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 182, 190 (2d Cir. 2004). Indeed, an arbitral award must “be enforced, despite a court’s disagreement with it on the merits, if there is a barely colorable justification for the outcome reached.” Id. (internal quotation marks omitted).

In applying the manifest disregard standard, we consider “first, ‘whether the governing law alleged to have been ignored by the arbitrators was well defined, explicit, and clearly applicable,’ and, second, whether the arbitrator knew about ‘the existence of a clearly governing legal principle but decided to ignore it or pay no attention to it.’”

Applying this standard, the Court of Appeals affirmed the District Court’s rejection of any challenge.

The Court also addressed the Committee’s argument concerning which law, federal or state, provided the rule of decision for pre-judgment interest.  Since the claim was asserted under federal law, the federal rate applied.