ERISA Claims Resolved in Bankruptcy Court, Not Through Arbitration
With two federal statutes in conflict, Delaware’s Judge Goldblatt found a rebuttable presumption in favor of enforcing arbitration.
When two federal statutes were irreconcilably in conflict, Bankruptcy Judge Craig T. Goldblatt of Delaware decided there is a presumption, but not a requirement, that a chapter 11 debtor must arbitrate claims for withdrawal liability asserted by multiemployer pension plans.
In his 40-page opinion on March 27, Judge Goldblatt said that the presumption in favor of arbitration can be overcome. Ultimately, he decided that “the unusual circumstances of this case counsel strongly in favor of resolving the withdrawal liability disputes through the claims allowance process [in bankruptcy court], notwithstanding the presumption in favor of arbitration.”
The Trucking Company Chapter 11 Liquidation
One of the nation’s largest truckers liquidated in chapter 11. Bankruptcy meant that the debtor was withdrawing from no less than 20 multiemployer pension plans. As a consequence of the resulting withdrawal liability, the multiemployer plans filed claims for almost $8 billion.
The pension plans filed a motion to compel arbitration of their claims, or alternatively, to modify the automatic stay so the pension plans could initiate arbitrations. Naturally, the debtor opposed, contending that resolution of the claims should be decided in the ordinary claims allowance process in bankruptcy court.
The choice between arbitration and ordinary claims processing was not evident, because two federal statutes are diametrically at odds. On one hand, Section 502(b) of the Bankruptcy Code says that the “court . . . shall determine the amount of such claim” when an objection is filed to a proof of claim.
On the other hand, federal labor law is more complex but equally adamant that arbitration must resolve the claim. The Multiemployer Pension Plan Amendments Act of 1980 amended the Employee Retirement Security Act. When an employer withdraws from a multiemployer pension plan, the Pension Benefit Guaranty Corp. calculates withdrawal liability. (We shall refer to ERISA, as amended, as “labor law.”)
When there is a dispute, either party may initiate arbitration. However, labor law goes on to say that any dispute “shall be resolved through arbitration.” The resulting arbitration, before an expert, is unlike a typical arbitration covered by the Federal Arbitration Act.
As Judge Goldblatt explained, the arbitrator’s decision “may be reviewed in a federal district court under a standard similar to that applicable to an ordinary appeal — with deference paid to factual findings but legal rulings subject to de novo review.”
The pension funds wanted Judge Goldblatt to compel the debtor to initiate arbitration, but he did not “see any statutory basis, either in non-bankruptcy law or under the Bankruptcy Code, for the funds’ request that” the court direct the debtor to initiate arbitration. “Accordingly,” he said, “the question before the Court should be understood as arising in the context of a motion for relief from stay.”
Conflicting Statutes
To rule on a lift-stay motion, Judge Goldblatt said he was confronted with “conflicting federal statutes.” Citing Epic Systems Corp. v. Lewis, 584 U.S. 497, 510 (2018), he said that “courts are ‘not at liberty to pick and choose among congressional enactments and must instead strive to give effect to both.”’
To “harmonize the conflicting statutory directives” in the Bankruptcy Code and in federal labor law, Judge Goldblatt first analyzed two Third Circuit opinions that dealt with lawsuits brought by trustees. The outcome differed, depending on whether the trustee was bringing suit based on a claim of the debtor or a claim belonging to a creditor that a trustee was bringing on behalf of the estate. When the claim belonged to a creditor who was not a party to the arbitration agreement, the Third Circuit did not compel arbitration.
Judge Goldblatt did not find the cases helpful because they did not deal with claims allowance, on which there was no direct Third Circuit authority regarding arbitration. However, he cited a third case from the Third Circuit where the chapter 13 debtor filed an adversary proceeding to disallow a secured claim and rescind a mortgage.
The Third Circuit did not view the case as involving a claims dispute, because no provision in the Bankruptcy Code underpinned the debtor’s lawsuit. With no issue of bankruptcy law, the Third Circuit compelled arbitration, seeing no “inherent conflict” between the FAA and bankruptcy law.
Judge Goldblatt did not read the third case “to hold that the presence of an arbitration clause requires that a claim against the debtor’s bankruptcy estate be liquidated through arbitration rather than through the claims allowance process in bankruptcy.” [Emphasis in original.]
Finding no binding authority from the circuit, Judge Goldblatt said he was “thus left with the task of reconciling the statutory directives provided in [federal labor law] and § 502(b) of the Bankruptcy Code.”
Labor Law Gives Rise to a Rebuttable Presumption
Judge Goldblatt said that labor law and bankruptcy law “cannot simultaneously be given full effect,” but they could be “reconciled, at least in part.” He decided that the statutes could be “best reconciled by treating the arbitration provision as creating a presumption in favor of stay relief to permit the claim to be liquidated in arbitration.” [Emphasis in original.] He went on to say that the presumption “can be overcome in appropriate circumstances where the imperatives of the bankruptcy case (which will typically be reflected in other Sonnax factors) so require.”
Judge Goldblatt went on to conclude that “the unusual circumstances of this case counsel strongly in favor of resolving the withdrawal liability disputes through the claims allowance process, notwithstanding the presumption in favor of arbitration.” He advanced several reasons for the conclusion.
First, Judge Goldblatt said he was “not convinced” that the arbitrators would allow other parties to participate. Second, he had scheduled a trial in four months and “conclude[d] that the risk of delay [in arbitration] counsels strongly in favor of denying stay relief.
Third, an arbitration under labor law is subject to judicial review. Therefore, Judge Goldblatt said that the “arbitrator’s determination would be reviewed by a district court in essentially the same manner in which this Court’s claims allowance decision would be reviewed.”
Fourth, Judge Goldblatt said that an arbitrator would be disqualified by federal law from entertaining the debtor’s planned attacks on PBGC regulations.
Although Judge Goldblatt did “not believe that the presumption in favor of arbitration is one that should lightly be overcome,” he nevertheless decided to “deny the motions for relief from stay and resolve the withdrawal liability dispute through the claims allowance process.”
Scholarly Commentary
In his opinion, Judge Goldblatt approvingly cited Reframing Arbitration & Bankruptcy, 96 Am. Bankr. L.J. 701 (2022), by Prof. Robert M. Lawless, the Max L. Rowe Professor of Law and co-director of the Program on Law, Behavior & Social Science at the University of Illinois College of Law.
Prof. Lawless provided ABI with the following commentary:
Judge Goldblatt cut through the rhetoric and got it right. Both the Federal Arbitration Act and the Bankruptcy Code command the court. The judge’s job is to follow both commands if he can, but he cannot here.
The case is about claims allowance, and to allow one claim necessarily lowers the recovery of others. There would be significant due process concerns in sending a claim off to a process in which those affected by the process cannot participate and, in all events, in which they have not obligated themselves to participate.
None of this is to say that all claims allowance matters must be heard in bankruptcy court. In his opinion, Judge Goldblatt correctly notes the circumstances under which a bankruptcy court might exercise discretion to let another forum determine the amount of a bankruptcy claim.
I hope the courts build on Judge Goldblatt’s opinion to reinstate rationality to the body of case law about arbitrability of bankruptcy matters, recognizing the task is not about adding up “policies” but about reconciling two statutory commands, enacted decades apart, without express instructions on how to fit them together.
Opinion Link
Case Details
Case Citation
In re Yellow Corp., 23-11069 (Bankr. D. Del. March 27, 2024)
Case Name
In re Yellow Corp.
Case Type
Business