## Facts

- United States Lines, an ocean-shipping company, filed for Chapter 11 reorganization.
- A confirmed plan created a reorganization trust that succeeded to the debtors’ rights and obligations.
- Approximately 12,000 former employees asserted more than 18,000 asbestos-related personal-injury claims arising from employment with the debtors.
- Payment for the asbestos claims depended primarily on proceeds from historic maritime insurance policies (including P&I coverage), described as the only significant potential recovery source.
- The trust filed an adversary proceeding seeking declaratory relief concerning the insurers’ duties and the scope of insurance coverage for the asbestos liabilities.
- The insurers disputed coverage and sought to enforce arbitration clauses in the insurance contracts under the Federal Arbitration Act.
- The trust and asbestos claimants argued the dispute was a core bankruptcy proceeding and that arbitration would impair centralized administration of the reorganization and distribution to claimants.

## Issues

1. Whether the insurance coverage dispute concerning proceeds central to plan implementation and creditor recovery was a “core” proceeding under 28 U.S.C. § 157(b).
2. Whether, even if arbitration clauses were otherwise enforceable under the Federal Arbitration Act, the bankruptcy court could refuse to compel arbitration because arbitration would seriously conflict with Bankruptcy Code objectives.

## Decision

- The court held the insurance coverage dispute was a core bankruptcy proceeding because it was integral to administration of the case and restructuring of debtor-creditor relations, given the centrality of insurance proceeds to satisfying the asbestos claims.
- The court held the bankruptcy court had authority to deny enforcement of arbitration clauses where compelling arbitration would seriously jeopardize Bankruptcy Code objectives.
- The court reversed the district court’s order compelling arbitration and remanded for further proceedings consistent with its core-jurisdiction and anti-arbitration-conflict determinations.

## Legal Principles

- A proceeding is core if it invokes a substantive right under Title 11 or is the type of proceeding that can arise only in the context of bankruptcy, assessed in light of the case’s functional realities.
- Insurance coverage litigation may be core when insurance proceeds are the primary estate asset available to satisfy a large class of claims and the dispute is integral to plan execution and equitable distribution.
- The Federal Arbitration Act’s policy favoring arbitration yields when enforcing an arbitration clause would create an inherent conflict with the Bankruptcy Code.
- In core proceedings, a bankruptcy court may decline to compel arbitration where arbitration would materially interfere with centralized claim resolution, coordinated administration of estate assets, or timely and equitable distribution to creditors.

## Conclusion

The court treated the insurance coverage dispute as a core bankruptcy matter because coverage and proceeds were central to the reorganization and payment of mass asbestos claims, and it permitted the bankruptcy court to refuse arbitration when arbitration would substantially disrupt core bankruptcy administration and distribution objectives.


In re United States Lines, Inc., 197 F.3d 631 (2d Cir. 1999)