In re GWI, Inc.
| Decision Date | 15 August 2001 |
| Docket Number | Bankruptcy No. 00-3647(MFW) to 00-3654(MFW). Adversary No. 01-768(MFW). |
| Parties | In re GWI, INC., et al., Debtor. SFC New Holdings, Inc., Plaintiff, v. The Earthgrains Company, The Bank of New York, Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
Mark S. Chehi, David R. Hurst, Grenville R. Day, Skadden Arps Slate Meagher & Flom, LLP, Wilmington, DE, Jay M. Goffman, George A. Zimmerman, Skadden Arps Slate Meagher & Flom, LLP, New York City, for debtors.
Mark Minuti, Saul Ewing LLP, Wilmington, DE, John L. Hardiman, William L. Farris, Sullivan & Cromwell, New York City, for The Earthgrains Company.
Robert J. Kochenthal, The Bank of New York, Legal Department, New York City, for The Bank of New York.
Before the Court is the Motion of the Defendant. The Earthgrains Company ("Earthgrains"), to stay this proceeding pending arbitration. Over the objection of SFC New Holdings, Inc.("SFC"), a reorganized debtor in this case, we grant Earthgrains' motion.
On March 20, 2000, SFC entered into a Stock Purchase Agreement to sell its outstanding stock in Metz Baking Company to Earthgrains in exchange for $625 million ("the Purchase Agreement"). Section 9.13 of the Purchase Agreement provides:
the parties hereby agree that any action arising out of, in connection with, or relation to, this Agreement (or any other agreement contemplated by or related to, this Agreement) . . . shall be settled at the request of any party to this Agreement, exclusively by a final and binding arbitration. . . .
Contemporaneously, the parties also executed an escrow agreement in accordance with sections 5.12 and 8.5 of the Purchase Agreement ("the Escrow Agreement"). The Escrow Agreement provides that $20 million of the purchase price be held in escrow to cover "certain indemnification claims which Earthgrains may have against SFC pursuant to the Purchase Agreement." The Escrow Agreement further provides that, unless Earthgrains notifies the escrow agent of a claim, $10 million would be released to SFC from escrow on March 20, 2001, and the remaining funds would be released on March 20, 2002.
On August 15, 2000, Earthgrains notified SFC that it intended to exercise its rights of indemnification from the escrow account for SFC's alleged breaches of representations and warranties contained in the Agreement. Earthgrains subsequently notified SFC on September 28 and November 1, 2000, that it believed it had additional indemnification claims against SFC. On February 2, 2001, Earthgrains advised the escrow agent of claims in excess of $20 million. Consequently, the escrow agent has not made any distribution from the escrow fund.
On September 18, 2000, six months after closing on the Purchase Agreement and one month after Earthgrains first gave notice of its indemnification claims, SFC filed for relief under chapter 11 of the Bankruptcy Code. On November 2, 2000, SFC and its affiliates submitted a joint liquidating plan ("the Plan"), which was confirmed on December 11, 2000. Article V, section A of the Plan provides, inter alia, that on the Plan's effective date, the disbursing agent would "(ii) perform the obligations of the Debtors related to the Escrow Agreement under the Purchase Agreement, in accordance with the terms and conditions thereof. . . ."
On March 30, 2001, SFC commenced this adversary action seeking a declaratory judgment that the escrow agent, the Bank of New York, is obligated to release $10 million from escrow to SFC. Earthgrains has, in response, filed a motion to stay the action pending arbitration. SFC opposes Earthgrains' motion.
The issue before the Court is whether we must stay this adversary action pending arbitration, pursuant to section 3 of the Federal Arbitration Act (FAA), which provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, 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, provided that the applicant for the stay is not in default in proceeding with such arbitration.
The Supreme Court has found that the FAA is a "congressional declaration of a liberal federal policy favoring arbitration agreements" which is applicable to any arbitration within the coverage of the Act. Moses H. Cone Mem'l Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Therefore, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Id. at 24-25, 103 S.Ct. 927.
