Citigroup: Beware of Arbitrary Arbitrators

In Citigroup Global Markets, Inc. v. Bacon, the United States Court of Appeal for the Fifth Circuit considered whether an arbitrator's manifest disregard for the law was grounds for vacation of an arbitration award.  The Fifth Circuit held that it was not. An arbitration panel ordered Citigroup Global Markets to pay Debra Bacon $256,00.  Bacon's husband had forged her signature to withdraw funds from her Citigroup Individual Retirement Accounts.  Bacon submitted a claim in arbitration seeking reimbursement for the unauthorized withdrawals and the panel awarded her $218,000 in damages and $38,000 in attorneys' fees.

Citigroup made an application to the district court to vacate the award and the district court did so on the basis of Texas law and the fact that Bacon's husband used the money for her benefit and he had promised to pay her back.

Bacon appealed the district court's vacatur.  The Fifth Circuit vacated the district court's vacatur holding that the arbitration panel's disregard for Texas law did not constitute  independent and sufficient grounds for the vacatur.  The Court said:

Hall Street unequivocally held that the statutory grounds are the exclusive means for vacatur under the FAA.  Our case law defines manifest disregard of the law as a nonstatutory ground for vacatur.  (citations omitted.)  Thus, to the extent that manifest disregard for the law constitutes a nonstatutory ground for vacatur, it is no longer a basis for vacating awards under the FAA (Federal Arbitration Act).

In the future, parties may rightly be wary of including FAA language in their contracts.  Now the only bases for setting aside arbitration awards under the FAA are (1) fraud or corruption in obtaining the award; (2) evident partiality by the arbitrator; (3) misconduct or misbehavior by the arbitrator; and (4) where the arbitrator exceeded its power.  See 9 U.S.C. § 10(a).