Congelton, L.L.C. v. Phillips , 403 F.3d 164 ( 2005 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: WHITE MOUNTAIN MINING 
COMPANY, L.L.C.,
Debtor.
JOSEPH C. PHILLIPS,
Plaintiff-Appellee,
and
MOWBRAY, L.L.C.,
Defendant-Appellee,
and
WHITE MOUNTAIN MINING COMPANY,

L.L.C., a West Virginia Limited
Liability Company, No. 04-1586
Reorganized Debtor-Appellee,
v.
CONGELTON, L.L.C.,
Defendant-Appellant,
and
UNITED STATES TRUSTEE,
Party in Interest.
ALLIANCE CONSULTING,
INCORPORATED; ALPHA ENGINEERING
SERVICES; COMER ELECTRIC INC.;
UNSECURED CREDITORS’ COMMITTEE,
Members of Creditors’ Committee:

2 IN RE: WHITE MOUNTAIN MINING COMPANY
Gary Hartsog (Alpha Engineering 
Services); James Billings (H&W
Mine Supply, Incorporated); Larry
Dye (Atlas Belt Service); Carl
Campbell (A&C Equipment &
Supply); Les Monk (Monk Mining
Supply, Incorporated); Cindy 
Whitehead (POHL Corporation);
David A. Walls (Classic Conveyor
Company); Gregory Bailey (Frontier
Management, L.L.C.); Joe Parris
(Atlas Belt Service),
Creditors.

Appeal from the United States District Court
for the Southern District of West Virginia, at Beckley.
David A. Faber, Chief District Judge.
(CA-03-146-5; BK-02-50480; AP-02-99)
Argued: November 30, 2004
Decided: April 1, 2005
Before WIDENER, MICHAEL, and MOTZ, Circuit Judges.
Affirmed by published opinion. Judge Michael wrote the opinion, in
which Judge Widener and Judge Motz joined.
COUNSEL
ARGUED: Eugene D. Gulland, COVINGTON & BURLING, Wash-
ington, D.C., for Appellant. John Joseph Nesius, SPILMAN,
THOMAS & BATTLE, P.L.L.C., Charleston, West Virginia; John
Allen Rollins, LEWIS, GLASSER, CASEY & ROLLINS, P.L.L.C.,
IN RE: WHITE MOUNTAIN MINING COMPANY 3
Charleston, West Virginia, for Appellees. ON BRIEF: Kara L. Cun-
ningham, STEPTOE & JOHNSON, P.L.L.C., Charleston, West Vir-
ginia; Michael St. Patrick Baxter, Dennis B. Auerbach, Michael L.
Rosenthal, COVINGTON & BURLING, Washington, D.C., for
Appellant. Michael G. Sullivan, Columbia, South Carolina, for
Appellees Joseph C. Phillips and Mowbray, L.L.C.
OPINION
MICHAEL, Circuit Judge:
A core issue in an adversary proceeding in this chapter 11 bank-
ruptcy case was also an issue in an international arbitration to be con-
ducted in England. The bankruptcy court denied a motion to compel
arbitration, refused to stay the adversary proceeding, and enjoined
participation in the arbitration, all because the arbitration would have
seriously interfered with the debtor’s efforts to reorganize. We, like
the district court, affirm.
I.
White Mountain Mining Company, L.L.C. (White Mountain), a
limited liability company organized under the laws of Florida, was
engaged in the coal mining business in southern West Virginia. As of
December 31, 2000, White Mountain was owned by Joseph C. Phil-
lips, a West Virginia coal operator, and Arquebuse Trust, a private
trust wholly owned by Phillips. In January 2001 Phillips and Arque-
buse Trust sold a fifty percent interest in White Mountain to White
Trust, a foreign investment trust, for $7.5 million. The parties exe-
cuted three documents in connection with the sale: a Sale Agreement
between the two sellers and the buyer; an Operating Agreement
between White Mountain, White Trust, and Arquebuse Trust to gov-
ern White Mountain’s operations; and a letter dated January 19, 2001
(the January 2001 Letter), signed by White Trust and White Mountain
to clarify certain matters prior to the closing. Following the sale
White Trust assigned its one-half interest in White Mountain to Con-
gelton, L.L.C., a West Virginia limited liability company; Phillips and
Arquebuse Trust assigned their one-half interest in White Mountain
to Mowbray, L.L.C., a company wholly owned by Phillips.
