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 Corp., 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.

On March 5, 2009, Magna Entertainment Corp. and its affiliates filed for Chapter 11 protection, according to the opinion. Prior to the petition date, a nondebtor affiliate of the debtors, Santa Anita Enterprise Inc. (Enterprise), entered into a joint venture with Santa Anita Associates Holding Co. LLC (Caruso) and Santa Anita Associates LLC (Associates) to develop a high-end shopping center on property owned by one of the debtors, The Santa Anita Companies Inc. (SAC). That agreement was encompassed in an LLC agreement, pursuant to which Caruso and Enterprise each owned a 50 percent interest in Associates and Caruso acted as the managing member. It was contemplated that SAC would enter into a ground lease of the property with Associates if certain conditions were met. SAC confirmed this by letter in March 2007, the opinion said. SAC was not a party to the LLC agreement and the March 2007 letter from SAC did not contain an arbitration provision.

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