In Woodbridge Wind-Down Entity v. Monsoon Blockchain Storage (In re Woodbridge Group of Companies), Adv. Proc. No. 19-50102 (BLS), 2020 Bankr. Lexis 1944 (Bankr. D. Del. July 15, 2020), the U.S. Bankruptcy Court for the District of Delaware addressed the issue of when an arbitration provision should be enforced in connection with post-petition contracts entered into by and between a debtor and a counterparty.

In this case, the debtors, post-petition (actually, post-confirmation but prior to the effective date of their plan), entered into a certain asset purchase agreement (the APA) with Monsoon Blockchain Storage Inc. for the purchase of certain real property owned by the debtors. Prior to the effective date of the debtors’ plan, the debtors alleged that the defendant breached the APA by failing to close and consummate the sale. As a result of the defendant’s asserted breaches of the APA, the debtors filed a complaint in the bankruptcy court seeking a declaration that the deposit previously paid by the defendant was now property of the debtors’ estates and sought to compel the defendant to remit the balance of the contractual purchase price.

In response to the filing of the complaint, the defendant filed a motion to dismiss, alleging, among other things, that the court lacked jurisdiction to adjudicate this dispute due to an arbitration provision that was enacted under state law. In particular, the defendant alleged that pursuant to paragraph 22(B) of the California Residential Purchase Agreement and Joint Escrow Instructions (paragraph 22(B)), which the defendant included in its offer to the debtors, the matter had to be arbitrated. In the alternative, the defendant asserted that the court should transfer venue of the dispute to the U.S. Bankruptcy Court for the Central District of California, the closest venue to where the real property was located.

In response, the debtors asserted that a certain addendum that the parties had entered into in connection with the APA expressly overruled Paragraph 22(B). In particular, the addendum provided that:

“The Bankruptcy Court shall have sole and exclusive jurisdiction to interpret and enforce the terms of the [APA] and the parties hereby consent and submit to exclusive jurisdiction.” Woodbridge Group of Companies, 2020 Bankr. LEXIS 1944, at *6.

In addressing the motion to dismiss and, in particular, the enforceability of the arbitration position, the court ruled that “deciding whether arbitration is required is a two-step process: in the first step, the court determines ‘whether there is an agreement to arbitrate,’ and then in the second step, the court decides whether ‘the dispute at issue falls within the scope of the agreement,’” (citing Jaludi v. Citigroup, 933 F.3d 246, 254 (3d Cir. 2019) (quoting Certain Underwriters at Lloyd’s London, 584 F.3d 513, 523 (3d Cir. 2009))).

In analyzing these steps, the Woodbridge court found that paragraph 22(B) did, in fact, provide for an arbitration of disputes arising out of the APA. Nevertheless, the court also found that the addendum represented the parties’ actual intent and found that the express language in the addendum controlled. Indeed, the addendum expressly provided that “to the extent that this addendum conflicts with the [APA], the terms of the addendum should control.” Furthermore, the addendum also provided that “[t]he Bankruptcy Court shall have the sole and exclusive jurisdiction to interpret and enforce the terms of the agreement and the parties hereby consent and submit to such exclusive jurisdiction.” In light of such language (which the court found to be unambiguous), the court found that “the parties did not agree to arbitrate claims arising out of the [APA].” In further support of its decision, the court also opined that “the claims at issue here all arise out of the interpretation and enforcement of the [APA], which the parties [by virtue of the addendum] agreed to submit to the sole and exclusive jurisdiction of the Bankruptcy Court.”

The court also rejected the defendant’s contention that the court lacked jurisdiction over the dispute because the issues arose post-confirmation. In rejecting this contention, the court found that it did have jurisdiction over this dispute as these claims were filed after the confirmation order was entered but prior to the occurrence of the plan’s effective date. The court also found that a sale motion is a core proceeding and “likewise, matters seeking to interpret or enforce orders issued in core proceedings are also core proceedings within a bankruptcy court’s jurisdiction.”

