Supreme Court Denies Review on the Interplay Between the U.S. Bankruptcy Code and the Federal Arbitration Act

By Amy Foust

The Supreme Court today denied certiorari in GE Capital Retail Bank v. Belton, No. 20-481, an arbitration case in a bankruptcy matter.  The question presented by petitioner GE Capital, and rejected in this morning’s order list by the Court, was “whether provisions of the Bankruptcy Code providing for a statutorily enforceable discharge of a debtor’s debts impliedly repeal the Federal Arbitration Act, 9 U.S.C. § 1 et seq.”

The U.S. Bankruptcy Code section in question, 11 U.S.C. § 524(a)(2), provides in part:

A discharge in a case under this title— …

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]

The case, on cert petition from the Second U.S. Circuit Court of Appeals in New York, suggests a tension between this section of the bankruptcy code and the Federal Arbitration Act, which provides that written agreements to arbitrate are “valid, irrevocable, and enforceable” (9 U.S.C. §2), and that if there is no issue with the making of the agreement, a court “shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.” 9 U.S.C. §4. 

The underlying dispute was a putative class action related to GE Capital’s efforts to collect debts discharged in bankruptcy.  The plaintiffs–the discharged debtors–brought contempt proceedings under § 524 arguing a violation of the injunction against continued recovery.  GE Capital moved to have the dispute referred to arbitration. 

The case of Respondent Belton and two others similarly situated were addressed in a consolidated decision by the federal bankruptcy court in New York’s Southern District, finding that referring these cases to arbitration would defeat the purpose of seeking bankruptcy protections.  The U.S. District Court for the Southern District reversed the bankruptcy court and sent Belton’s case to arbitration. 

But around the same time, the Second Circuit decided Anderson v. Credit One Bank, N.A., 884 F.3d 382 (2d Cir. 2018), a case involving similar facts to GE Capital. In Anderson, an appeals panel found an inherent conflict between § 524 and the FAA because the discharge injunction is critical to the bankruptcy code’s purpose; the contempt claim requires the bankruptcy court’s continuing supervision, and denying the court the power to enforce its own injunctions would undermine bankruptcy code enforcement. 

In response to a request for reconsideration in view of Anderson, the U.S. District Court reversed itself and denied the motion to compel arbitration.  GE Capital appealed to the Second Circuit, which affirmed the district court. 

GE Capital then appealed to the Supreme Court, framing the issue as an implied repeal of the FAA, citing the Court’s support from Epic Systems v. Lewis, 138 S. Ct. 1612, 1627 (2018), where the Court rejected a request to have the National Labor Relations Act override the Federal Arbitration Act. 

In a response to GE Capital’s request asking the nation’s top court to decline to hear the case, Respondent Belton had argued that the Second Circuit was correct in its analysis of this narrow issue, which is not the subject of any circuit split and did not merit the Court’s attention.

So the Second Circuit decision stands, allowing the respondents to proceed with contempt sanctions against major banks for continuing attempts to recover debts that had been subject of a bankruptcy discharge.

* * *

The author is an LLM candidate studying dispute resolution at the Straus Institute, Caruso School of Law at Malibu, Calif.’s Pepperdine University, and an intern with the CPR Institute through Spring 2021.

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Second Circuit: No U.S. Discovery for Private International Arbitration

By Yixian Sun

Does 28 U.S.C. §1782(a), which authorizes “any interested person” in a proceeding before a “foreign or international tribunal” to ask for and receive discovery from a person in the United States, cover private international arbitration tribunals? (Full text available at https://bit.ly/3fvtr8z .)

This is a hot issue in the arbitration world, with cases sprinkled throughout the federal courts. In the latest decision, the Second U.S. Circuit Court of Appeals held last week that arbitration isn’t covered by Section 1782. In re Application and Petition of Hanwei Gup for an Order to take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. 1782 (Guo v. Deutsche Bank Securities Inc.), No. 19-781, 2020 WL 3816098 (2d Cir. July 8, 2020), as amended (July 9, 2020) (available at https://bit.ly/38SLd) (Guo).