4 IN RE: WHITE MOUNTAIN MINING COMPANY
The Operating Agreement and the Sale Agreement contain arbitra-
tion clauses. The Operating Agreement requires that "each claim, dis-
pute or controversy of whatever nature, arising out of, in connection
with, or in relation to the interpretation, performance or breach of this
Agreement (or any other agreement contemplated by or related to this
Agreement) . . . shall be settled, at the request of any party to this
Agreement, by final and binding arbitration conducted in the City of
London, United Kingdom . . . in accordance with the Commercial
Arbitration Rules then in effect of the International Arbitration Asso-
ciation." J.A. 298-99. The Sale Agreement provides that disputes will
be resolved "in accordance with the Arbitration provisions of the
Operating Agreement as if set out herein." J.A. 262. Phillips is a party
to the Sale Agreement, so he is bound by the arbitration provisions.
The agreements aside, White Mountain — with Phillips in charge
— began operations at an underground mine in May 2001. Unfavor-
able geological conditions, which led to major roof falls, made mining
extremely difficult. The mine was forced to shut down in November
2001. Between January 2001 and June 2002 Phillips advanced over
$10.6 million of his own money to White Mountain, which was used
to meet expenses. Congelton was warned that without "additional
funds [or] outside financing . . . the company [would] have no choice,
but to pursue the protection of federal bankruptcy." J.A. 307.
Congelton took the position that Phillips had misrepresented White
Mountain’s prospects and financial condition in order to induce White
Trust to buy one-half of the company. In addition, Congelton main-
tained that Phillips was obligated under the Sale Agreement to ensure
the adequacy of White Mountain’s capitalization. Thus, Congelton
claimed that Phillips’s advances to White Mountain were contribu-
tions to capital, and Phillips claimed that the advances were loans pur-
suant to a provision in the January 2001 Letter. (The January 2001
Letter provides: "If White Mountain requires additional advances
over the amount that was originally stated in the budgets and profor-
ma’s [sic], Phillips will advance the company the money and will be
repaid for these advances after the company begins operations." J.A.
267.) In November 2001, as a result of this dispute, Congelton and
White Trust served Phillips, Arquebuse Trust, and Mowbray with a
demand for arbitration, to be conducted in London. In their August
13, 2002, statement of claim in the arbitration Congelton and White
IN RE: WHITE MOUNTAIN MINING COMPANY 5
Trust sought, among other forms of relief, "an award declaring that
. . . advances made by Phillips to White Mountain should be treated
as contributions to capital rather than as loans." J.A. 170.
In the meantime, on June 26, 2002, Phillips filed an involuntary
Chapter 11 bankruptcy petition against White Mountain in the United
States Bankruptcy Court for the Southern District of West Virginia.
Two weeks later Phillips initiated an adversary proceeding in bank-
ruptcy court against White Mountain, Mowbray, and Congelton. In
the complaint Phillips sought a determination that White Mountain
was indebted to him in the amount of $10,625,818 "for funds
advanced by way of loans," J.A. 98, and that he was not obligated to
advance additional money to White Mountain pursuant to the January
2001 Letter. In response to the complaint, Congelton moved the bank-
ruptcy court (1) to compel Phillips to submit his claims to arbitration
in London and (2) to stay or dismiss the adversary proceeding. The
bankruptcy court denied Congelton’s motion and enjoined it from
prosecuting the pending arbitration. The court reasoned that because
Phillips’s complaint sought "a determination that [he] is owed money
by the Debtor," it entailed a core proceeding under 28 U.S.C.
§ 157(b)(2)(B). J.A. 179. Moreover, the proceeding presented issues
that were "critical to [White Mountain’s] ability to formulate a Plan
of Reorganization." J.A. 181. The arbitration, the court said, "clearly
[sought] a determination of claims against White Mountain as well as
a determination of the extent of equity holders in the entity." J.A. 181.
Thus, the core proceeding trumped the arbitration, according to the
bankruptcy court.
