U.S. Supreme Court Upholds Arbitration–Again! What’s the Effect on Bankruptcy? (Epic Systems v. Lewis)

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A strong foundation upholding the wheel

By: Donald L. Swanson

Last week, the U.S. Supreme Court made its latest pronouncement upholding arbitration: Epic Systems Corp. v. Lewis, U.S. Supreme Court Case No. 16-285 (issued May 21, 2018).

The pronouncement follows a long line of precedents upholding and enforcing arbitration agreements, founded on the Federal Arbitration Act.

This article explores the Epic Systems v. Lewis decision and its effect on arbitration of bankruptcy disputes.

Epic Systems v. Lewis Questions

The questions before the U.S. Supreme Court in Epic Systems v. Lewis are these:

“Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”

“Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employers?”

Epic Systems v. Lewis Facts

The essential facts are these:

Ernst & Young and Stephen Morris entered into an employment agreement providing, (i) for arbitration of any employment disputes between them in “individualized arbitration,” and (ii) that any similar claims of other employees would be addressed in separate proceedings.

Then, the employment relationship ended, and Morris sued Ernst & Young in federal court, claiming that his position as junior associate had been misclassified as a “professional employee,” resulting in the loss of overtime pay in violation of Fair Labor Standards Act.

Although the arbitration agreement provided for individualized proceedings, Morris sought to litigate his claim in federal District Court on behalf of a nationwide class. Ernst & Young replied with a motion to compel arbitration.

The District Court granted the motion to compel arbitration, but the Ninth Circuit reversed.

U.S. Supreme Court

The U.S. Supreme Court granted certiorari and, in a five-to-four majority, upheld and enforced the arbitration agreement.

–Gorsuch wrote the majority opinion, joined by Roberts, Kennedy, Thomas and Alito, with Ginsburg, Breyer, Sotomayor and Kagan dissenting.

The majority opinion explains, (i) as “a matter of policy” the questions identified above “are surely debatable,” but (ii) “as a matter of law the answer is clear.” The clarity of answer, says the majority, comes from this:

“In the Federal Arbitration Act, Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings”;

The National Labor Relations Act does not provide a “conflicting command”;

The Supreme Court’s duty is “to interpret Congress’s statutes as a harmonious whole rather than at war with one another”; and

While the National Labor Relations Act secures rights to organize unions and bargain collectively, “it says nothing about how judges and arbitrators must try legal disputes.”

The majority also notes that the U.S. Supreme Court has reached a similar result whenever a similar question is raised:

“In many cases over many years, this Court has heard and rejected efforts to conjure conflicts between the Arbitration Act and other federal statutes,” including these:

Sherman Act,
Clayton Act,
Age Discrimination in Employment Act,
Credit Repair Organizations Act,
Securities Act of 1933,
Securities Exchange Act of 1934, and
Racketeer Influenced and Corrupt Organizations Act.

“Given so much precedent pointing so strongly in one direction, we do not see how we might faithfully turn the other way here.”

As to honoring the intent of Congress, the majority opinion explains:

“Our decision does nothing to override Congress’s policy judgments”;

“legislative policy embodied” in the National Labor Relations Act aims at “safeguarding, first and foremost, workers’ rights to join unions and to engage in collective bargaining,” which rights “stand every bit as strong today as they did yesterday”; and

instead of “overriding Congress’s policy judgments, today’s decision seeks to honor them.”

Application to Bankruptcy

–Limited Effect

The Epic Systems v. Lewis ruling is, actually, limited in nature — it’s a preservation of the status quo.  Here’s how the Supreme Court explains the limitation (emphasis added):

“today’s decision merely declines to read into” the law “a novel right to class action procedures,” which novel right “the Board’s own general counsel disclaimed as recently as 2010.”

So, rulings denying arbitration for bankruptcy-unique issues should continue to occur.

In Anderson v. Credit One Bank, N.A. (In re Anderson), Case No. 16-2496 (2nd Cir., March 7, 2018), for example, the Bankruptcy Court denied arbitration of a dispute over violation of the discharge injunction.  This Anderson ruling is based on Congressional intent:

the Federal Arbitration Act establishes a non-absolute federal policy favoring arbitration, which may be “overridden by a contrary congressional command”; and

Congress intended uniquely-bankruptcy disputes, like discharge-injunction violations, to be addressed by bankruptcy courts.

 This Anderson ruling remains good law.

–Favoring Arbitration–Collier on Bankruptcy 15th Ed.

