Arbitration Award Upheld By Second Circuit - Manifest Disregard Challenge Available - Sort Of

Goldman Sachs Execution & Clearing, L.P., et al. v. The Official Unsecured Creditors' Committee of Bayou Group, L.P., et al., 10-5049-cv (lead) (2d Cir. 2012) (summary order), provides a summary of several important legal principles governing international dispute resolution.

Goldman Sachs began serving as the sole clearing broker for the hedge fund Bayou Fund in 1999 and later served in that capacity for three additional related funds. The funds, says the Second Circuit, was "a massive Ponzi scheme". In 2008 the bankruptcy court authorized claims to proceed against Goldman.

An agreement between Bayou Funds and Goldman required disputes to be arbitrated before the Financial Industry Regulatory Authority (FINRA). On appeal to the District Court from the arbitral award, and in the Second Circuit, Goldman argued that the arbitration panel rendered its award in manifest disregard of the law. The cases are split on whether manifest disregard remains a viable ground to seek to overturn an arbitral award. Says the Second Circuit here:

Although the Supreme Court's decision in Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 585 (2008), created some uncertainty regarding the continued viability of the manifest disregard doctrine, we have concluded that "manifest disregard remains a valid ground for vacating arbitration awards."

Having said that, the Court of Appeals went on to say:

Our review under the manifest disregard standard, however, "is 'highly deferential' to the arbitrators, and relief on such a claim is therefore 'rare.'" [citations omitted] We cannot "vacate an arbitral award merely because [we are] convinced that the arbitration panel made the wrong call on the law." Wallace v. Buttar, 378 F.3d...