Camac Fund, L.P. v. McPherson (In re McPherson), Case No. 21-10205-MMH

CourtU.S. Bankruptcy Court — District of Maryland
Writing for the CourtMICHELLE M. HARNER U.S. BANKRUPTCY JUDGE
PartiesIn re: John McDonnell McPherson, Debtor. Camac Fund, L.P., Movant, v. John McDonnell McPherson, Respondent.
Decision Date02 June 2021
Docket NumberCase No. 21-10205-MMH

In re: John McDonnell McPherson, Debtor.

Camac Fund, L.P., Movant,
v.
John McDonnell McPherson, Respondent.

Case No. 21-10205-MMH

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND at Baltimore

June 2, 2021


Chapter 11

MEMORANDUM OPINION

The filing of a chapter 11 bankruptcy case generally stops all matters affecting the debtor's financial affairs and consolidates the resolution of those matters in one forum, the bankruptcy court. That collective process is intended to, among other things, allow a debtor to catch its financial breath and develop a cohesive reorganization plan; provide consistency and certainty in the resolution of matters potentially affecting the debtor's reorganization; and ensure fair and equal treatment of the debtor's creditors. To that end, a bankruptcy court has original and exclusive jurisdiction over the bankruptcy case, original and non-exclusive jurisdiction over related civil proceedings, and exclusive jurisdiction over all the debtor's property and property of the

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bankruptcy estate wherever located. 28 U.S.C. § 1334. A frequent question, and one presented by this contested matter, is how these basic principles apply to an arbitration clause in a prepetition contract between the debtor and just one creditor.

Courts recognize that the Federal Arbitration Act ("FAA") creates a strong presumption in favor of arbitration. 9 U.S.C. §§ 1-14. As the Supreme Court has explained, "[t]he preeminent concern of Congress in passing the [FAA] was to enforce private agreements into which parties had entered, and that concern requires that we rigorously enforce agreements to arbitrate." Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985). The enforcement of an arbitration agreement may conflict, however, with the core objectives of another statutory scheme, such as the Bankruptcy Code.1 In those instances, courts must scrutinize the statute at hand to determine whether "Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227 (1987).

The parties in this contested matter have very different views concerning a potential conflict between a pending prepetition arbitration proceeding and this chapter 11 case. From the debtor's perspective, all of the issues overlap with his reorganization efforts and thus should be resolved by this Court. From the creditor's perspective, the arbitrator could resolve most, if not all, issues between the parties, leaving just the treatment of any resulting claim for the chapter 11 case. Like many disputes, the Court fails to find an easy or bright line solution resolving the matter in accordance with either party's position. The dispute requires careful consideration of the language of the arbitration agreement, the FAA, and the Code.

Having reviewed all of the materials, applicable law, and the parties' arguments, the Court concludes that it must defer to the arbitration proceeding, but only as to the prepetition non-core

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claims asserted by the parties in that proceeding. It will, in turn, modify the automatic stay of section 362 of the Code for this limited purpose. All other issues and claims between the parties will remain subject to the automatic stay and resolution in connection with this chapter 11 case.

I. Relevant Background

John McDonnell McPherson, the above-captioned debtor and debtor in possession (the "Debtor"), filed this chapter 11 case on January 12, 2021. Prior to that filing, the Debtor and Camac Fund, L.P. ("Camac") entered into a Litigation Funding Agreement (the "Funding Agreement"). Under the Funding Agreement, Camac was to extend financing to the Debtor in exchange for a percentage of the Debtor's interest in certain whistleblower litigation cases. Disputes arose between the parties under the Funding Agreement, and Camac invoked its rights under the Funding Agreement's arbitration clause. The Debtor filed a response disputing, among other things, the validity of the arbitration and asserting counterclaims against Camac. A hearing was scheduled in the arbitration proceeding, but was stayed by the filing of this chapter 11 case.

The parties have since filed various papers and commenced two adversary proceedings in this case. These actions include a Motion for Relief from Stay (the "Stay Motion"), filed by Camac; a complaint asserting six counts against Camac, filed by the Debtor (the "Debtor's Complaint"); and a complaint seeking to determine certain debts nondischargeable, filed by Camac ("Camac's Complaint").2 The Court held a hearing on the Stay Motion and Camac's motion asking this Court to abstain from or stay the adversary proceeding involving the Debtor's Complaint (the "Abstention Motion")3 on May 5, 2021 (the "Hearing"). The Court has considered the papers and the arguments of counsel, and these matters are now ripe for resolution.

