charter Funerals, Inc. under which the debtors agreed to transfer forty-five funeral homes and cemeteries to Charter. The debtors were involved in a boundary dispute for six of the properties which had been formerly owned by the Hughes family and Charter refused to close on these properties until that dispute was resolved.
The sale agreement included a call and a put option that allowed Charter or the debtors to force consummation of the sale upon resolution of the boundary dispute. Alderwoods Group, Inc. became the reorganized successor to the debtors. Charter and Alderwoods exercised the option by exchange of correspondence. However, when contacted by Alderwoods’ counsel, Charter identified six conditions in the sale agreement that Alderwoods had failed to satisfy. Charter and Alderwoods did not resolve their differences and Alderwoods re-conveyed the property to the Hughes family.
Thereafter, Alderwoods filed an adversary complaint for breach of contract, indemnification, breach of the implied covenant of good faith and fair dealing, common law fraud, negligent misrepresentation, unjust enrichment, and promissory estoppel on the basis that Charter allegedly failed to pay necessary transfer taxes and was involved in misconduct related to the Hughes property transaction. Charter counterclaimed that Alderwoods was involved in misconduct in the Hughes property transaction and requested a break up fee for another unrelated transaction.
Alderwoods moved the Court to abstain. In the event the Court agreed to abstain, Alderwoods also requested that the matter be referred to arbitration pursuant to provisions in the asset purchase agreement. The Court found that arbitration was not required pursuant to the provision, but that it would review the motion pursuant to a list of factors mandated by Third Circuit precedent to see if abstention was warranted in the interest of justice.
Factors Favoring Abstention
The adversary dealt with a contract dispute peripheral to the bankruptcy estate that had been filed over four years after plan confirmation. The Court commented that the resolution of the adversary might have an effect on the value of the securities issued under the plan. However, the Court held that resolution of the dispute would not have an impact on the administration of the estate, favoring abstention. In addition, State law contract issues predominated the dispute and no specific Bankruptcy Code provision was implicated. Abstention was also warranted because the dispute was currently pending in an arbitration proceeding. The adversary proceeding was only remotely related to the administration of the estate which further favored abstention. Even though the right to a jury trial had not been exercised, it existed in the case and favored abstention.
Factors not Favoring Abstention
The Court held that the adversary proceeding was core, as it arose from post-petition agreements to sell assets which did not favor abstention. The Court determined that the state law issues were not novel or unsettled, which did not support abstention.
Neutral Factors
Neither party addressed whether there was a jurisdictional basis other than §1334, so this factor was neutral towards abstention. As the complaint only contained core matters, the issue of severability of state law issues from core issues was inapplicable. The addition of four new judges alleviated the historical burden on the Court’s docket rendering this factor neutral. The issue of forum shopping was also neutral, as the bankruptcy case was filed in Delaware, Alderwoods was a Delaware Corporation, and the parties’ agreement identified the Court as the appropriate forum. The defendant purchasers were also the only non-debtor parties in the case.
The Court held that not only did more factors favor abstention than not, but the ones that favored abstention were substantive ones, i.e., that the actions involved only state law issues and that their resolution would not have an effect on the efficient administration of the estate. The Court also noted that there is a strong federal policy in favor of arbitration because 1) enforcing freely entered into agreements is desirable and 2) arbitration proceedings are efficient and are completed with relative speed. The relative speed of an arbitration proceeding, in particular, furthers the goals of the Bankruptcy Code of providing parties with a quick and efficient end to their disputes. Consequently, the Court abstained in favor of sending the matter to arbitration.
