Recent Illinois bankruptcy court decision allows some claims to proceed to arbitration

The question was posed to the court post confirmation of a chapter 11 plan when the debtor challenged claims filed by a creditor in the bankruptcy case. In turn the creditor sought to compel arbitration relying on the underlying agreement which called for arbitration of “all disputes”. However, in seeking such relief, the creditor referenced various bankruptcy law claims including estoppel based upon the debtor's failure to schedule the claim. The court analysed the claims advanced, and bifurcated its ruling based upon the genesis of each claim.

In determining the motion, Judge Cleary pointed to one of his own prior decisions, In re Johnson, and reiterated the court’s view that “there is no national policy favoring arbitration. The federal policy is about treating arbitration contracts like all others, [and] [w]hen an arbitration demand is made in a bankruptcy case, … a bankruptcy court should enforce the bilateral arbitration agreement, or its in rem jurisdiction over the claims under the Bankruptcy Code”.

In its prior case, the court had analysed whether, in reviewing both the arbitration agreement and the conflict with the Bankruptcy Code, the analysis should turn on the conflict as it related to the particular claim in dispute. In this recent case, there were two claims ­– one for a money judgment, and the other for a declaratory judgment finding that the creditor could not assert a setoff defence in light of the bankruptcy filing.

In the first instance, the court found that the debtor's claim for a money judgment could be arbitrated, as the confirmed plan did not address or rely upon liquidation of the account receivable. However, regarding the creditor’s claims for a right to set-off against the debtor’s affirmative claims, the court found this would not be appropriate for an arbitrator to determine, as the claim relied upon issues of bankruptcy law under section 553 of the Bankruptcy Code, and, whether in light of confirmation of the plan, the creditor retained an enforceable claim.

Judge Cleary determined that once the arbitrator liquidated the claim, the parties were to return to the bankruptcy court for him to rule upon the creditor's defences to the liquidated claim. The question could be raised whether it would have been more efficient to hear both claims together in the bankruptcy court, but the analysis was predicated upon deference to the recognition of arbitration and the tension between the statutes.

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Leslie A. Berkoff is a Partner at Moritt Hock & Hamroff LLP and Chair of its Dispute Resolution Practice Group. She concentrates her practice in the areas of Dispute Resolution serving as a mediator and arbitrator, as well as, Corporate Restructuring work working in both arenas nationally and internationally. Leslie is also Global Chair of the GGI LDR Practice Group and Regional Chair North America of the GGI Debt Collection, Restructuring & Insolvency (DCRI) Practice Group.