Delaware Bankruptcy Judge Declines to Order Arbitration of Key Pension Claims

In a memorandum opinion and order issued on March 27, 2024, in In re Yellow Corporation, et al, Judge Craig T Goldblatt denied motions filed by multiemployer pension funds to arbitrate debtors’ objections to pension withdrawal liability claims in the United States Bankruptcy Court for the District of Delaware.

The debtors filed chapter 11 bankruptcy petitions in August 2023 in the United States Bankruptcy Court for the District of Delaware.  Prior to bankruptcy, the debtors participated in multiemployer pension plans.  Those pension plans are regulated by the Multiemployer Pension Plan Amendments Act of 1980 (‘MPPAA[), which was enacted to address the problem that occurred when an employer withdrew participation from a multiemployer pension plan, causing other participating employers to exit to avoid having to pay for the unfunded benefits of the companies that exit the plan. 

Pension funds filed proofs of claim for withdrawal liability under the MPPAA.  If the employer disputes liability, it must raise its objections to the pension fund, but if the parties are unable to resolve the matter, the MPPAA provides that either the employer or the pension fund may initiate arbitration.  The pension funds filed motions to ‘compel arbitration of withdrawal liability disputes,’ or, alternatively, to grant relief from the automatic stay to permit arbitration against the debtors. The debtors objected, arguing that the bankruptcy court should decide whether to allow the claims against the bankruptcy estates.  The largest holder of publicly traded stock of Yellow Corp. also objected to the motion, asserting that the value of its equity holdings would be determined by whether or not the claims were allowed.  The Pension Benefit Guaranty Corporation (‘PBGC’) filed a motion contending that the Administrative Procedure Act (‘APA’) requires the bankruptcy court to accept as valid regulation under which the funds calculated the withdrawal liability, and that the debtors were essentially attempting to challenge the regulation in bankruptcy court where a lawsuit in federal court is the only way to challenge agency regulations.

Judge Goldblatt viewed the funds’ request as a motion for relief from the stay, and found ‘no suggestion in the language of the [MPPAA],’ nor in the FAA, that allowed a plan sponsor to ‘obtain a court order directing the employer to commence an arbitration,’ and no basis under the Bankruptcy Code for the court to compel arbitration.  The court then considered ‘whether the MPPAA’s directive that disputes over withdrawal liability be subject to arbitration imposes a mandatory obligation to grant such relief.’

The court found that the MPPAA does not require granting the motions and permit the withdrawal liability claims to be arbitrated, analyzing the apparent conflict between the MPPAA and the Bankruptcy Code.  The MPPAA states that ‘[a]ny dispute between an employer and the plan sponsor of a multiemployer plan . . . shall be resolved through arbitration,’ but § 502(b) of the Bankruptcy Code states that when an objection is filed to a proof of claim, the ‘court . . . shall determine the amount of such claim . . . and shall allow such claim in such amount.’  Relying on precedent reconciling the FAA and the Code, the court found that it must ‘[reconcile] the Bankruptcy Code’s dispute resolution mechanisms and a statutory requirement to arbitrate.’

The court found that Third Circuit precedents, while not addressing the particular issue at hand, were instructive.  The court held that, given the ‘strong policy in favor of arbitration,’ one must find an ‘inherent conflict between arbitration and another federal statute’s underlying purpose’ to decline to enforce an arbitration clause.  However, while the MPPAA’s arbitration provision created a strong presumption in favor of granting stay relief to permit arbitration, that presumption may still be overcome ‘in appropriate circumstances.’

The court concluded that ‘the unusual circumstances of this case’ weighed heavily in favor of allowing the court to oversee the claims allowance, including that an arbitral process could potentially exclude other parties in interest from participating,  that the dispute was one of the most important issues in the case, and that there was a risk of delay associated with arbitration.  Judge Goldblatt also considered how an arbitration decision would be reviewable by a district court the same way as a bankruptcy court claims determination would be reviewed, eliminating the danger that exists in many cases in which an arbitrator’s decision is unreviewable due to narrow bases under which arbitral awards are subject to judicial review.

Finally, the court did not find persuasive the PBGC’s argument that the APA bars a bankruptcy court from considering the validity of agency regulations, noting that this argument instead weighed in favor of denying the stay relief motion.  While the question need not be decided at this stage in litigation, the PBGC may ‘participate as a party in interest in the claims allowance process for the purpose of defending its regulation.’

The court ultimately denied the pension funds’ motions for relief from the automatic stay and the PBGC’s motion for a determination that the court may not consider the validity of its regulation.  The withdrawal liability claims will remain in bankruptcy court and Judge Goldblatt, rather than an arbitrator, will decide these key claims disputes.

Judge Goldblatt’s opinion in Yellow Corp. illustrates an instance in which an arbitration clause—often respected and enforced by courts—may not be given effect in specific circumstances.  The decision departs from courts’ longstanding tendency to enforce arbitration clauses, and rests on the court’s finding that the importance of the resolution of the claim to the larger case outcome and the value of the bankruptcy process counsel in favor of keeping such claims in bankruptcy court.  The court’s opinion in In re Yellow Corporation illustrates a willingness for the bankruptcy court to apply a thoughtful case-by-case analysis in considering whether to keep a dispute even where a competing federal statute mandating arbitration exists.

Lisa M. Schweitzer is a Partner at Cleary Gottlieb (New York).

 Emily P. King is an Associate at Cleary Gottlieb (New York).