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II. Jurisdiction and Legal Standards

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Under 28 U.S.C. § 157(a) and its Local Rule 402, the United States District Court for the District of Maryland has referred this case to the Court. This matter is a statutorily core proceeding under 28 U.S.C. §§ 157(b)(1) and (b)(2).

The Stay Motion seeks relief from the automatic stay of section 362(a) of the Code. That section generally enjoins the continuation of actions or proceedings against a debtor, property of the debtor, or property of the bankruptcy estate. 11 U.S.C. § 362(a). A creditor or other party may request relief from the automatic stay by filing a motion under section 362(d) of the Code, which provides that a bankruptcy court shall grant a moving party relief from the automatic stay imposed by section 362(a) if, among other things, cause exists for that relief. 11 U.S.C. § 362(d)(1). Moreover, the relief mandated by section 362(d) may include "terminating, annulling, modifying, or conditioning" the automatic stay imposed by section 362(a). 11 U.S.C. § 362(d).

The Court considers Camac's request for relief from the automatic stay under this standard and in light of the particular facts of this case and applicable precedent concerning the appropriate treatment of arbitration clauses in bankruptcy.

III. Analysis

The primary issue before the Court is the impact of the arbitration clause in the Funding Agreement and the prepetition arbitration proceeding on this chapter 11 case and the various disputes between the parties. This issue permeates the relief requested by Camac in the Stay Motion and the Abstention Motion. In sum, Camac asserts that this Court is required to enforce the arbitration clause and that such clause covers most of the parties' claims and causes of action. The Debtor views matters quite differently, acknowledging the arbitration clause but arguing its

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application to this case inherently conflicts with key objectives of the Code. The Debtor posits that this Court could resolve all of the parties' disputes within the context of the Debtor's chapter 11 plan of reorganization and the related claims administration process.

The Court finds some merit to the Debtor's position. The Code and chapter 11 more specifically are designed to facilitate a timely, cost-effective resolution of all claims asserted against a debtor. This process deters gamesmanship and competition among creditors. It also provides all parties affected by the bankruptcy with ready access to the same forum, applying applicable law in a consistent manner as to all such parties' claims. Particularly in the context of a chapter 11 reorganization, consistency, certainty, and sometimes speed are critical to the debtor's success, as well as the maximization of value for all creditors.

Absent the arbitration clause in the Funding Agreement, this Court would have several alternatives available to it to accomplish the procedural objectives of chapter 11. It could, for example, consolidate all issues between the Debtor and Camac, either in connection with the plan process or separately, and then schedule those matters in a manner that allowed this chapter 11 case to continue moving forward without delay. The presence of the arbitration clause requires this Court to pause, however, and determine the appropriate forum to resolve some or perhaps all of the parties' respective claims. The Court considers these issues below, concluding that even if suboptimal for this case, applicable law requires some bifurcation of the parties' claims between this bankruptcy case and the prepetition arbitration proceeding.

A. Arbitration Clauses and Bankruptcy

The FAA and the Code both are grounded in important policy considerations concerning efficiency and fairness. The FAA focuses on these notions in the context of, among other things, private contracts affecting commerce, creating a strong presumption in favor of the parties'

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threshold agreement to arbitrate disputes. See, e.g., 9 U.S.C. §§ 2, 3; Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220, 226 (1987) ("The Arbitration Act thus establishes a 'federal policy favoring arbitration,' Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), requiring that 'we rigorously enforce agreements to arbitrate.' Dean Witter Reynolds Inc. v. Byrd, supra, 470 U.S., at 221, 105 S.Ct., at 1242."). This approach reflects the reality that, at least in contracts subject to negotiation, the arbitration clause may be a critical piece of the parties' bargain and integral to their cost-benefit analysis of the contract itself.

The Code, on the other hand, is not party- or contract-specific but seeks to balance the rights of many parties with many different contracts, rights, and interests involving a single debtor. As the Fourth Circuit has explained, "'Congress intended to grant comprehensive jurisdiction to bankruptcy courts so that they might deal efficiently and expeditiously...

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