Disputing Guest Post | Hall Street Meets S. Maestri Place: What Standards of Review will the Fifth Circuit Apply to Arbitration Awards Under FAA Section 10(a)(4) after Citigroup?



As the United States Court of Appeals for the Fifth Circuit decides more “manifest disregard” of the law cases, we thought that you might be interested in reading our guest-post published at the Loree Reinsurance and Arbitration Law Forum earlier this year.

Check it out!




Hall Street Meets S. Maestri Place: What Standards of Review will the Fifth Circuit Apply to Arbitration Awards Under FAA Section 10(a)(4) after Citigroup?

By Victoria VanBuren

May 4, 2009

I. Introduction

I am delighted to be invited to guest-blog today by Philip J. Loree Jr. of the Loree Reinsurance and Arbitration Law Forum. I was thrilled that Phil jumped right on it when I suggested that we should guest-post on each others blogs in the near future.

Phil did an outstanding job discussing the Arbitration Fairness Act of 2009 (read the post here) last week as a guest-blogger at Disputing. He suggested that I explore the topic of “manifest disregard” of the law in light of the United States Supreme Court decision Hall Street Associates, LLC v. Mattel, Inc. 128 S.Ct. 1396 (2008) and the Fifth Circuit ruling in Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349 (5th Cir. 2009). So, after conquering some initial, mild trepidation about my first guest-blogging experience, here I am.

II. Discussion: Hall Street and Citigroup

In Hall Street, the Supreme Court concluded that the Sections 10 and 11 provide the exclusive bases for vacatur and modification of arbitration awards under the Federal Arbitration Act (”FAA”). Under Section 10, the grounds to vacate an arbitration award are:

(1) where the award was procured by corruption, fraud, or undue means;

(2) where there was evident partiality or corruption in the arbitrators, or either of them;

(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or

(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.

9 U.S.C. § 10(a).

The Court stated that “manifest disregard” of the law was not an independent ground for vacating awards. The Court, however, observed that in the past it may have used the term “manifest disregard” to refer collectively to all FAA Section 10 grounds, or as a “shorthand” for situations where the arbitrators were “guilty of misconduct” under Section 10(a)(3), or “exceeded their powers” under Section 10 (a)(4). Over the past year, the circuit courts have differed over whether the “manifest disregard” doctrine survives the Supreme Court’s holding in Hall Street.

Recently, in Citigroup, it was the Fifth Circuit’s turn to decide the doctrine’s fate. There, Debra Bacon discovered that her husband had made five fund withdrawals from her Citigroup Individual Retirement account without her authorization. Bacon notified Citigroup as soon as she discovered what happened, but this notification was seven months after her husband had withdrawn $50,000, and five months after her husband had withdrawn another $150,000. Bacon filed for divorce. Citigroup refused to reimburse Bacon, and in 2004, she submitted her claim to an arbitration panel as required by her contract with Citigroup. The panel ordered Citigroup to pay Bacon $256,000 ($218,000 in damages and $38,000 in attorneys’ fees).

Citigroup petitioned to vacate the award claiming that the arbitration panel had “manifestly disregarded” the law. The United States District Court for the Southern District of Texas vacated the award on the ground that the arbitration panel “manifestly disregarded” the law. According to the District Court:

  1. Bacon was not harmed by the fund withdrawals because her husband used the money for their benefit and subsequently promised to pay her back;
  2. Bacon’s claims were barred by Texas law, which permits such claims only if the customer reports unauthorized transactions within thirty days of the withdrawal; and
  3. Texas law requires apportionment among liable parties, which in this case, includes Bacon’s husband.

The District Court said that although Citigroup “briefed and argued the requirements of Texas’s law on [bank] accounts, the panel ignored its contents obdurately.” The court concluded that “[a] lawless award must be vacated.” When the District Court decided the case (Aug. 2, 2007), Hall Street had not been decided.

On appeal, the Fifth Circuit, citing Hall Street, held that Sections 10 and 11 provide the exclusive grounds for vacatur and modification of arbitral awards. Citing case law within the Fifth Circuit, the Court observed that the Fifth Circuit was “among the very last [of the circuit courts] to adopt manifest disregard,” and added that case law reflected that the narrow doctrine had a “standard difficult to satisfy.” The Court also stated that “the term itself, as a term of legal art, is no longer useful in actions to vacate arbitration awards.” The court ultimately ruled that “to the extent that manifest disregard of the law constitutes a nonstatutory ground for vacatur, it is no longer a basis for vacating awards under the FAA.”

