Arbitration Denied in Bankruptcy Priority Fight

“[T]he bankruptcy court did not abuse its discretion in denying [the debtor’s former employees’] motion to compel arbitration” when the dispute turned on the relative priority of their claims, held the U.S. Court of Appeals for the Second Circuit on Oct. 6, 2016. In re Lehman Bros. Holdings Inc., 2016 WL 5853265, *2 (2d Cir. Oct. 6, 2016). The Securities Investor Protection Act (SIPA) trustee in the Lehman Brothers, Inc.(LBI) liquidation had asked the bankruptcy court to subordinate the employees’ claims under their compensation agreements, but the employees sought to enforce the arbitration clause in those agreements to avoid litigating in the bankruptcy court. According to the Second Circuit, because the priority dispute was a “core proceeding,” arbitration “would have ‘seriously jeopardize[d]’ the objectives of the Bankruptcy Code.” Id., citing MBNA Am. Bank v. Hill, 436 F.3d 104, 108 (2d Cir. 2006). In this article, of counsel Michael Cook discusses the Second Circuit's decision to deny a motion to compel arbitration in bankruptcy court.