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In re Wirecomm Wireless

August 1, 2008

IN RE WIRECOMM WIRELESS, INC., DEBTOR,
NEW CINGULAR WIRELESS SERVICES, INC., APPELLANT,
v.
MICHAEL F. BURKART, AS TRUSTEE, APPELLEE.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

In September 2005, New Cingular Wireless Services, Inc. ("Appellant") and Wire Comm Wireless, Inc. ("Debtor") entered arbitration over unpaid commissions and residuals. Four days before the scheduled arbitration hearing, Debtor filed for Chapter 11 bankruptcy protection. Thereafter, by initiating an adversary proceeding against Appellant, the appointed bankruptcy trustee, Michael F. Burkart ("Appellee") removed the claims from arbitration to the bankruptcy court. The bankruptcy court denied Appellant's Motion to Compel Arbitration. Appellant appealed that decision and moved the bankruptcy court for an order staying the adversary proceeding pending appeal. The bankruptcy court also denied Appellant's stay request.

Presently before the Court is Appellant's Motion to Stay Pending Appeal of its Motion to Compel Arbitration.*fn1 For the reasons set forth below, the bankruptcy court's decision to deny Appellant's Motion to Stay Pending Appeal is reversed. The adversary proceeding is consequently stayed pending resolution of Appellant's request that arbitration be compelled.

BACKGROUND*fn2

Debtor was a dealer of Appellant's telecommunication products. In September 2005, Debtor commenced arbitration proceedings against Appellant, seeking to recover some $1,225,000.00 in unpaid commissions. Appellant counterclaimed, arguing that it was entitled to recover overpayment of commissions and residuals dating back to 2004. Debtor's counsel filed no response to Appellant's counterclaim, claiming he did not realize the arbitration rules required him to do so. Debtor subsequently retained new counsel and moved for leave to file a reply. The arbitrator denied that motion and, on December 8, 2006, Debtor filed for bankruptcy. The arbitration hearing, scheduled to begin on December 12, was suspended because of the bankruptcy. On February 6, 2007, Appellant filed a proof of claim in the amount of $2,949,703.17.

As indicated above, Appellee's initiation of an adversary proceeding against Appellant effectively removed the claims from arbitration to the bankruptcy court. On September 17, 2007, Appellant moved to compel arbitration. At the October 16, 2007 hearing, the bankruptcy court denied that motion, finding that it had discretion to deny arbitration of the state law claims because it had "core" jurisdiction over the adversary proceeding. The court also stated it was not required to abstain in favor of pending arbitration because in arbitration "the trier of fact has to be hired by the parties," (De Liberty Decl. Ex. D, 31:19-20), and the trustee's assets were "basically $13,000 plus a cause of action" (De Liberty Decl. Ex. D 32:18-19). According to the bankruptcy court, it was "simply not persuaded that the Federal Arbitration Act operates as an extra exception that, de facto, trumps 28 U.S.C. § 1334 [which grants jurisdiction to bankruptcy courts and district courts to hear bankruptcy cases]." (De Liberty Decl. Ex. D, 34:1-3.)

"[T]o require arbitration of a proof of claim after it is filed and the trustee's objection, the counterclaim to that proof of claim, really runs completely counter to the whole structure and purpose of the Bankruptcy Code." (De Liberty Decl. Ex. D, 34:4-8.)

On December 11, 2007, Appellant filed a motion asking the bankruptcy court to stay the adversary proceeding pending appeal. The bankruptcy court heard and denied that motion on January 10, 2008. The court concluded the appeal did not have enough merit to justify a stay because the order denying arbitration was interlocutory, and the district court had not yet granted leave to appeal. This Court has since granted leave to appeal the bankruptcy court's decision denying Appellant's Motion to Compel Arbitration under Federal Rule of Bankruptcy Procedure 8005.*fn3

STANDARD

Factors a court must consider when determining whether to issue a stay pending appeal are "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Hilton v. Braunskill, 481 U.S. 770, 776 (1987). Essentially, the party seeking the stay must demonstrate that the injury it would sustain if the stay did not issue outweighs the harm the stay would cause the party opposing the stay. Autoskill Inc. v. Nat'l Educ. Support Sys., Inc., 994 F.2d 1476, 1498 (10th Cir. 1993). Where the moving party has established irreparable harm to the movant, absence of harm to the opposing party, and lack of injury to the public interest, the "likelihood of success" requirement is relaxed somewhat. Lundgrin v. Claytor, 619 F.2d 61, 63 (10th Cir. 1980).

A bankruptcy court's findings of fact are reviewed under a clearly erroneous standard, while conclusions of law are reviewed de novo. In re Jan Weilert RV, Inc., 315 F.3d 1192, 1196 (9th Cir. 2003). "When a bankruptcy court has ruled on the issue of a stay of its order pending appeal, the district court, sitting as an appellate court, reviews that decision for abuse of discretion." In re Irwin, 338 B.R. 839, 844 (Bankr. E.D. Cal. 2006) (quoting Universal Life Church v. United States, 191 B.R. 433, 444 (E.D. Cal. 1995)). Abuse of discretion occurs "when the judicial action is arbitrary, fanciful or unreasonable." Id. (citing In re Blackwell, 162 B.R. 117, 119 (E.D. Pa. 1993)). "If reasonable men could differ as to the propriety of the action taken by the trial court, then it cannot be said that the trial court abused its discretion." Id.

ANALYSIS

1. Presence of Substantial Question Justifying Stay

The Ninth Circuit has never squarely addressed whether appealing the denial of a motion to compel arbitration requires a stay of core proceedings in a bankruptcy court. In Britton v. Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir. 1991), the Ninth Circuit held that the appeal of the denial of a motion to compel arbitration does not divest a trial court from proceeding with the merits of the case. In Britton, however, the Ninth Circuit found the defendant-appellant's motion to compel arbitration "frivolous," serving merely "to stall a trial." Id. The defendant-appellant had moved to compel arbitration in an attempt to avoid producing documents during discovery. Id. at 1407-09. By the time the case reached the Ninth Circuit, the district judge had already entered a default judgment against the defendant-appellant. Id. at 1409. In permitting the district court to continue ...


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