And that move aggravates a circuit split created in recent months that points to the U.S. Supreme Court in an area that a year ago was considered settled law.

For more than two decades, the answer to the question on Section 1782’s applicability to private arbitral tribunals has been a firm “no.” In National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2nd Cir. 1999) (available at https://bit.ly/2UcWfdq) (“NBC”), the Second Circuit held that the phrase “foreign or international tribunal” does not encompass “arbitral bod[ies] established by private parties,” id. at 191. The Fifth Circuit quickly reached the same conclusion in Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880 (5th Cir. 1999) (available at https://bit.ly/3gViPB0).

But the tide is turning. In 2019 and 2020, the Sixth Circuit and Fourth Circuit each decided that a private, party-contracted international arbitration panel constituted “tribunals” under Section 1782, in In re Application to Obtain Discovery for Use in Foreign Proceedings (Abdul Latif Jameel Transp. Co. v. FedEx Corp.), 939 F.3d 710 (6th Cir. 2019) (available at https://bit.ly/2AFPIB9) and Servotronics Inc. v. Boeing Co., 954 F.3d 209 (4th Cir. 2020) (available at https://bit.ly/3h7s0P8), thereby breaking with its sister circuits.

In the new July/August edition of Alternatives, and in an online discussion with Alternatives’ Editor Russ Bleemer, John B. Pinney, a senior trial lawyer at Graydon, in Cincinnati, provided an in-depth explanation on the changing landscape on this seemingly settled legal issue. See CPR Speaks for the discussion, the article, and links to the cases, at https://bit.ly/3gxyPIG.

Lying in the background of this debate is Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) ((available at https://bit.ly/2zamp9C), the only Section 1782 case considered by the U.S. Supreme Court. In Intel, writing for the majority, Justice Ruth Bader Ginsberg held that the European Commission’s Directorate-General for Competition constituted a “foreign or international tribunal” within the meaning of Section 1782.

Intel did not directly address the issue of whether a private international tribunal is a “foreign or international tribunal.” Ginsberg’s opinion, however, cited a 1965 law review article written by Columbia Law School’s Professor Hans Smit, who has participated in the amendment of Section 1782: “the term ‘tribunal’ … includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” Id. at 248-49 (citing Hans Smit, International Litigation Under the United States Code, 65 Colum. L. Rev. 1015, 1026, n.71 (1965)).

The Intel court’s favorable reference to Smit’s expanded interpretation of “foreign or international tribunals” was used by the Sixth Circuit as an additional support of its inclusion of private international arbitration under Section 1782. In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 724.

This fact was also heavily relied upon by the petitioner in the new Second Circuit Guo decision. As noted, the panel rejected the petitioner’s reasoning, and concluded that “nothing in the Supreme Court’s Intel decision alters [its] prior conclusion in NBC that §1782 (a) does not extend to private international commercial arbitrations.” In re Guo, at *2.

* * *

In 2018, Hanwei Guo initiated arbitration against Guomin Xie, Tencent Music, and several other entities before the China International Economic and Trade Arbitration Commission, best known as CIETAC. Id. at *4.

According to Guo, Xie and other respondents, through a series of fraudulent transactions, led him into selling his shares in the companies that later became part of Tencent Music for less than the shares allegedly were worth. Guo asked for compensation and asked to have his equity stake restored. The parties selected an arbitral panel in April 2019, and the matters are still pending. Id. at *3-5.

In December 2018, Guo filed a petition for discovery for information from four underwriters related to Tencent Music’s IPO pursuant to Section 1782 in New York’s  Southern District Court. Following the NBC precedent and determining that the nature of CIETAC is closer to a “private arbitral body,” the SDNY denied Guo’s application in February 2019. In re Application of Hanwei Guo for an Order to Take Discovery for Use in a Foreign Proceeding Pursuant to 28 U.S.C. § 1782, 2019 WL 917076, at *3 (S.D.N.Y. Feb. 25, 2019).