Congelton appealed the bankruptcy court’s order denying arbitra-
tion to the district court, and both courts denied motions for a stay
pending appeal. The bankruptcy court held a trial in the adversary
proceeding and determined that Phillips’s advance of $10.6 million to
White Mountain was a loan made pursuant to the January 2001 Letter
and that Phillips was not obligated to make further advances. The dis-
trict court affirmed the bankruptcy court. Congelton now appeals to
this court, arguing that (1) the bankruptcy and district courts erred in
failing to enforce the arbitration agreement, (2) the bankruptcy court
was divested of jurisdiction to try the adversary proceeding once Con-
gelton appealed the denial of arbitration to the district court, and (3)
the injunction against the London arbitration was invalid because it
6 IN RE: WHITE MOUNTAIN MINING COMPANY
was overly broad. We review de novo the conclusions of law reached
by the district and bankruptcy courts, and we review the bankruptcy
court’s findings of fact for clear error. Tavenner v. Smoot, 257 F.3d
401, 405-06 (4th Cir. 2001).
II.
Congelton first argues that the bankruptcy and district courts erred
in failing to enforce the international arbitration agreement against
Phillips. There is a strong federal policy in favor of arbitration, see
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24 (1985), and the Arbitration Act calls for the enforcement of valid
arbitration agreements, see 9 U.S.C. § 2. This "federal policy applies
with special force in the field of international commerce," Mitsubishi
Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 614, 631
(1985), because the United States has acceded to the Convention on
Recognition and Enforcement of Foreign Arbitral Awards (the Con-
vention), December 29, 1970, 21 U.S.T. 2517. (The Convention is
implemented in this country through the Arbitration Act, 9 U.S.C.
§ 201 et seq.) Any order to arbitrate in this case would be based on
the Convention because White Trust, one of the parties to the arbitra-
tion agreement, is a foreign investment trust with a Swiss trustee. See
id. § 202.
The Convention provides that "[t]he court of a Contracting State
. . . shall, at the request of one of the parties [to an arbitration agree-
ment], refer the parties to arbitration, unless it finds that the said
agreement is null and void, inoperative, or incapable of being per-
formed." Convention, art. II, para. 3. Congelton argues that the Con-
vention’s plain language requires enforcement of the arbitration
agreement in this case. The issue is much more complicated than
Congelton suggests because the Convention "contemplates exceptions
to arbitrability grounded in domestic law." Mitsubishi, 473 U.S. at
639 n.21 (1985). Thus, Congress may "reserve [certain categories of
claims] for decision by our own courts without contravening this
Nation’s obligations under the Convention." Id. "If Congress did
intend to limit or prohibit waiver of a judicial forum for a particular
claim, such an intent ‘will be deducible from [the statute’s] text or
legislative history,’ or from an inherent conflict between arbitration
and the statute’s underlying purposes." Shearson/Am. Express, Inc. v.
IN RE: WHITE MOUNTAIN MINING COMPANY 7
McMahon, 482 U.S. 220, 227 (1987) (quoting Mitsubishi, 473 U.S.
at 628); see also In re: United States Lines, Inc., 197 F.3d 631, 639
(2d Cir. 1999) (applying McMahon analysis to deny enforcement of
international arbitration agreement in bankruptcy proceeding). After
applying McMahon’s third ("inherent conflict") line of analysis, we
reach the same conclusion as did the Second Circuit: "In the bank-
ruptcy setting, congressional intent to permit a bankruptcy court to
enjoin arbitration is sufficiently clear to override even international
arbitration agreements." United States Lines, 197 F.3d at 639.
The first alternative under McMahon is to ask whether the text of
the bankruptcy laws reveal a congressional intent "to limit or prohibit
waiver [through arbitration agreements] of [the bankruptcy] forum"
for the litigation of core proceedings. See McMahon, 482 U.S. at 227.
"Bankruptcy judges may hear and determine . . . all core proceedings
arising under title 11 . . . and may enter appropriate orders and judg-
ments, subject to review under section 158 of [title 28]." 28 U.S.C.
§ 157(b)(1). Core proceedings include, for example, "matters con-
cerning the administration of the estate" and the "allowance or disal-
lowance of claims against the estate." Id. § 157(b)(2)(A), (B). The
adversary proceeding was a core proceeding because Phillips’s com-
plaint against White Mountain (the debtor) sought a determination
that the advances of $10.6 million from Phillips to White Mountain
were loans "due and owing" from White Mountain to Phillips. The
claim in the London arbitration raised the same core issue, but sought
the opposite determination (that the advances were contributions to
capital).
