Bankruptcy court is typically not the preferred venue for a nondebtor to conduct litigation. As a result, the existence of an arbitration clause within a contract giving rise to a dispute with a Chapter 11 debtor can create an invaluable option for the nondebtor litigant. However, though bankruptcy courts will generally honor a right to arbitration, it must be timely raised and pursued to avoid losing it.
In a recent U.S. Bankruptcy Court for the District of Delaware decision,In re Magna Entertainment , 2012 Bankr. LEXIS 330 (Bankr. D. Del. 2012). Judge Mary F. Walrath highlighted a number of issues involving the impact of an arbitration clause and, in particular, the perils of not timely raising and pursuing a right to arbitration before litigation in the bankruptcy court advanced.
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