Opinion
Case No. 02-13533 (AJG), Jointly Administered
October 20, 2003
ORDER MODIFYING THE AUTOMATIC STAY TO ALLOW ARBITRATION TO PROCEED TO LIQUIDATE CLAIM
Before the Court is the renewed motion by Paul-Michael Sweeney, Chapter 11 trustee for Inphomation Communications Inc. ("Movant" or "Inphomation") seeking relief from the automatic stay to proceed with an arbitration commenced prepetition. The Court has considered and given due regard to the applicable legal standard under Sonnax Indus., Inc. v. Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1286 (2d Cir. 1990) (listing twelve factors) (" Sonnax" and the factors considered therein " Sonnax Factor'(s)"). See also Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 143 (2d Cir. 1999) (providing that all twelve Sonnax Factors will not be relevant in every case); Burger Boys, Inc. v. South St. Seaport Ltd. P'Ship (In re Burger Boys, Inc.), 183 B.R. 682, 688 (S.D.N.Y. 1994) (providing that the court will not accord equal weight to each element). For the reasons that follow, the Court will modify the automatic stay to allow arbitration to proceed to liquidate Movant's claim.
The Court denied Movant's original motion on January 22, 2003. The Court assumes familiarity with this ruling.
As a threshold matter, the Court notes that the parties were ordered prepetition to arbitrate the current dispute ("District Court Order"). The District Court Order provides, in pertinent part, that the relevant agreements between the parties contain broad arbitration provisions.
By way of background, Inphomation was engaged in the telemarketing business. Before filing for bankruptcy protection in 1998, Inphomation operated the Psychic Friends Network. The Psychic Friends Network was a service that provided customers the ability to call a purported psychic for a fee. On October 2, 1996, Inphomation and WorldCom entered into a Carrier Agreement and a Billing Agreement whereby WorldCom provided telecommunications services to Inphomation's Psychic Friends Network Both the Carrier Agreement and the Billing Agreement contain arbitration provisions. It was the arbitration provisions contained in the Carrier Agreement and the Billing Agreement that formed the basis, in part, for the District Court Order.
Returning to the analysis here, the Court relies upon Sonnax Factors one and twelve to find that Movant has established cause for relief from the automatic stay. Debtors have failed to convince the Court that continuing the automatic stay is justified in this particular situation.
Under Sonnax Factor one, the Court must consider whether relief would result in a partial or complete resolution of the issues. It appears that relief from the automatic stay would result in a complete resolution of the issues between the parties. The District Court Order that provides that "There is no doubt that each and every one of [Inphomation's] claims in the instant lawsuit" fall within the ambit of the arbitration provisions. See District Court Order at 4, 5. Debtors do not appear to dispute Movant's assertions that Inphomation's proof of claim mirrors the claims that the District Court Order found to be arbitrable. See Second Motion For Relief From The Automatic Stay, dated August 27, 2003 at ¶¶ 7, 8, 12. Accordingly, the Court resolves this Sonnax Factor in favor of Movant.
Under Sonnax Factor twelve, the Court must consider the impact of the stay on the parties and the balance of harms. As a preliminary matter, the Court notes that many of the considerations underlying the denial of Movant's first motion for relief from stay are less relevant now that WorldCom has proposed a plan of reorganization and is in the final stages of the plan confirmation process. The Court is not opining on the confirmability of Debtors' current plan of reorganization, but merely recognizing that the temporary respite function of the automatic stay has essentially run its course and the continuing imposition of the automatic stay would be justified, if at all, based upon the automatic stay's function of centralizing all disputes concerning property of the estate before the bankruptcy court. The question thus becomes whether the automatic stay's centralization function is sufficient to override Movant's interest to proceed with arbitration. The Court holds that Movant is entitled to arbitrate its claim as provided in the District Court Order.
Arbitration, as an alternative method to resolve disputes, is favored in our judicial system. United States Lines, Inc. v. American S.S. Owners Mut. Protection Indem. Ass'n (In re United States Lines, Inc.), 197 F.3d 631, 639 (2d Cir. 1999). Pursuant to the Federal Arbitration Act, when an action is brought in any United States court
upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending . . . shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. . . .
9 U.S.C. § 3. If a party to written arbitration agreement refuses to arbitrate, pursuant to 9 U.S.C. § 4, a party injured by such refusal may seek an order compelling arbitration from a federal district court. Thus, the Arbitration Act mandates enforcement of valid arbitration agreements. United States Lines, 197 F.3d at 639. However, the policy favoring arbitration may be overridden by a contrary policy mandated by another federal statute. Caldor Corp. v. S Plaza Assocs., L.P. (In re Caldor, Inc.), 217 B.R. 121, 129 (Bankr. S.D.N.Y. 1998). The party who opposes the use of arbitration has the burden of showing the other statute's countervailing policy, and the Congressional intent to preclude use of a non-judicial forum. Hays Co. v. Merrill Lynch Pierce, Fenner Smith, Inc., 885 F.2d 1149, 1156 (3d Cir. 1989), citing, Shearson/American Exp., 482 U.S. 220, 226-27, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987). This congressional intent can be deduced from the text of the statute or its legislative history, or if arbitration conflicts with the statute's underlying purpose. United States Lines, 197 F.3d at 639, citing, Shearson/American Exp., 482 U.S. at 227.