The Second Circuit affirmed last week. According to the panel, private international commercial arbitrations are still barred from proceedings under Section 1782 even in the wake of the Supreme Court’s Intel decision. The panel also determined that the arbitration before CIETAC is indeed a “non-covered, private, international commercial arbitration.” In re Guo, at *1-2.

Writing for a unanimous panel, Judge Debra A. Livingston offered several reasons in defending why NBC remains good law.

The Second Circuit recounted the NBC-Intel history, and tackled the recent Fourth and Sixth Circuit cases going the other way, finding that Section 1782 applied to private arbitrations. 

Judge Livingston noted that the Intel court’s “fleeting reference” of “arbitral tribunals” is merely dicta. Id. at *17. Even if this reference had any legal significance, she added that under Section 1782, “‘arbitral tribunals’ does not necessarily encompass private tribunals,” because even Prof. Smit stated that “an international tribunal owes both its existence and its powers to an international agreement.” Id. (Quoting Hans Smit, Assistance Rendered by the United States in Proceedings Before International Tribunals, 62 Columbia L. Rev. 1264, 1267 (1962); the opinion also points to NBC, 165 F.3d at 189 (citing Smit’s 1962 article)).

Moreover, according to the Second Circuit panel, the legislative history does not warrant recognition of private international arbitration as “tribunals” under Section 1782. While Congress introduced the phrase “foreign or international tribunal” in order to expand the provision’s earlier formulation (which permitted for assistance only for “judicial proceeding[s] in any court in a foreign country”), a survey of House and Senate reports did not reveal the legislators’ intention to promote a “much more dramatic expansion into private arbitration.” Id. at *18-19. (Emphasis is the Second Circuit’s.)

The Second Circuit then found that the CIETAC arbitration did not qualify as an arbitration under a state-sponsored adjudicatory body, noting that “district court correctly concluded that the CIETAC arbitration is a private international commercial arbitration outside the scope of § 1782(a)’s ‘proceeding in a foreign or international tribunal’ requirement.”

In doing so, Judge Livingston analyzed whether “the [arbitral] body in question possesses the functional attributes most commonly associated with private arbitration.”

Several factors were taken into account. First, CIETAC, evolving from a government-sponsored entity, now “possesses a high degree of independence and autonomy” in its administration of arbitral cases, “and, conversely, a low degree of state affiliation.” Id. at *21-22.

Second, the power possessed by the Chinese government to “intervene to alter the outcome of an arbitration after the [CIETAC] panel has rendered a decision” is limited. In fact, such power is similar to that possessed by a U.S. court in setting aside or enforcing a private arbitration award under the Federal Arbitration Act and its incorporation of the New York Convention on the enforcement of international arbitration awards. Id. at *22-24.

Third, the CIETAC panel derives its jurisdiction “exclusively from the agreement of the parties,” rather than “any governmental grant of authority.” Id. at *24.

Finally, the ability of the parties to select their own arbitrators further suggests the private status of the CIETAC arbitration. Id. at *24-25.

* * *

The Second Circuit’s ruling mirrors the Fifth Circuit opinion in El Paso Corp. v. La Comision Ejecutiva Hidroelectrica Del Rio Lempa, 341 F. App’x 31 (5th Cir. 2009) (unpublished) (Available at https://bit.ly/3gXOTU7). There, the Fifth Circuit held that Intel has no negative effect on its Biedermann analysis, and concluded that a private Swiss arbitral tribunal did not constitute a “tribunal” within Section 1782. Id. at *34.

Judge Livingston also responded to the more-recent contrary rulings made by the Sixth and the Fourth Circuits. She pointed out that the Sixth Circuit never said that Intel compels a ruling allowing discovery for private arbitration. Rather, it held that such a way of understanding “was merely consistent” with Intel. In re Guo, at *17 (emphasis is the Second Circuit’s); see also In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 725-26.

