HBLR Online is a portal to timely pieces about recent developments in business law. As an important forum for opinion and scholarship, HBLR Online is designed to be a cutting edge guide to developments in the field of business law. HBLR Online also provides opportunities for student members to develop their own editing and writing skills. Accordingly, HBLR Online will contain pieces by students as well as outside contributors.
Benjamin Iverson, Jared A. Ellias, and Mark Roe†
In this Article, we present the first effort to use an empirical approach to bolster the capacity of the bankruptcy system during a national crisis—here, the COVID-19 crisis. We provide two analyses, one using data from May 2020, very early on in the crisis, and another using data from September 2020, closer to the publication of this Article. Our analysis is based on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a rise in bankruptcy filings. If this historical trend continues to hold, the May 2020 unemployment rate of 13.3% would have predicted a substantial increase in bankruptcy filings and the lower September 2020 level would still predict noticeably increased filings. Clearly, governmental assistance, the unique features of the COVID-19 pandemic, the possibility of a quick economic recovery, and judicial triage are likely to reduce the volume of bankruptcies and increase the courts’ capacity to handle those that occur. It is also plausible that the recent unemployment spike will be short-lived—indeed, by September 2020, the rate had declined to 7.9%. Further, medical solutions to the underlying pandemic—such as the recent initial distribution of an effective vaccine—would further reduce the pressure on the bankruptcy system. Yet, even assuming that the worst-case scenarios are averted, our analysis suggests that a substantial investment in the bankruptcy system resources should be considered, even if only on a standby basis.
Our model assumes that Congress would like to have enough bankruptcy judges so that the average judge would not work more than the last bankruptcy peak in 2010, when the bankruptcy system was pressured and judges worked 50 hour weeks on cases on average. Because the bankruptcy system before the pandemic was not stretched as severely as it was prior to the 2010 financial crisis, it has some extra capacity to handle extra cases.
To keep judicial workload at 2010 levels, the bankruptcy system would need at least 50 additional temporary judges based on the number of unemployed in May 2020 who did not see themselves as temporarily unemployed. In the worst-case scenario, in which none of the May 2020 unemployed returned to work quickly, the bankruptcy system would have needed as many as 243 temporary judges—which would have represented a considerable expansion, even if only temporary, of the bankruptcy judiciary. The lower September 2020 unemployment rate points to a need for 20 temporary judges. Because of this model’s sensitivity to unemployment data, it reports a wide range of estimations for additional bankruptcy judgeships.
We discovered a considerable administrative lag of about a year or more for appointing additional bankruptcy judges. Therefore, given that economic crises can unfurl much faster, embedding extra capacity in the bankruptcy judicial system in normal economic times is a prudent precaution to prepare for unexpected stress of additional bankruptcy petitions.
† BYU Marriott School of Business; University of California, Hastings College of the Law; and Harvard Law School. The authors thank Jacob Barrera, Denise Han, Jessica Ljustina, Spencer Kau, Victor Mungary, Julia Staudinger, and Sara Zokaei for research assistance. We earlier, at the very beginning of the COVID-19 crisis, wrote a report on the potential pressure on bankruptcy judicial capacity due to the Covid-19 crisis, on which this document is based. That report was endorsed by a group of bankruptcy academics and then forwarded to Congress. For recent Congressional action related to our report, see infra note 8.
The recent unanimous decision of the United States Supreme Court (“Supreme Court” or “Court”) in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC (“Outokumpu”) resolves a relatively straightforward question: whether a non-signatory to an international commercial arbitration agreement can enforce it on the basis of the equitable estoppel doctrine. The United States Courts of Appeals for the Eleventh and Ninth Circuits had categorically ruled out the availability of equitable estoppel in this context. In contrast, the First and Fourth Circuits had applied the doctrine to enforce international commercial arbitration agreements by or against non-signatories. Answering the question in the affirmative and reversing the Eleventh Circuit, the Supreme Court has now resolved this split among the circuit courts. Its decision also brings much-needed clarity and predictability to the enforcement of international commercial arbitration agreements in the United States. However, in its narrow judgment the Supreme Court left unresolved two related and equally contentious questions: first, whether international commercial arbitration agreements must be signed to be valid and enforceable in the United States, and second, how the equitable estoppel doctrine is to be formulated in this context and whether state or federal law governs its application.
