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Some U.S. Courts Give 'Manifest Disregard of the Law' New Life as a Basis for Challenging Arbitration Awards
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May 11, 2009
By Clark T. Thiel
Howrey LLP
In March 2008, the U.S. Supreme Court held that manifest disregard of the law was not an independent ground for vacating arbitration awards. Rather, it held, the grounds set out in the Federal Arbitration Act (9 USC §§1, et seq.) provide the exclusive bases for overturning an arbitration award. Hall Street Associates v. Mattel, 128 S.Ct. 1396 (2008). Click here for a summary of that decision.
While acknowledging the binding nature of this precedent, it now appears that the U.S. Court of Appeals for the 5th Circuit may have joined the 2nd, 6th and 9th Circuits in recognizing the possibility that manifest disregard of the law "might support vacatur [of an arbitration award] under… the statutory grounds" set out in the Federal Arbitration Act. Citigroup Global Markets, Inc. v. Bacon, No. 07-20670 (5th Cir. Mar. 5, 2009).
The case involved a dispute between Debra Bacon and Citigroup in which Ms. Bacon claimed that Citigroup allowed her husband to fraudulently withdraw $238,000 from her Citigroup IRA. In an arbitration conducted pursuant to the Federal Arbitration Act, Ms. Bacon was awarded $218,000 in damages and $38,000 in attorney fees.
Citigroup sought to have the award vacated on the grounds that 1) Ms. Bacon was not harmed because her husband used the money for her benefit and promised to repay her; 2) Ms. Bacon did not comply with Texas law requiring that an unauthorized transaction be reported within 30 days of the transaction; and 3) the arbitrators did not apportion the damages among the liable parties, including Ms. Bacon’s husband, as required by Texas law.
In a decision handed down before the Supreme Court’s Hall Street decision, the District Court agreed with Citigroup, holding "that the arbitrators in this case manifestly disregarded the law."
On appeal, the 5th Circuit recounted the history of "manifest disregard of the law" as a ground for vacating an FAA arbitration award and acknowledged that, in 5th Circuit jurisprudence, it had become accepted as a non-statutory basis for judicial intervention in an arbitral determination. It also acknowledged that, after Hall Street, "manifest disregard of the law" no longer was an independent basis under the Federal Arbitration Act for vacating an award.
The court continued, however, to analyze other post-Hall Street decisions. First, noting that the 1st Circuit "concluded that Hall Street abolished manifest disregard of the law as a ground for vacatur," it dismissed any precedential value of that court’s opinion as "dictum and with little discussion."
It then turned to an unpublished 6th Circuit opinion, which it interpreted as "narrowly construing the holding of Hall Street to apply only to contractual expansions of the grounds for review." The Citigroup court also read a recent 2nd Circuit decision as recognizing "that manifest disregard survives Hall Street… by recasting manifest disregard as a shorthand for §10(a)(4)" of the Federal Arbitration Act. Last, the court observed that the 9th Circuit "has concluded that Hall Street did not abolish manifest disregard because its case law defined manifest disregard as shorthand for §10(a)(4)."
Following its analysis of these four post-Hall Street cases, the 5th Circuit remanded the case to the District Court to "consider whether the grounds asserted for vacating the award might support vacatur under any of the statutory grounds," creating the possibility of arbitration awards being overturned in the 5th Circuit upon a showing of "manifest disregard of the law" if that showing fit within one of the grounds set out in the Federal Arbitration Act.
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For more information about the issues covered in this report, please contact Clark Thiel in our San Francisco office at 415-848-4934 or at thielc@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2009 Howrey LLP
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