In the bankruptcy context, the Second Circuit has found that "congressional intent to permit a bankruptcy court to enjoin arbitration is sufficiently clear." United States Lines, 197 F.3d at 639. The Second Circuit referenced the bankruptcy court's "well-established powers . . . to preserve the integrity of the reorganization process." 197 F.3d at 640. The force of the Bankruptcy Code's countervailing policy and the court's discretion to deny the request to enforce an arbitration clause depend on whether the court has core jurisdiction to adjudicate the particular claim. Caldor, 217 B.R. at 129-30. The presence of core jurisdiction enhances the countervailing policies advanced by the Bankruptcy Code and allows the court to exercise discretion in determining whether to compel arbitration. BNY Licensing Corp. v. Isetan of America Inc. (In re Barney's Inc.), 206 B.R. 336, 343 (Bankr. S.D.N.Y. 1997). Thus, courts have used their discretion to deny arbitration when the dispute implicates important aspects of the Bankruptcy Code and significant estate assets are involved, Caldor, 217 B.R. at 129, or when the issue involved a core matter that concerns the extent of a debtors' property rights. Barney, Inc., 206 B.R. at 343.
While a core purpose of bankruptcy is to centralize all disputes concerning a debtor's property, nonetheless, because the bankruptcy court does not have exclusive jurisdiction, Congress did not mandate that all bankruptcy related matters be resolved before the bankruptcy court. United States Lines, 197 F.3d at 640. Thus, there is a conflict between the goal of centralizing bankruptcy related matters in one forum and the objective of enforcing arbitration agreements. Id. In non-core proceedings, this conflict is lessened because it is unlikely that such proceedings will "present a conflict sufficient to override by implication the presumption in favor of arbitration." Id., citing, Hays Co. v. Merrill Lynch Pierce, Fenner Smith, Inc., 885 F.2d 1149, 1161 (3d Cir. 1989). However, core proceedings present "more pressing bankruptcy concerns." United States Lines, 197 F.3d at 640.
Debtors' correctly contend that the allowance of Movant's $130 million claim against Debtors is a core proceeding as defined by section 157(b)(2)(B) of title 28 of the United States Code. Debtors also note that on April 22, 2003, Debtors filed their objection to Inphomation's proof of claim denying liability generally and raising several defenses.
In response to Inphomation's contention that allowing arbitration to proceed provides cause for relief from the automatic stay, Debtors argue that the arbitration should remain stayed. Relying on In re FRG, 115 B.R. 72, 74-75 (E.D. Pa. 1990), Debtors contend that no authority provides a per se rule that the automatic stay must be modified whenever a debtor has agreed to arbitrate certain claims asserted against it. In re FRG, 115 B.R. 72, 74-75 (E.D. Pa. 1990) (rejecting as "inequitable and illogical" the notion that the mere presence of an arbitration clause in a contract should per se constitute cause under § 362(d)). The issue, however, before the Court is whether the Court should utilize its discretion to modify the automatic stay. No party disputes that the analysis under Sonnax provides this Court with such discretion therefore the Court need not consider whether there is a per se rule.
Although Debtors' objection to Movant's proof of claim is a core proceeding, courts have distinguished so-called "procedurally core" matters (like the claim objection we have here that involves a prepetition contract and the Debtors prepetition activities) from substantively core matters that involve rights created under the Bankruptcy Code. See, e.g., Kittay v. Landegger (In re Hagerstown Fiber Ltd. P'Ship), 277 B.R. 181, 202-03 (Bankr. S.D.N.Y. 2002). In the former situation courts have ruled that the bankruptcy court lacks the discretion to refuse arbitration unless the resolution of the dispute fundamentally and directly affects a core bankruptcy function. See id. In the latter situation, bankruptcy courts enjoy much greater discretion to refuse to compel arbitration. Id.
The Court finds that this matter is procedurally core only, and that Debtors have failed to establish that the resolution of the dispute fundamentally and directly affects a core bankruptcy function. See id. ("Objections to proofs of claim and counterclaims asserted by the estate . . . exemplify [procedurally core] matter[s].").
Debtors suggest that allowing this claim to proceed in arbitration would provide any creditor with a contract that provides for arbitration a de facto exemption from the automatic stay. Debtors also argue that the automatic stay should allow this Court to centralize all disputes concerning property of the estate so that reorganization can proceed efficiently.
Debtors have failed to establish that allowing Movant's claim to proceed in arbitration will create a de facto exemption to the automatic stay. This is because the applicable legal standard for relief from the automatic stay requires that the Court rule on the particular facts of each motion. See Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 110 (2d Cir. 2002) (providing that the decision whether or not to modify the automatic stay depends upon the facts of each motion). To the extent that the resolution of a motion for relief from stay raises the Debtors' concerns, the Court will consider the merits in each particular instance and will rule accordingly. The Court cannot hypothesize how it may rule in every possible situation and therefore it is not accurate to assume that allowing Movant's claim to proceed in arbitration will create a de facto exemption to the automatic stay.
As for the automatic stay's centralization function, Debtors have failed to demonstrate that allowing arbitration to proceed will adversely affect an underlying purpose of the Bankruptcy Code where the bankruptcy court does not have exclusive jurisdiction and Congress did not mandate that all bankruptcy related matters be resolved before the bankruptcy court. See United States Lines, 197 F.3d at 640. Although Congress originally intended that all disputes be handled before a bankruptcy judge, it has been recognized that the Supreme Court's decision in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), and the 1984 amendments to the Bankruptcy Reform Act of 1978 undermined this original purpose. Hays, 885 F.2d at 1159-60. Thus, the balance of harms tips in Movant's favor where prevailing legal authority would appear to recognize Movant's interest in arbitrating its claim and Movant has failed to adequately demonstrate a fundamental and direct affect on a core bankruptcy function.
Accordingly, the Court resolves Sonnax Factor twelve in favor of Movant.
For the foregoing reasons, the Court will modify the automatic stay to allow Movant to liquidate its claim in arbitration. The Court stays the effectiveness of this order until November 3, 2003.
SO ORDERED.