The Bottom Line
The Third Circuit, in a nonprecedential opinion in FBI Wind Down, Inc. Liquidating Trust v. Heritage Home Group, LLC (In re FBI Wind Down Inc.), Case No. 17-2315 (3d Cir. July 27, 2018), recently held that the bankruptcy court retained jurisdiction over the parties' dispute that centered on the definition of terms in a court-approved asset purchase agreement because the claims fell outside the scope of an arbitration provision in the agreement.
What Happened?
The Debtors, plaintiff-appellee FBI Wind Down, Inc., sold substantially all of its assets to Heritage Home Group, the defendant-appellants, under an asset purchase agreement (the APA) approved by the bankruptcy court. The APA allowed the Debtors to retain "cash and cash equivalents" that would be incurred before the actual sale but would not be recognized by the debtor's cash management systems until after the sale had closed. To do so, an adjustment mechanism was established under an amendment to the APA so that the aggregate purchase price would remain $280 million. To maintain that fixed price, the amendment also established an adjustment mechanism for the post-closing calculation of accounts payable obligations. The amendment contained two identical arbitration provisions that applied to the sections on cash and cash equivalents and accounts payable obligations. Under the arbitration provision, the parties were to "submit to a mutually acceptable 'big four' accounting firm for resolution any disputed items in accordance with the procedures ... provided by such accounting firm." (emphasis added). Pursuant to the bankruptcy court order approving the sale and the terms of the APA, the bankruptcy court retained jurisdiction to inter alia "interpret, implement, and enforce the terms and provisions of this Order and the [APA], all amendments thereto ... and to adjudicate if necessary, any and all disputes concerning or relating in any way to the Sale or Transaction." The parties were unable to resolve post-closing adjustments and the Debtors commenced an adversary proceeding. The crux of the disputes was what constituted "cash and cash equivalents" and "accounts payable obligations" under the APA. Heritage Home Group argued that the definition of those terms was a "disputed item" and thus subject to the arbitration clause. In contrast, the Debtors contended that defining the terms was a matter of contract interpretation and therefore fell under the bankruptcy court's retained jurisdiction. The bankruptcy court agreed with the Debtors and the district court affirmed.
On appeal, the Third Circuit affirmed, finding that the APA and the amendment expressed a clear intent to limit arbitration to disputes about accounting items. The Third Circuit found that, on its face, the arbitration provision was limited by its application to "disputed items" and not "disputes." The Third Circuit agreed with the lower courts that "disputed items" referred to accounting calculations and that the scope of the arbitration provision was limited to disputes over "accounting items." The Third Circuit rejected Heritage Home Group's argument that the plain meaning of "items" includes matters of contract interpretation, finding that such a reading would essentially nullify the section in the APA requiring "any and all claims, actions, causes of action, suits, and proceedings relating to this agreement ... be filed and maintained only in the Bankruptcy Court." The Third Circuit stated that adopting Heritage Home Group's proposed plain meaning would render part of the APA superfluous. Accordingly, it adopted a meaning to give all the terms of the contract their full effect and concluded that "disputed item" excludes "threshold matters of contract interpretation," which could be resolved by the courts under the APA and the amendment. The Third Circuit found that this clear intent to exclude disputes other than accounting items from arbitration was confirmed by the language of the bankruptcy court order approving the sale.
Why This Case Is Interesting
It is not unusual for bankruptcy sale contracts to include provisions for arbitration of disputes, typically around adjustments to purchase price and other accounting matters. It is also well recognized that bankruptcy courts retain jurisdiction to address matters of court-approved contracts. With this opinion, the Third Circuit affirmed the bankruptcy court's ability to retain jurisdiction over disputes, even in the presence of an arbitration clause. While there is a federal policy favoring arbitration agreements (even in bankruptcy), if the particular claims are not subject to an arbitration clause, courts may decline to compel arbitration. For a bankruptcy court to retain jurisdiction where an arbitration clause is present, the parties' intent to exclude a matter from arbitration must be clear, as should the language providing for the bankruptcy court's retention of jurisdiction. The Third Circuit clarified that it did not hold that parties cannot contract to submit matters of contract interpretation to arbitration. But if parties intend to do so, the intent must be clear. If parties want to ensure that a bankruptcy court retains jurisdiction over certain issues, this opinion demonstrates the importance of carefully drafting and reviewing arbitration clauses and those clauses retaining bankruptcy court jurisdiction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
