In Matter of Thorpe Insulation Co.

When a bankruptcy court finds a contract dispute to be a “core proceeding” in a bankruptcy case, the bankruptcy court may use its discretion to find an arbitration agreement in that contract unenforceable.

Thorpe Insulation, a manufacturer of asbestos-containing products, and Continental Insurance Company, entered into an agreement settling all asbestos related claims between the parties, but not including third-party claims against Continental. In the agreement, the parties agreed to arbitrate any issues arising outside of the agreement. Thorpe later filed for bankruptcy under § 524(g) of the Bankruptcy Code. In filing for bankruptcy, third-party insurers agreed to assign rights against Continental to Thorpe, who would assign the rights to the trust established as part of the bankruptcy plan. Continental filed a breach of contract claim and tried to compel arbitration. The bankruptcy judge and the district court denied the claim. The Court of Appeals found Continental’s claim against Thorpe in the bankruptcy proceeding to be a “core proceeding” and held that the bankruptcy court may, in its discretion, deny enforcement of an agreement to arbitrate. The Court noted a “fundamental bankruptcy policy” of having the bankruptcy court oversee all aspects of placing a “debtor’s asbestos-related assets and liabilities into a single trust for the benefit of asbestos claimants.” AFFIRMED.