This article was originally published by the ABA Section of Litigation News & Developments.
The U.S. Court of Appeals for the Second Circuit has refused to vacate Citigroup Inc.’s arbitration victory in a dispute over a $7.5 billion investment that the Abu Dhabi Investment Authority (ADIA) made in the bank before the 2008 financial crisis. In Abu Dhabi Inv. Auth. v. Citigroup, Inc., 13-1068-CV, 2014 WL 628354 (2d Cir. Feb. 19, 2014), the court held that ADIA did not meet the “high hurdle” of showing that the American Arbitration Association (AAA) panel demonstrated a “manifest disregard of the law” or exceeded its powers in ruling for Citigroup. The case’s procedural history illustrates the federal courts’ limited role in overseeing arbitration proceedings.
The underlying controversy dates back to just before the Great Recession. The ADIA’s investment agreement allowed Citigroup to replenish capital after losses decimated its market value in 2007. But thereafter, ADIA claimed that its investment was severely diluted when the bank issued preferred shares—later converted to common stock—to other investors on better terms than those given to it. (Citigroup ultimately required three federal bailouts, but is now the third-largest American bank). ADIA commenced arbitration proceedings against Citigroup in December 2009. Each party nominated one arbitrator, and these nominees jointly selected the third, neutral member of the tribunal, who was designated its chair. All three were American attorneys.
In the arbitration, ADIA argued that it had been fraudulently induced into the investment and asserted claims of common law fraud, securities fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing. ADIA’s claims were rejected completely by the AAA panel in October 2011. In February 2012, ADIA moved in the Southern District of New York to vacate the award. In March, 2013, the district court rejected the motion and confirmed the award.
On appeal, ADIA argued that the district court erred by failing to vacate the award because the arbitration panel incorrectly applied New York’s interest analysis in deciding to apply the law of New York—rather than the law of Abu Dhabi—to ADIA’s common law fraud and negligent misrepresentation claims. ADIA argued that this choice-of-law decision was in manifest disregard of the law and exceeded the panel’s powers, in violation of the Federal Arbitration Act (FAA), 9 U.S .C. § 10(a)(3)-(4).
The Second Circuit began its analysis by noting that an arbitration award may be vacated if it results from the arbitrators’ “manifest disregard of the law” or if the “arbitrators exceeded their powers.” Porzig v. Dresdner, Kleinwort, Benson, North America LLC, 497 F.3d 133, 138, 139 n. 3 (2d Cir.2007). It noted, however that “A party seeking to vacate an award under the FAA must surmount a high hurdle [since] awards are vacated for manifest disregard only in those exceedingly rare instances where some egregious impropriety on the part of the arbitrator is apparent.” (Internal citations omitted).
Here, the Second Circuit noted that the underlying investment agreement did not specify what law should govern tort claims between the parties. The agreement merely directed that any dispute the parties could not resolve was to be decided by the International Centre for Dispute Resolution rules (the international arm of the AAA). Those rules state that in the absence of a choice of law designation, “the tribunal shall apply such law(s) or rules of law as it determines to be appropriate.” ICDR Rules, Art. 28(1). Consistent with this provision, the AAA panel conducted research and concluded that New York law governed ADIA’s claims. The Second Circuit found that the federal courts should not disturb that determination.
Interestingly, this appeal is only part of the story of this case. After losing its first round of arbitration, ADIA launched a second round of arbitration proceedings in August 2013 against Citigroup on separate but related claims. Citigroup quickly went back to the Southern District, filing a complaint to stop the new proceedings because they were based on largely the same claims as the first. But the district court refused to do so, holding that it was the arbitrators, not the courts, who had the authority to decide on the validity of the new proceedings.
In short, Abu Dhabi Inv. Auth. v. Citigroup, Inc. is an example of courts taking a hands-off approach to decisions properly vested in arbitral panels. Both the district court and the Second Circuit declined to find that the AAA panel had acted in manifest disregard of the law or exceed its powers in violation of the FAA when it decided to apply law of New York rather than the law of Abu Dhabi. Similarly, a different district judge allowed the AAA, and not the court, to determine whether ADIA could bring a second round of arbitration.
—Brian Farkas, Goetz Fitzpatrick LLP, New York, New York.