Fifth Circuit: Life After Hall Street

Last week, the Fifth Circuit decided whether manifest disregard of the law remains a valid ground for vacating an arbitration award in light of last year’s U.S. Supreme Court case Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008). For background and commentary on that case, visit our previous posts:

• Dead? Alive? Matter of Opinion? Dec. 4, 2008
• Rau Responds Jun. 9, 2008
• Rau Gives Souter a C-minus Jun. 5, 2008
• Glen Wilkerson on Hall Street v. Mattel April 19, 2008
• No Longer Can You Craft Your Own Arbitral Standard of Review March 26, 2008

The facts of the new case, Citigroup Global Markets Inc. v. Bacon (No. 07-20670) (5th Cir., 2009), are as follows. In 2002, Debra Bacon discovered that her husband had withdrawn a total of $238,000 from her Citigroup Individual Retirement account without her authorization (her husband forged her signature to obtain the funds). Bacon notified Citigroup as soon as she discovered what happened and filed for divorce. But Citigoup refused to reimburse her, and in 2004, Bacon submitted her claim to an arbitration panel. The panel ordered Citigroup to pay Bacon $256,000 ($218,000 in damages and $38,000 in attorneys’ fees).

Citigroup sued Bacon in district court claiming that the arbitration panel had manifestly disregarded the law, citing section 10 of the FAA. It is worth noting that, when that court decided the case, (Aug. 2, 2007) Hall Street (March 25, 2008) had not been decided by the U.S. Supreme Court just yet. In 2007, the U.S. District Court for the Southern District of Texas vacated the award, (Citigroup Global Markets, Inc. v. Debra Bacon (No. H-05-3849), 2007 U.S. Dist. LEXIS 56779) on the grounds that:

1. Bacon was not harmed by the 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.

Here, the Fifth Circuit first explained the reasoning behind limited judicial role in the arbitration process. Then, citing Hall Street, the court stated that the grounds for vacatur and modification provided by sections 10 and 11 of the FAA are exclusive. Next, the court mentioned case law history from the Fifth Circuit recognizing the doctrine of manifest disregard and how it was a “standard difficult to satisfy.” The court also noted that the Fifth Circuit was “among the very last to adopt manifest disregard.” Finally, the court concluded 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. “

In addition, the Fifth Circuit surveyed the other circuits’ decisions subsequent to Hall Street, focusing on whether manifest disregard survived after Hall Street. In particular, whether manifest disregard could be a shorthand for statutory grounds (section 10(a)(3) or 10(a)(4), when the arbitrators were “guilty of misconduct” or “exceeded their powers” as Hall Street hinted). But the circuits are split on this issue.

At the end, the Fifth Circuit made clear that manifest disregard, “as a term of legal art, is no longer useful in actions to vacate arbitration awards.” And it stated that ” from this point forward, arbitration awards under the FAA may be vacated only for reasons provided in section 10.” The court, however, remanded the case for the district court to decide whether the award could be vacated under statutory grounds.

It is clear by this opinion that the use of manifest disregard will not go well when trying to vacate an arbitral award in the Fifth Circuit. But it remains to be seen how the Fifth Circuit would rule, if an arbitral panel, like the one in Citigroup, “exceeded their power” by knowing the law and refusing to apply it?

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arbitration, ADR, law, FAA, Citigroup Global Markets, Hall Street, Supreme Court