The Fourth Circuit’s Servotronics opinion, on the other hand, was based on the finding that the U.K. arbitration at issue was a “product of government-conferred authority,” thereby falling into the same framework as the Second and the Fifth Circuits which limited § 1782 to tribunals “acting with the authority of the State.” In re Guo at *14 (quoting Servotronics, 954 F.3d at 214).

Indeed, the Intel decision neither compelled, nor rejected, the inclusion of private international commercial arbitration under Section 1782.

Therefore, before a directly on-point Supreme Court opinion, lower courts are free to make their own judgments, according to their own statutory construction methodologies, policy considerations, and factors considered in determining the nature of a foreign tribunal.

The Second Circuit relies more on legislative history in understanding the scope of “tribunals,” but the Sixth Circuit uses a textualist approach and looks into the usage of “tribunals” in legal writings. Compare In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 726-28, with In re Guo at *18-19.

The Second Circuit fears that allowing discovery would decrease the efficiency and the cost-effectiveness of private arbitration, whereas the Sixth Circuit appear to dismiss such concerns. Compare In re Application to Obtain Discovery for Use in Foreign Proceedings, 939 F.3d at 728, with In re Guo at *11. The Second Circuit believes that the fact that arbitrations are sanctioned, regulated and judicially supervised by the national authority does not suffice to make them “state-sponsored,” while the Fourth Circuit holds the contrary. Compare Servotronics, Inc. v. Boeing Co., 954 F.3d at 214-15, with In re Guo at *21-26.

* * *

One thing seems to be certain. A Supreme Court response is strongly called for. In a motion to stay issuance of the mandate, Rolls-Royce, the appellee in the Fourth Circuit’s Servotronics decision, represented that it intended to file a petition for certiorari to the Supreme Court.

Now that the Second Circuit refuses to change its position, author John Pinney predicted that the odds of the Supreme Court granting certiorari would increase. John B. Pinney, “Will the Supreme Court Take Up Allowing Discovery Under Section 1782 for Private International Arbitrations?” 38 Alternatives 103 (July/August 2020) (available in multiple formats at https://bit.ly/2ZwUt8N).

Other commentators, share similar expectations with Pinney. See, e.g., David Zaslowsky, “Second Circuit Holds That Section 1782 Discovery is Not Available in Aid of Private International Commercial Arbitration,” Global Arbitration News (July 10, 2020) (available at https://bit.ly/2CDUzne). Stay tuned for the next development.

* * *

The author, a second-year Harvard Law School student, is a 2020 CPR Institute Summer Intern.

US Appeals Court in “Manifest Disregard” Claim Instructs Arbitrator to Clarify “Irreconcilable Determinations”

By Mark Kantor

Kantor Photo (8-2012)

I draw to your attention an interesting recent approach from the U.S. Court of Appeals for the Second Circuit towards an argument that an arbitration award should be set aside for manifest disregard of the law – Weiss v. Sallie Mae, Incorporated (2d Cir. Dkt No. 18-2362, September 12, 2019, available here – https://cases.justia.com/federal/appellate-courts/ca2/18-2362/18-2362-2019-09-12.pdf?ts=1568298609).  Instead of vacating the arbitration award for “manifest disregard,” the Court of Appeals remanded the case to the lower court to require the arbitrator to seek to clarify material inconsistencies in the arbitration award.  The Court of Appeals also took steps to assure that the same District Court judge and the same 3-person panel of Court of Appeals judges would be the ones to review any effort by the arbitrator to resolve the “irreconcilable determinations.”

The summary for the Court of Appeals opinion states the relevant circumstances and the appellate order succinctly.  The lower court (the U.S. District Court for the Western District of New York) had vacated the underlying arbitration award due to irreconcilable determinations relating to the effectiveness of a general release in a judicial class action versus an award of damages in the arbitration award (“the arbitrator ignored the unambiguous terms of the general release”).  The Court of Appeals (Peter Hall, J., for a unanimous 3-person appellate tribunal) in turn vacated that decision of the District Court and instead remanded to the lower court with instructions “to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.”