Finally, the court also found that, even assuming that the parties agreed to arbitrate the dispute at issue, the dispute at issue would not fall within the scope of agreement as the arbitration clause specifically excluded from arbitration “any matter that is within the jurisdiction” of the bankruptcy court. As this dispute fell within the jurisdiction of the bankruptcy court, the Woodbridge court held that the arbitration clause was unenforceable.

The court also rejected the defendant’s motion to transfer venue. In making this determination, the court did not rely solely on the forum selection clause contained in the addendum. Rather, the court, while acknowledging that a forum selection clause is a “significant factor” in the court’s analysis in deciding to transfer venue, used the 12-factor test established in DHP Holdings II v. The Home Depot (In re DHP Holdings II), 435 B. R. 264, 269 (Bankr. D. Del. 2010).

As noted by the Woodbridge court, this 12-factor test includes:

“(1) plaintiff’s choice of forum, (2) defendant’s forum preference, (3) whether the claim arose elsewhere, (4) location of books and records and/or the possibility of viewing the premises if applicable, (5) the convenience of the parties as indicated by their relative physical and financial condition, (6) the convenience of witnesses—but only to the extent that the witnesses may actually be unavailable for trial in one of the fora, (7) the enforceability of the judgment, (8) practical considerations that would make the trial easy, expeditious or inexpensive, (9) the relative administrative difficulty in the two fora resulting from congestion of the court’s dockets, (10) the public policies of the fora, (11) the familiarity of the judge with applicable state law, and (12) the local interest in decided local controversies at home.” - Woodbridge, 2020 Bankr. LEXIS 1944, at *11-12 (citing DHP Holdings, 435 B.R. at 269 (quoting Hechinger Liquidation, Trust v. Fox (In re Hechinger Investment Company of Delaware), 296 B.R. 323, 325-26 (Bankr. D. Del. 2013)).

After analyzing these factors, the Woodbridge court found that “consideration of the venue transfer factors” weighed against transfer of venue and, thus, denied the motion. Indeed, the court could only find one factor, the third factor, which supported the venue transfer and that the rest of the factors either supported the court’s retention of jurisdiction over the adversary proceeding or were inapplicable.

In analyzing the individual factors, the court noted that factors, 1, 2, 5, 8, 10 and 12 all weighed against a transfer of venue. With respect to factors 1, 2 and 5, the court found that these factors all weighed against a venue transfer, particularly in light of the fact that by entering into the addendum, the “parties have contractually agreed to the jurisdiction of the bankruptcy court.” The court also found that factor 8 also weighed in favor of denying transfer of venue, especially given that the court was “already familiar with th[e] matter and the Chapter 11 case” and, as such, “it further[ed] judicial economy for the court to retain th[e] adversary proceeding.”

Similarly, the court also found that factor 10 supported the court’s retention of the adversary proceeding. According to the court, “[t]he policy of this forum ‘favors centralization of bankruptcy matters and the district in which the underlying bankruptcy case is pending is presumed to be the appropriate district for hearing and determining a proceeding in bankruptcy.’” Id. (quoting DHP Holdings, 435 B.R. at 274 (citing Oglebay Norton v. Port (In re Onco Inv.), 320 B.R. 577, 581 (Bankr. D. Del. 2005)). Finally, the court also found that factor 12 supported the court’s retention of the adversary proceeding as “there is an interest in keeping matters concerning Section 363 sales before the bankruptcy court that authorized the sale. These factors weigh against transfer,” (quoting DHP Holdings, 435 B.R. at 275 (quoting Gulf States Exploration v. Manville Forest Products (In re Manville Forest Products), 896 F. 2d 1384, 1391 (2d Cir. 1990)).

The court’s analysis in Woodbridge should be considered by parties when entering into section 363 sales and, in light of the holding of this case, parties should anticipate that any disputes regarding the particular asset purchase agreement are, in all likelihood, going to be within the jurisdiction of the presiding court.

Lawrence J. Kotler is co-chair of the bankruptcy and fiduciary representations division of Duane Morris’ business reorganization and financial restructuring practice group. He represents Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors’ committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.

Elisa Hyder practices in the area of business reorganization and financial restructuring. She is a 2019 graduate of Temple University Beasley School of Law, where she was a note/comment editor of the Temple Law Review, and a graduate of the University of Pennsylvania.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.