In general, a bankruptcy court has original and exclusive jurisdiction of chapter 11 bankruptcy cases. However, problems arise when a prepetition contract contains an arbitration clause, and a court must decide if it has discretion to enforce arbitration of a core claim. The statutes that play essential (but competing) roles in a court's analysis are the Federal Arbitration Act ("FAA") and the United States Bankruptcy Code (the "Bankruptcy Code"). In sum, "bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach toward dispute resolution."
In these cases, a bankruptcy court must determine if there are core claims and if it has discretion to enforce arbitration of such claims. Core claims "stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process;" thus, courts have a stronger interest in refusing to enforce arbitration. However, without any clear guidance from case law or the Bankruptcy Code, courts have split as to whether they have discretion to enforce arbitration of core claims.
This memorandum discusses the applicable considerations in determining whether a core claim must be arbitrated if a prepetition contract contains an arbitration clause. Part I discusses the underlying tension between the FAA and the Bankruptcy Code. Part II explains the key distinctions between core and noncore claims. Part III analyzes the split among bankruptcy courts regarding the discretion a court has (or does not have) to enforce arbitration of a core claim.