The Third Circuit has held that courts have no discretion to deny the enforcement of an arbitration clause in a non-core bankruptcy proceeding. Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1155-57 (3d Cir.1989). In so holding, the Court found that the Bankruptcy Code contains no text to suggest that arbitration clauses are unenforceable in non-core adversary proceedings. Nor did the Court find that the purposes of the Code would be offended if arbitration were compelled in a non-core matter. Id. at 1157.
SFC raises two arguments. First, this is a core proceeding; therefore, this Court has exclusive jurisdiction to determine this action, and the matter may not be decided by an arbitrator. Second, this case should not be referred to arbitration for policy reasons, including the effect of a delay in the collection and distribution process and the preference for resolving all related issues in a single forum. We reject both of these arguments.
SFC asserts that because this is a core matter, it should be resolved by the bankruptcy court. It asserts that the liberal policy favoring arbitration is overridden by a countervailing policy favoring resolution of issues by the bankruptcy court where the action is a core bankruptcy proceeding. However, the policy favoring resolution of core issues by bankruptcy courts is not determinative. Even where a matter is found to be a core proceeding,2 courts have permitted arbitration.
Where a matter is a core proceeding, it is left to the bankruptcy court's discretion to decide whether to refer the matter to arbitration. See, e.g., Insurance Co. of N. America v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re National Gypsum Co.), 118 F.3d 1056, 1067-68 (5th Cir.1997)( to find the arbitration of core bankruptcy proceedings inherently irreconcilable with the Bankruptcy Code based solely on the jurisdictional nature of a bankruptcy proceeding); Shugrue v. Air Line Pilots Assoc. Int'l. (In re Ionosphere Clubs, Inc.), 922 F.2d 984 (2d Cir.1990)( that automatic stay provision did not preclude arbitration where collective bargaining agreement required the parties to arbitrate); In re Sacred Heart Hosp., 181 B.R. 195, 202 (Bankr.E.D.Pa.1995)("as to core proceedings, this court may exercise its full panoply of discretion . . . in determining whether to refer a proceeding before it to arbitration"). See also In re Glen Eagle Square, Inc., 1991 WL 71782 (in exercising its discretion to order arbitration, court retained jurisdiction of core proceedings because "they impact upon the Debtor's relationship with its entire body of creditors").
In exercising our discretion to determine whether to allow this matter to proceed to arbitration, we find it significant that SFC has already ratified (postpetition) the arbitration provision. As noted above, the confirmed Plan expressly provided that the Purchase and Escrow Agreements would be performed in accordance with their terms, which include having all issues decided by arbitration.
SFC focuses on the term of the Plan which provides that this Court retains exclusive jurisdiction over "all matters arising out of or related to the Chapter 11 case and the Plan, including jurisdiction to determine any and all adversary proceedings, motions, applications, and contested or litigated matters." However, SFC ignores the Plan provision which specifically adopts all of the terms of the Purchase and Escrow Agreements. Since the latter provision is more specific, it controls. See, e.g., Gulf Oil Corp. v. Fed. Power Comm'n, 563 F.2d 588, 601 (3d Cir.1977)("We must give effect to the specific provision rather than to the more general language"); Capitol Bus Co. v. Blue Bird Coach Lines, Inc., 478 F.2d 556, 560 (3d Cir.1973)("while a contract's provisions must be interpreted with reference to the whole the specific controls the general").
By adopting the provisions of the Purchase Agreement in the confirmed Plan, SFC specifically agreed to the arbitration provisions. It is bound by that choice. Section 1141(a) states that "the provisions of a confirmed plan bind the debtor." See also Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir.1997)("a confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation.") quoting In re Szostek, 886 F.2d 1405, 1408 (3d Cir.1989) (internal quotes omitted).
The Federal Rules of Bankruptcy Procedure provide that parties may opt for arbitration even where this court has exclusive jurisdiction. Rule 9019 provides that "on stipulation of the parties to any controversy affecting the estate, the court may authorize the...
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