A brief introduction to international commercial arbitration in the United States will set the stage for further discussion of Outokumpu and these lingering questions. Congress enacted the Federal Arbitration Act (“FAA” or “Act”) to govern the enforcement of arbitration agreements falling within its jurisdiction. Chapter 1 of the Act governs domestic arbitration agreements, while Chapter 2 incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention” or “Convention”), which governs the enforcement of international commercial arbitration agreements and awards. Chapter 1 of the FAA also applies to actions and proceedings brought under Chapter 2 to the extent that Chapter 1 is not “in conflict” with Chapter 2 or the New York Convention.
The Supreme Court has consistently interpreted the FAA as embodying a “liberal federal policy favoring arbitration agreements,” and as creating “a body of federal substantive law” that requires arbitration agreements to be placed “upon the same footing as other contracts.” Moreover, “[t]he goal of the [New York] Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and . . . enforced in the signatory countries.” In line with this pro-arbitration approach, the Supreme Court in Outokumpu held that non-signatories can rely on the equitable estoppel doctrine to enforce international commercial arbitration agreements under the Convention. However, two related questions that have long been the subject of contradictory circuit court decisions remain unresolved in the Court’s opinion.
The first question is antecedent to the equitable estoppel issue and relates to the “in writing” requirement of Article II(1) of the New York Convention. Article II(1) provides that the “[c]ontracting State shall recognize an [arbitration] agreement in writing.” The term “in writing” is in turn defined in Article II(2) as including “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Circuit courts have not consistently interpreted the Convention’s “in writing” requirement. The Second, Third, Ninth, and Eleventh Circuits have found that the Convention requires an actual signature for an international commercial arbitration agreement to be valid. The First, Fourth, and Fifth Circuits, in contrast, have not insisted on a strict signature requirement and have enforced international commercial arbitration agreements on the basis of various contract and agency principles. The Supreme Court’s decision in Outokumpu may be interpreted as effectively siding with the latter circuit courts on this question. After all, how can courts continue to impose a strict signature requirement when the Supreme Court has allowed non-signatories to rely on equitable estoppel under the Convention? Nonetheless, the Court explicitly declined to decide “whether Article II(2) requires a signed agreement.”
The second question, which the Supreme Court left to the Eleventh Circuit to determine on remand, arises from the Court’s holding that non-signatories can enforce international commercial arbitration agreements on the basis of equitable estoppel. This question relates to the specific formulation of the equitable estoppel doctrine in this context and to “which body of law” governs its application––federal or state law. In her concurring opinion, Justice Sotomayor noted the varied formulations of the doctrine across jurisdictions, but she would leave lower courts to determine the matter “on a case-by-case basis.” The general understanding has been that courts are to apply “ordinary state law principles that govern the formation of contracts” to the enforcement of domestic arbitration agreements under Chapter 1 of the FAA. However, circuit courts have divided as to whether federal common law or state law governs the application of equitable estoppel in the international context. The First, Second, and Fourth Circuits have applied federal law to address this question, while the Fifth and Eight Circuits have held that state law governs the enforcement of international arbitration agreements on the basis of doctrines such as equitable estoppel. The Supreme Court’s opinion in Outokumpu is ambiguous on this question.
This Note will next summarize the facts of the Outokumpu case and the lower courts’ judgments. It will then turn to the opinion of the Supreme Court and discuss both the questions the Court decided and the questions that it left unanswered or ambiguous.
† Assistant Professor, University of Alberta Faculty of Law