Recognizing that Phillips brought a core proceeding, we return to
the question of whether the text of the bankruptcy laws just cited
reveals that Congress intended to limit or preclude the waiver of the
bankruptcy forum for core proceedings. The Second Circuit in United
States Lines did not deduce from the statutory text a congressional
intent to prohibit entirely the arbitration of core issues: "a determina-
tion that a proceeding is core will not automatically give the bank-
ruptcy court discretion to stay arbitration." 197 F.3d at 640. There is
the counter argument, however, that the statutory text giving bank-
ruptcy courts core-issue jurisdiction reveals a congressional intent to
choose those courts in exclusive preference to all other adjudicative
bodies, including boards of arbitration, to decide core claims. See In
8 IN RE: WHITE MOUNTAIN MINING COMPANY
re: Summerfield Pine Manor, 219 B.R. 637, 638 (B.A.P. 1st Cir.
1998) ("Clearly the Bankruptcy Court . . . cannot abstain from the
administration of the bankruptcy case, leaving a state court to deter-
mine core matters. They are matters that arise exclusively under the
Bankruptcy Code and related jurisdictional statutes establish jurisdic-
tion in the district court and in the Bankruptcy Court, its delegatee.");
In re Caldor, Inc., 217 B.R. 121, 130 (Bankr. S.D.N.Y. 1998) (bank-
ruptcy court’s authority to refuse enforcement of arbitration clause
depends largely on whether court has "core jurisdiction to adjudicate
the claims that [the debtor’s lessor] seeks to arbitrate"). We need not
decide today whether the statutory text itself demonstrates congressio-
nal intent to override arbitration for core claims because this case may
be decided under McMahon’s third line of analysis — whether con-
gressional intent is deducible "from an inherent conflict between arbi-
tration and the statute’s underlying purposes." 482 U.S. at 227. This
was the dispositive consideration in the United States Lines case, in
which the Second Circuit upheld a bankruptcy court’s decision refus-
ing to refer core proceedings to arbitration. 197 F.3d at 641.
We thus turn to whether there is an inherent conflict between arbi-
tration and the underlying purposes of the bankruptcy laws. "[T]he
very purpose of bankruptcy is to modify the rights of debtors and
creditors," 1 Collier on Bankruptcy, ¶ 3.02[2] (15th ed. rev. 2005)
(quotation omitted), and Congress intended to centralize disputes
about a debtor’s assets and legal obligations in the bankruptcy courts,
see Grady v. A.H. Robins Co., 839 F.2d 198, 201-02 (4th Cir. 1998);
28 U.S.C. § 157. Arbitration is inconsistent with centralized decision-
making because permitting an arbitrator to decide a core issue would
make debtor-creditor rights "contingent upon an arbitrator’s ruling"
rather than the ruling of the bankruptcy judge assigned to hear the
debtor’s case. Note, Jurisdiction in Bankruptcy Proceedings: A Test
Case for Implied Repeal of the Federal Arbitration Act, 117 Harv. L.
Rev. 2296, 2307 (2004).
Centralization of disputes concerning a debtor’s legal obligations
is especially critical in chapter 11 cases, like White Mountain’s. The
"fundamental purpose" of chapter 11 is rehabilitation of the debtor,
"prevent[ing it] from going into liquidation, with an attendant loss of
jobs and possible misuse of economic resources." NLRB v. Bildisco
& Bildisco, 465 U.S. 513, 528 (1983). To protect reorganizing debtors
IN RE: WHITE MOUNTAIN MINING COMPANY 9
and their creditors from piecemeal litigation, the bankruptcy laws
"centralize all disputes concerning [a debtor’s legal obligations] so
that reorganization can proceed efficiently, unimpeded by uncoordi-
nated proceedings in other arenas." In re: Ionosphere Clubs, Inc., 922
F.2d 984, 989 (2d Cir. 1990).
The inherent conflict between arbitration and the purposes of the
Bankruptcy Code is revealed clearly in this case, in which both the
adversary proceeding and the London arbitration involved the core
issue of whether Phillips’s advances to the debtor were debt or equity.
