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Summary of In re Magna Entertainment Corp: Arbitration Provisions May Be Waived If Not Timely Raised

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On January 30, 2012, Judge Mary F. Walrath, issued an opinion declining to stay a claim objection in favor of arbitration in In re Magna Entertainment Corp., 2012 WL 272847, Bkrtcy.D.Del., January 30, 2012 (NO. 09-10720 MFW).

The dispute was based on a claim arising as a result of a limited liability company agreement between a non-debtor affiliate and a third party to develop a shopping center on real property owned by the debtor. Pursuant to the terms of the LLC agreement, the debtor was to enter into a ground lease with the LLC. The non-debtor affiliate terminated the LLC agreement because certain conditions were not timely satisfied by the third party. The third party contested the termination and filed a claim in the debtor’s bankruptcy case in excess of $21 million; even though the debtor was not a party to LLC agreement.

In response to the debtor’s objection to its claim, the claimant argued that, pursuant to the LLC agreement, its claim was subject to arbitration and that a decision by the bankruptcy court not to stay the claim objection in favor of arbitration would be immediately appealable under the Federal Arbitration Act (FAA); thereby divesting the bankruptcy court of jurisdiction to decide the claim objection.

The Court held that it would not be divested of jurisdiction because (1) the FAA was not applicable because the debtor was not a party to the LLC agreement with the arbitration clause; and (2) even if the debtor had been a party to the agreement, the claimant had waived its right to insist that its claim be arbitrated. In reaching the conclusion regarding waiver, Judge Walrath relied on the Third Circuit’s six nonexclusive factors in Gray Holdco, Inc. v. Cassady, 654 F.3d 444, 451 (3d Cir. 2011) (citing Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912, 925 (3d Cir. 1992)) to find that the debtor would be prejudice if compelled to arbitrate. In weighing the factors, the court focused on the claimant’s significant delay in raising the arbitration issue and the extensive discovery and trial preparation that the parties had completed by the time the claimant raised the issue, in addition to the fact that the claimant had previously argued the contrary position that it was not required to arbitrate the claim.

A copy of the bankruptcy court’s opinion is available here.

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