[The district court granted] Defendant‐Appellee’s motion to vacate an arbitration award based on the arbitrator’s failure to apply a general release provision in a settlement agreement that barred all of Plaintiff‐Appellant’s claims.  We agree with the district court that the arbitrator ignored the unambiguous terms of the general release and therefore conclude that the award of statutory damages for a subset of Plaintiff’s claims is irreconcilable with the arbitrator’s determination that Plaintiff was a member of the settlement class and that she received adequate notice of its terms. The arbitrator’s failure to provide an explanation for these mutually exclusive determinations renders this Court unable to ascertain whether the arbitrator adhered to applicable substantive law as required by the parties’ arbitration agreement and, consequently, whether the arbitral award was issued in manifest disregard of the law, as the district court held. We therefore vacate the decision and order of the district court and remand the case to provide an opportunity for the district court to require the arbitrator to clarify whether he intended to deem the class notice sufficient and, if determined to be sufficient, to construe the general release in the first instance and vacate or modify the award as necessary.

The doctrine of manifest disregard sets a very high barrier for successful application in the Second Circuit.  Vacatur is appropriate only in “exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent ….” (citations omitted here and below).

“A litigant seeking to vacate an arbitration award based on alleged manifest disregard of the law bears a heavy burden, as awards are vacated on grounds of manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” …. We will uphold an arbitration award under this standard so long as “the arbitrator has provided even a barely colorable justification for his or her interpretation of the contract.” …. Vacatur is only warranted, by contrast, “when an arbitrator strays from interpretation and application of the agreement and effectively dispenses his own brand of industrial justice.”

Here, the appeals court made clear that the failures in the arbitration award indeed appeared egregious.

The arbitral award granted Weiss $108,500 in statutory damages under the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. §§ 227 et seq.  The arbitrator, however, determined simultaneously that Weiss was a class member in a class action against Defendant‐Appellee Sallie Mae, Inc. that had been resolved by a settlement agreement containing a general release barring class members from bringing TCPA claims against Sallie Mae and its successors.  We agree with the district court’s conclusion that the arbitrator ignored the unambiguous general release provision in that settlement agreement.

****

… ignored the unambiguous terms of the general release ….

****

The arbitrator’s failure to provide an explanation for these mutually exclusive determinations ….

****

… it is impossible to square that conclusion [that a notice of class proceedings “entitled Weiss to recover for ATDS calls made prior to the consent revocation deadline] with the general release provision [in the consequent class action] barring Weiss’s recovery for “any and all” TCPA claims ….

****

… the arbitrator’s finding …  appears to rest on a parsing of the applicable law grounded neither in a constitutional due process analysis nor in a faithful exercise in contract interpretation.

****

… the incoherence of the arbitrator’s decision ….

****

… the arbitrator did not even mention the release in his decision ….

Judge Hall saw nothing in the arbitration award addressing the impact of the “unambiguous” general release.  Unlike the District Court, however, the Court of Appeals did not set aside the arbitration award for manifest disregard of the law.

Because the arbitrator did not even mention the release in his decision, we are unable to ascertain from the record whether the arbitrator in fact based his decision on the four corners of the Arthur Settlement agreement and its accompanying class notice, as Weiss appears to contend, or whether he instead discarded the agreement in favor of his own policy preferences.

Significantly, the Court of Appeals did not then conclude that the arbitrator had actually manifestly disregarded applicable law.  Rather than vacate the arbitration award entirely on grounds of manifest disregard as the District Court had done, the appeals judges instead remanded the case, instructing the lower court to require the arbitrator to clarify the inconsistency.

