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Univ. of Toledo College of Law

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Friday, June 3, 2011

2d Circuit: Arbitrator's "Predisposition" not a Basis for Vacatur

The Second Circuit recently issued an opinion discussing the tests for judicial review of arbitration awards under FAA 10 as well as the manifest disregard of the law (assuming it still exists after Hall St. Associates).  STMicroelectronics, N.V. v. Credit Suisse LLC (2d Cir. June 2, 2011).   The underlying facts of the controversy involve Credit Suisse's purchases for its customer STM of auction rate securities.  Under the plan approved by STM, CS was to purchase only ARS that were backed by federally guaranteed student loans.  After only a few days, however, CS began buying much riskier types of ADR for STM's accounts and covered this up by sending STM phony confirmations.  The arbitration panel unanimously found for STM and essentially ordered rescission of the transactions, ordering STM to return the portfolio to CS in exchange for $400 million, plus other costs and fees.

CS's argument for vacating the award under FAA 10(a) was that one of the arbitrators had a predisposition of the case, because of his extensive work as an expert on behalf of claimants in financial disputes.  Midway through the arbitration hearing, it sought to remove the arbitrator, alleging that he painted a more balanced picture of his experience on his disclosure report when he stated that he represented both sides.  In fact, CS argued, the arbitrator's consulting work was done principally for claimants.

Before the district court, which confirmed the award, CS had relied on FAA 10(a)(2) -- "evident partialilty" -- but on appeal it shifted its legal theory and argued that the arbitrator's misleading disclosure was cause to vacate under FAA 10(a)(3) -- "other misbehavior by which the rights of any party have been prejudiced."  The Second Circuit said that the reason for the shift was clear -- 10(a)(2) addresses only nondisclosure of facts bearing on a relationship with a party, lawyer or other attorney.  In this case CS was making the novel argument that improper disclosure could be "other misbehavior" when it misrepresented facts that go to an arbitrator's predisposition on how he would decide certain kinds of cases.  The Second Circuit said, however, that it did not have to "div[e] very deeply into these difficult legal matters," because CS did not carry its burden of establishing facts that supported its legal theory:

Given the “very high” showing necessary to vacate an award ...we would expect Credit Suisse to present more evidence to support its contentions about Duval’s background. It appears, however, that Credit Suisse never asked Duval for an accounting of his experience, either before or during the arbitration or during the district court proceedings. Although we have limited the availability of discovery regarding the completeness of an arbitrator’s disclosures, we have not forbidden it altogether. ...

The lack of evidence means we cannot know exactly how much work Duval did or for whom. But that was Credit Suisse’s burden to show, and it has failed to carry it. At the very least, even if we assume that Duval has worked for many more claimants than respondents, his work for “numerous” respondents and his ability to cite two respondents employing him at the time of the 2008 arbitration belie Credit Suisse’s contention that he “served . . . almost exclusively as a professional claimant-side expert witness.”

In addition, in the course of the opinion, the Second Circuit made some interesting observations discrediting CS's argument based on "predisposition:"

More fundamentally, the major premise of Credit Suisse’s attack on Duval’s nondisclosure of his prior testimony fails. There is no contention here that Duval had any prior knowledge of, or misconception about, the facts of this case. Credit Suisse’s argument, rather, is that his testimony suggests he had pre-existing views about potentially relevant propositions of law. However, “[a] judge’s lack of predisposition regarding the relevant legal issues in a case has never been thought a necessary
component of equal justice, and with good reason. For one thing, it is virtually impossible to find a judge who does not have preconceptions about the law.”...  This is all the more true for arbitrators, “[t]he most sought-after” of whom “are those who are prominent and experienced members of the specific business community in which the dispute to be arbitrated arose.” ...Arbitrator Duval played that very role on this panel, as the “non-public arbitrator” specifically chosen for his industry connection....It would be strange if such an arbitrator were forced to search the record of all prior testimony for any statement that might – however tangentially – relate to any of the many legal issues that might arise in any given case. A party might like to know that information when shopping for arbitrators, but its absence cannot form a ground for vacating an arbitration award.

The opinion also has a thorough analysis of the manifest disregard of the law standard in dismissing CS's arguments based on the non-statutory standard.

http://lawprofessors.typepad.com/securities/2011/06/2d-circuit-arbitrators-predisposition-not-a-basis-for-vacatur.html

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