## Facts

- Statewide Realty Co. owned and operated the Newark Airport Hilton Hotel and entered a written management agreement with Hilton entities to manage the hotel.
- The management agreement contained an arbitration clause covering disputes relating to the agreement.
- Prepetition disputes arose; Hilton commenced AAA arbitration against Statewide and certain nondebtor former partners, and Statewide asserted counterclaims.
- The parties voluntarily stayed the arbitration before an arbitrator was selected.
- Statewide filed a voluntary Chapter 11 petition and continued as debtor-in-possession.
- Hilton filed a proof of claim for prepetition services.
- The bankruptcy court authorized Statewide to reject the management agreement; Hilton then filed an amended proof of claim asserting prepetition amounts and rejection damages and filed an amended arbitration demand.
- Hilton sought to proceed in arbitration (including against nondebtor parties) and moved in bankruptcy court to compel arbitration; Statewide moved for partial summary judgment to expunge Hilton’s damages claims.

## Issues

1. Whether the bankruptcy court should enforce the parties’ arbitration clause and compel arbitration of Hilton’s claim-related dispute notwithstanding the Chapter 11 case.
2. Whether compelling arbitration would inherently conflict with the purposes and provisions of the Bankruptcy Code, such that the court could decline enforcement of the arbitration agreement.
3. Whether Hilton waived any contractual right to arbitrate by filing a proof of claim and participating in the bankruptcy process.

## Decision

- The court granted Hilton’s motion to compel arbitration.
- The court denied Statewide’s motion for partial summary judgment to expunge Hilton’s damages claims.
- The court held the arbitration clause remained enforceable despite the bankruptcy filing and rejection of the agreement.
- The court found no waiver of arbitration based solely on Hilton’s filing of a proof of claim and related bankruptcy participation.

## Legal Principles

- Under the Federal Arbitration Act, courts generally must enforce valid arbitration agreements absent a contrary congressional command.
- In bankruptcy, arbitration should be compelled unless enforcing the arbitration agreement would create an inherent conflict with the Bankruptcy Code’s objectives or materially impair core bankruptcy functions.
- The “core” characterization of a dispute does not, by itself, bar arbitration; the controlling inquiry is whether arbitration would interfere with the orderly administration of the estate and the court’s ability to perform central bankruptcy tasks.
- Filing a proof of claim does not, without more, waive the right to arbitrate; waiver requires conduct clearly inconsistent with arbitration and typically substantial litigation activity causing prejudice or delay.
- A bankruptcy court may compel arbitration of underlying contract disputes while retaining authority over claim allowance, classification, and distribution, including incorporating an arbitral award into the claims-allowance process.

## Conclusion

The court required arbitration of the contract-based dispute arising from the hotel management agreement, concluding that arbitration would not frustrate Chapter 11 administration and that Hilton did not waive arbitration by filing a proof of claim; the bankruptcy court retained ultimate control over how any arbitral result would be treated in the claims process.


In re Statewide Realty Co., 159 B.R. 719 (Bankr. D.N.J. 1993)