In the Matter of Eber

A district court does not abuse its discretion when it affirms a bankruptcy court’s denial of a motion to compel arbitration where the bankruptcy court implicitly concludes that “allowing an arbitrator to decide issues that are so closely intertwined with dischargeability would ‘conflict with the underlying purposes of the Bankruptcy Code.’”

Michael Ackerman and Floyd Kuriloff (collectively, “Appellants”) appealed the district court’s orders affirming the bankruptcy court’s denial of their three motions: (1) Motion to Compel Arbitration and Stay Adversary Proceeding, (2) Motion for Relief from the Automatic Stay, and (3) Motion to Vacate Order re Automatic Stay. Ackerman and Eber entered into a contract for the construction and operation of Eber’s hair salon. Eber breached the contract, and Ackerman initiated arbitration proceedings, seeking damages for breach of contract, fraud, and breach of fiduciary duty. Eber filed a Chapter 7 bankruptcy less than a month later, automatically staying the arbitration proceedings. The bankruptcy court discharged Appellants’ claims. Appellants argued that their underlying state law claims involved arbitratable non-core matters, and that therefore the bankruptcy court could only deny the right to arbitration if it found that “enforcing the parties’ arbitration agreement would inherently conflict with the Bankruptcy Code.” According to Appellants, the bankruptcy court did not make such a finding. The district court noted that the bankruptcy court’s ruling implicitly recognized that establishing liability under 11 U.S.C. §§ 523(a)(2), (4), and (6) “is tantamount to establishing non-dischargeability,” a core bankruptcy issue. Accordingly, the district court found that the bankruptcy court made the factual finding that “arbitration of dischargeability inherently conflicts with the goals of a centralized resolution of bankruptcy issues, preventing piecemeal litigation, and the power of a bankruptcy court to enforce its own orders.” On appeal, the Ninth Circuit found no evidence that Congress intended to create an exception in the Bankruptcy Code for the Federal Arbitration Act, and deferred to the bankruptcy’s finding that arbitration conflicted with a core bankruptcy proceeding. AFFIRMED.