Bankruptcy courts have historically been opposed to the use of arbitration in settling controversies in which a trustee was involved unless both parties agreed. The distrust of the bankruptcy system stemmed from a string of Supreme Court decisions that refused to compel arbitration. Following the introduction of the Federal Arbitration Act in 1925, there has been a slow move towards embracing arbitration by the bankruptcy courts in non-core matters. However, there has been pushback by the bankruptcy courts in enforcing arbitration clauses in core matters that are fundamental to a bankruptcy case.
In determining whether to enforce an arbitration clause in a bankruptcy case, a court must balance the competing interests of the Federal Arbitration Act and the United States Bankruptcy Code. Title 11 of the United States Code, also known as the United States Bankruptcy Code (the “Bankruptcy Code”), is the source of bankruptcy law in the United States. This balancing act includes an analysis of whether the statutes are directly in conflict with one another. The first step is to determine whether the dispute is core or non-core. Bankruptcy courts generally deny enforcement of arbitration provisions in core matters, but the procedure for doing so varies by jurisdiction. The courts largely agree that bankruptcy courts do not have discretion to deny enforcement of an arbitration agreement in non-core matters.