The bankruptcy court concluded that ordering arbitration and staying
the adversary proceeding would substantially interfere with White
Mountain’s efforts to reorganize. The court found that an ongoing
arbitration proceeding in London would (1) make it very difficult for
the debtor to attract additional funding because of the uncertainty as
to whether Phillips’s claim was debt or equity, (2) undermine creditor
confidence in the debtor’s ability to reorganize, (3) undermine the
confidence of other parties doing business with the debtor, and (4)
impose additional costs on the estate and divert the attention and time
of the debtor’s management (even though the debtor was not a named
party in the arbitration, the proceeding would necessarily involve the
debtor’s personnel and business records). The bankruptcy court noted
that because resolution of the debt-equity issue was critical to the
debtor’s ability to formulate a plan of reorganization, the court would
resolve the adversary proceeding on an expedited basis. Finally, the
court found that allowing the adversary proceeding to go forward
would "allow all creditors, owners and parties in interest to participate
[in a centralized proceeding] at a minimum of cost." J.A. 181.
The bankruptcy court’s findings are not clearly erroneous. These
findings confirm that the London arbitration was inconsistent with the
purpose of the bankruptcy laws to centralize disputes about a chapter
11 debtor’s legal obligations so that reorganization can proceed effi-
ciently. Indeed, in this case the arbitration would have substantially
interfered with the debtor’s efforts to reorganize. Accordingly, the
bankruptcy court did not err in refusing to order arbitration between
Congelton and Phillips, refusing to stay the adversary proceeding, and
enjoining Congelton from pursuing the determination of a core issue
in arbitration.
10 IN RE: WHITE MOUNTAIN MINING COMPANY
III.
Congelton next argues that its notice of appeal to the district court
— appealing the bankruptcy court’s order denying the motion to com-
pel arbitration — divested the bankruptcy court of jurisdiction over
the adversary proceeding. Congelton bases this argument on a provi-
sion in the Arbitration Act, 9 U.S.C. § 16(a), which allows an inter-
locutory appeal from an order denying a motion to compel arbitration.
Congelton filed its notice of appeal with the district court on February
24, 2003, and three months later on May 22, 2003, moved the district
court to stay the adversary proceeding pending appeal. The district
court denied a stay. Our court has not decided whether a stay of the
entire action is required pending appeal of an order denying a motion
to compel arbitration or whether the filing of an interlocutory appeal
divests the trial court of jurisdiction. See Hill v. Peoplesoft USA, Inc.,
341 F. Supp. 2d 559, 560 (D. Md. 2004). In any event, these issues
are now moot in this case. Judgment has been entered in the adversary
proceeding, and we have held that the bankruptcy court was correct
in denying the motion to compel arbitration and in refusing to stay the
adversary proceeding pending arbitration. If Congelton is seeking to
set aside the judgment in the adversary proceeding, it is not entitled
to that relief. "In no case has a Court of Appeals granted [such]
relief," that is, "undoing a trial because the district court lacked juris-
diction to proceed after an appeal from an order denying arbitration"
that was ultimately affirmed. Motorola Credit Corp. v. Uzan, 388
F.3d 39, 54 (2d Cir. 2004) (emphasis in original).
IV.
Congelton’s last argument is that the district court erred in affirm-
ing the bankruptcy court’s broad injunction against the London arbi-
tration. The bankruptcy court enjoined the arbitration between
Congelton and Phillips in its entirety. The court invited Congelton on
several occasions to file a motion to modify the injunction, but Con-
gelton declined. On appeal Congelton does not request a modification
of the injunction, but appears to argue that because the injunction is
overbroad, it must be struck down entirely. See Brief for Appellant at
47 (arguing that the injunction must "stand or fall on its own terms").
The bankruptcy court was correct to enjoin Congelton from arbitrat-
ing a core issue that was critical to the debtor’s reorganization effort,
IN RE: WHITE MOUNTAIN MINING COMPANY 11
so there is no ground for vacating the injunction in its entirety.
Because Congelton does not request alternative relief, or suggest what
alternative relief might be appropriate, we decline to modify the
injunction.
V.
For the foregoing reasons, we affirm the orders of the district court
affirming the decisions of the bankruptcy court.*
AFFIRMED
*We grant the Motion for Substitution of Party filed by the reorga-
nized debtor, White Mountain Mining Company, L.L.C., a West Virginia
limited liability company, to the extent of adding it as an appellee in this
proceeding.