III. Manifest Disregard in the Fifth Circuit: The Future

In Citigroup, the Fifth Circuit rejected “manifest disregard” as an independent, nonstatutory ground for setting aside an award. Nevertheless, the court remanded the case to the District Court to determine whether vacatur is available under any of the FAA statutory grounds.

While “manifest disregard” is no longer an independent ground for vacatur in the Fifth Circuit, Citigroup may be able to use Section 10(a)(4) of the FAA as an alternative basis for relief. The court in Brabham v. A.G. Edwards & Sons, Inc., 376 F.3d 377 (5th Cir. 2004) clarified that the “essence of the agreement” test — under which an arbitration decision can be vacated if it does not draw its essence from the contract — is not a separate nonstatutory ground for vacatur but is part of Section 10(a)(4) of the FAA. Citigroup may have a legitimate argument that the arbitrators “exceeded their powers” to the extent that the award failed to draw its essence from the contract.

To establish that the arbitrators’ decision did not draw its essence from the contract, Citigroup will have to show that the decision effectively deprived it of the benefit of its bargain with Bacon. Absent contract language to the contrary, parties to every arbitration agreement presumably expect that their dispute will be decided according to some set of applicable legal rules. That is so even when the parties’ agreement does not contain a choice-of-law clause. The parties cannot expect that the arbitrators will construe the contract and apply the law in precisely the same way a court would. Mistakes of law and contract interpretation are risks that parties assume when they agree to arbitrate, and parties sometimes resort to arbitration because they want a decision based more on “rough justice” than strict compliance with legal technicalities. On the other hand, the parties arguably have the right to expect that the arbitrators’ award be based on at least a plausible or colorable interpretation of the applicable law and the contract, even if a court might reach a different conclusion on the same facts.

To illustrate this point, let’s look at an extreme example. Suppose that the umpire of a three-person arbitration panel said to the other two arbitrators during deliberations: “This is a tough case and I don’t have a clue how we should decide it. Let’s have a round of golf between you two party-appointed arbitrators and whoever wins gets to make the call on the arbitration.” To the extent the parties reasonably contemplated that the arbitrators would decide their case according to applicable law rather than on the golfing prowess of their party-appointed arbitrators, then the resulting award would probably exceed the panel’s powers because it did not draw its essence from the agreement — indeed, it drew its essence from the results of a golf match.

If Citigroup can establish that inherent in its contract with Bacon was the understanding that the arbitrators would resolve their disputes in a manner that was at least plausibly derived from applicable Texas Law, and if Citigroup can likewise demonstrate that the arbitrators’ decision had no plausible basis in the law or in the contract, then perhaps Citigroup may be entitled to relief under Section 10(a)(4). For example, Bacon appears to have suffered little or no actual damage because her husband shared the withdrawn money with her and promised to pay it back in any event. Bacon’s claims were barred by the Texas thirty-day statute of limitations period because Bacon notified Citigroup seven months after the first withdrawal and five months after the second withdrawal. In addition, the arbitrators failed to apportion as required by Texas law responsibility for the loss between Citigroup and Bacon’s husband. It may be that the arbitrators exceeded their powers by refusing to follow all of these clear principles of Texas law, provided there was no other plausible basis for their decision, and provided that the parties’ agreement contemplated that the resolution of any dispute be at least grounded in Texas law, even if not perfectly in accord with it.

It remains to be seen whether the Fifth Circuit will reconceptualize “manifest disregard” of the law within the specific statutory ground of FAA section 10(a)(4), perhaps under the rubric of the “essence of the agreement” test. The circuit’s prior case law articulating that test suggests that the court may have an alternative vehicle for addressing problems created by the rare arbitral award that is clearly erroneous, unjust and lacking any plausible basis in the law or the parties’ contract.

Finally, it will be interesting to see what happens on the Citigroup remand. Whatever the result, you will hear about it in Disputing and at the Forum.






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