Back in 1998, here’s what Collier’s 15th edition treatise on bankruptcy said about favoring arbitration:

“The bankruptcy courts have historically been antagonistic to the use of arbitration in settling controversies in which the trustee was involved unless both parties agreed”;

“The bankruptcy courts still have a long way to go in resolving their ambivalence toward arbitration”;

“The Supreme Court, whenever faced with a purported conflict between the Arbitration Act and another federal statute . . . has, for the past 25 years, decided in favor of the Arbitration Act”;

“Although the Court has not decided a case involving bankruptcy legislation, no reason comes to mind which would lead one to conclude that a different conclusion would be reached”; and

“There is no reason to think that, with time, the bankruptcy courts will not get there too.”

–My Resistance

I’m opposed, generally, to the idea of imposing arbitration upon bankruptcy courts and into bankruptcy disputes. See this article, this article and this article.

However, if the new Epic Systems v. Lewis ruling means anything, it’s that my view is going nowhere as a general proposition—absent Congressional action.

–Some Practicalities

My impression, for the vast majority of all bankruptcy disputes today, is this:

no one wants arbitration!

Here’s why: the costs of arbitration are materially higher, at the outset, than in a lawsuit. That’s because administrative costs of court systems are paid by taxpayers. Arbitrations receive no corresponding subsidy: the parties pay all costs.

Accordingly, creditors may want to think long and hard about including arbitration as boiler-plate provisions in their contract forms.

Federal Bankruptcy Rule 9019(c)

The Federal Rules of Bankruptcy Procedure do contain an arbitration provision. Rule 9019(c) says:

“(c) ARBITRATION. On stipulation of the parties to any controversy affecting the estate the court may authorize the matter to be submitted to final and binding arbitration.”

This Rule 9019(c) provision began with enactment of the current Bankruptcy Code in 1978. It’s history, however, goes back a long way. For example:

1. The official “Notes of Advisory Committee on Rules—1983” say that this subdivision (c) is “essentially the same” as “the provisions of former Rule 919” under the prior Bankruptcy Act;

2. The National Bankruptcy Act of 1898 contained § 26 which, beginning in 1898, said in part:

“§ 26. Arbitration of Controversies—(a.) The trustee may, pursuant to the direction of the court, submit to arbitration any controversy arising in the settlement of the estate”; and

3. § 26 of the 1898 Act created new law:

The Federal Court case of In re Ford et al., 9 Fed. Cas. 425, held that, under the previous Bankruptcy Act of 1867, “a creditor and the bankrupt could not submit to arbitration the question what amount was due to the creditor.”

–What Does it Mean?

The adoption of the current Rule 9019(c) occurred more than a half-century after Congress had already adopted the Federal Arbitration Act.

So, what can the Rule 9019(c) authorization of arbitration possibly mean, and what significance can it possibly have, if the Federal Arbitration Act had already authorized arbitration in bankruptcy?

Perhaps the answer is this:

–Rule 9019(c) authorizes arbitration by post-petition stipulation of the parties, and consent of the bankruptcy court, when the parties do not already have a pre-petition agreement for arbitration that’s enforceable.

Conclusion

The U.S. Supreme Court, in the past week, killed any remaining idea that bankruptcy disputes might escape the general thrust of the Federal Arbitration Act.  Exceptions, however, for bankruptcy-unique issues should remain viable.

Still . . . the likelihood is that parties to bankruptcy disputes will not want to arbitrate, in the vast majority of cases, due to administrative costs involved.

It will be interesting to see how all this plays out.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

2 thoughts on “U.S. Supreme Court Upholds Arbitration–Again! What’s the Effect on Bankruptcy? (Epic Systems v. Lewis)

Add yours

  1. Very useful article and explanation of why arbitration of any bankruptcy disputes is extremely unwise. Unexplored remains the fact that the high cost of AAA arbitrations themselves have forced small businesses into bankruptcy.

    The cost of a single AAA Commercial arbitration often exceeds an entire years profits for many smaller businesses. That is not the attorneys fees for representation in arbitration, but the excessive cost of the AAA’s fees and those of the AAA arbitrators.

    Even worse and more dangerous is the fact that many small businesses and their counsel do not realize the extraordinary danger posed by obscure provisions in multiple AAA Arbitration Rules for “Preliminary Deposits,” “Bonds” and “Preservatory Relief” to be ordered by AAA tribunals. Those Orders have themselves driven multiple small businesses into bankruptcy. It then cost hundreds of thousands of dollars to extricate the businesses from the onerous and expensive AAA arbitration so they could reorganize. Yet no bankruptcy would have been necessary, but for the AAA arbitration forcing them into bankruptcy in the first place!

    Liked by 1 person

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