Arbitration Clauses in Delaware and the Third Circuit Recently Examined

Congratulations are in order for fellow blogger and friend, Francis X. Pileggi of the Delaware Litigation Blog, who's made some new law in Delaware. As he reports here, the Delaware Supreme Court issued an opinion on March 14 (which favored Francis!) that is "must reading for anyone who drafts or needs to interpret an arbitration clause in an agreement governed by Delaware law." Francis writes that in the opinion --

Delaware's highest court affirmed the trial court and with pithy reasoning addressed the issues of: (i) who decides arbitrability if the agreement incorporates the rules of the American Arbitration Association (AAA); and (ii) based on the terms of the specific agreement at issue, whether the claims raised were governed by the arbitration clause. The Court determined that based on the terms of the particular agreement involved, the parties intended that the trial court determine the threshold issue of arbitrability, and that likewise injunctive relief should be decided by the trial court. CAVEAT: If the parties to an agreement simply incorporate the rules of the AAA without more, one should be aware that the AAA will likely be empowered to not only decide the issue of arbitrability, but the AAA will also be the forum to dispense equitable relief.

Coincidentally, just before reading Francis's post on the ruling, I was reading this opinion from the Third Circuit on whether an arbitration proceeding violated the automatic stay, and -- if so -- whether both the panel's deliberations and the resulting award were void. Acands, Inc. v. Travelers Casualty and Surety Co., 435 F.3d 252 (3d Cir., 1/19/2006).

What most caught my eye about this case, however, was the composition of the panel, which included former Third Circuit Judge -- now Supreme Court Justice -- Samuel A. Alito and Judge Milton I. Shadur, district court judge for the Northern District of Illinois (and himself a Chicago institution). A bankruptcy case resolved by these two judges seemed worth reading for this reason alone.

While not a "must read," it's a good read to be sure, for it reaffirms Judge Cristol's reminder (mentioned here) that "a little neglect may breed mischief." Here, it appears the only thing Travelers needed to have done to preserve the hard-fought benefits of painstaking arbitration proceedings (initiated by the debtor!) was to have filed a lift stay motion in the bankruptcy court in advance of filing a counterclaim against the debtor in those proceedings. Given that the debtor had initiated the arbitration proceedings, it is likely the bankruptcy court would have entered an order lifting the stay. Because Travelers failed to do so, the Third Circuit ruled, the proceeding was rendered a nullity, and the debtor -- having lost at arbitration -- was given a second bite at the apple.

In reaching this seemingly draconian result, the Third Circuit noted that the result was compelled because "no equitable power to grant relief from the automatic stay rests with the District Court. To the extent that an equitable exception to the automatic stay exists, it rests solely in the Bankruptcy Courts."

Judge Alito wrote this about the nature of the case, and of the results compelled by the automatic stay:

This case involves the applicability of the Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362(a), to an arbitration panel's resolution of an insurance coverage dispute. We hold that the arbitration proceeding became subject to the automatic stay after Travelers Casualty ("Travelers") submitted arguments supporting an award against the debtor ACandS [formerly Armstrong Contracting and Supply, one of the nation's largest installers of asbestos insulation], and that the panel's award granting Travelers affirmative relief violated the automatic stay by diminishing the bankruptcy estate. We therefore reverse the order of the District Court....


With respect to the application of § 362(a)(1), the District Court held that the automatic stay did not apply because the arbitration was an action initiated by the debtor....

[H]owever, the panel's authority must yield when a dispute threatens the rights of third parties in violation of the laws of the United States. To avoid interfering with the broad purposes served by the automatic stay, it was necessary for the arbitration proceeding to halt as soon as the scope of the parties' submissions supported an award that could diminish ACandS's estate. By continuing beyond this point, the proceeding violated § 362(a)(1), and the panel's deliberations and the resulting award are therefore void....

Travelers argues that even if the panel's award violates the automatic stay, equity precludes its application in this case. This argument fails because no equitable power to grant relief from an automatic stay rests with the District Court. To the extent that an equitable exception to the automatic stay exists, it rests solely in the Bankruptcy Courts. (Citations omitted.)

© Steve Jakubowski 2006

Written By:Francis Pileggi On March 19, 2006 4:46 PM

Thank you for your very kind remarks and your erudite analysis of the Third Circuit decision.