The District Court held that while there is a clear “federal policy favoring arbitration”, Moses H Cone Mem’l Hasp. v. Mercury Canst. Corp., 460 U.S. 1, 24-25 (1983), “[t]he tension that exists between the policy favoring enforceability of agreements to arbitrate and the paramount interest of the bankruptcy courts in resolving bankruptcy matters is well recognized, see e.g. In re National Gypsum, 118 F.3d 1056, 1065-1070 (5th Cir. 1997). Although non-core matters are generally arbitrated, the District Court found no requirement that matters be sent to arbitration. In the present case, Moses’ first cause of action was that the underlying debt was void and the second was for damages resulting from collecting such an illegal loan. The claim for damages was “therefore inextricably intertwined” with the assertion that the loan was void and proper for the bankruptcy court to adjudicate, which all parties admitted was a core proceeding. Arbitration of the damages claim, but not the claim validity, “would frustrate, rather than facilitate, the efficiency favored by arbitration and could potentially lead to inconsistent results.” Accordingly, due to the policy of the bankruptcy code of considering both claims together, the decision by the bankruptcy court to enter findings of fact and conclusions of law on the damages claim was not contrary to law.
This case has been appealed to the 4th Circuit.
It is also worth noting that when originally decided by the bankruptcy court, the Chapter 13 plan was not yet confirmed. As such, this case does not address the issue that “provisions of a confirmed plan bind . . . any creditor . . . .” Section 1141(a) essentially ‘create[s] and establishes the new relationships that a debtor has with its creditors after filing for bankruptcy relief.’” In re Weidel, 208 B.R. 848 (Bankr. M.D.N.C. 1997). See also, In re Crittendon, 2006 Bankr. LEXIS 2172 (Bankr. M.D.N.C. Sept. 1, 2006)(“The confirmed chapter 13 plan constitutes a new agreement between the debtor and the creditors…”)
Absent a statutory prohibition on modifying the rights of the creditor, as, for example, 11 U.S.C. § 1322(b)(2) protects creditors secured by the mortgage against the debtor’s residence, or a provision in the Confirmation Order (and 9 U.S.C. § 2 would explicitly require it to be such provision in writing), it is unclear how the supplanted pre-petition contract, including any mandatory arbitration provisions, is controlling.
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