In light of the incoherence of the arbitrator’s decision, we hereby VACATE the district court’s order and REMAND the case to the district court to remand to the arbitrator with instructions to clarify whether the class notice was or was not sufficient and, if determined to be sufficient, then to construe the general release provision in the first instance and to vacate or modify the arbitral award if necessary. See Hardy v. Walsh Manning Sec., L.L.C., 341 F.3d 126, 134 (2d Cir. 2003) (acknowledging this Court’s “authority to seek a clarification of whether an arbitration panel’s intent in making an award evidences a manifest disregard of the law” (internal quotation marks and alterations omitted)).

The citation in the above quote to the Hardy decision for authority to order a remand to the arbitrator for clarification is interesting in the context of an application to vacate an arbitration award for manifest disregard of the law.  The Hardy decision finds its authority for remanding to the arbitrator to resolve problems with the award in only one other cited opinion, Americas Insurance Company, v. Seagull Compania Naviera, S.A., 774 F.2d 64 (2d Cir. 1985).  Neither Hardy nor Americas Insurance, however, refer to a statutory or juridical basis for that asserted authority.  As the 2nd Circuit appeals court in Hardy had stated:

Although certainly not the normal course of things, we do have the authority to remand to the Panel for purposes broader than a clarification of the terms of a specific remedy.  That is, we have the authority to seek a clarification of whether an arbitration panel’s intent in making an award “evidence[s] a manifest disregard of the law.” Americas Ins. Co., 774 F.2d at 67.  The Panel should be afforded such an opportunity.   In Americas Insurance, 774 F.2d at 67, we directed a district court to remand awards to an arbitration panel for clarification of whether the panel intended awards to be subject to principles of subrogation.  We believe that this is the proper result here.

In addition to instructing the arbitrator to seek to clarify the arbitration award, Judge Hall also took steps in his Weiss v. Sallie Mae opinion to assure that any resulting reinterpretation of the arbitration award returned to the same District Court judge and then to the same Second Circuit appellate panel, rather than moving to another set of judges.

The arbitrator shall be instructed either to interpret and apply the terms of the Arthur Settlement agreement’s general release provision or to explain why that provision does not bar Weiss’s claims. Further, the district court shall thereafter hear and rule on any subsequent objections to the arbitrator’s decision, which objections may be advanced by appropriate motion of either party. Any appeal from the district court’s decision thereon may be advanced by letter notice to the Clerk of this Court without necessity of filing a new notice of appeal, and that appeal shall be assigned to this panel.

The uncommon feature of the Court of Appeals ruling in Weiss v. Sallie Mae lies in its remand with instructions to the arbitrator to address and resolve the inconsistent determinations.  That judicial approach arguably avoids a common criticism of the doctrine of manifest disregard as unauthorized by the FAA and the New York Convention.  Rather, Judge Hall and his appellate colleagues appear to be relying on the appeals court’s general judicial authority to require clarification of a material ambiguity in the underlying arbitral record.  That remedy puts the purportedly offending arbitrator back in control of the arbitration award, rather than vacating that award.  But the appeals court additionally assured that the same previously-briefed and skeptical judges at the U.S. District Court and Second Circuit Court of Appeals would review any resulting modifications put forward by the arbitrator.  Does that suffice for a petitioner seeking vacatur of the award?   What do you think?

_______________________________________________

Mark Kantor is a CPR Distinguished Neutral. Until he retired from Milbank, Tweed, Hadley & McCloy, Mark was a partner in the Corporate and Project Finance Groups of the Firm. He currently serves as an arbitrator and mediator. He teaches as an Adjunct Professor at the Georgetown University Law Center (Recipient, Fahy Award for Outstanding Adjunct Professor). Additionally, Mr. Kantor is Editor-in-Chief of the online journal Transnational Dispute Management.

This material was first published on OGEMID, the Oil Gas Energy Mining Infrastructure and Investment Disputes discussion group sponsored by the on-line journal Transnational Dispute Management (TDM, at https://www.transnational-dispute-management.com/), and is republished with consent.