Confirmation / Vacation of Arbitration Awards

Three recent decisions addressed whether arbitration awards should be confirmed or vacated:

• In Hudson v. ConAgra Poultry Co., No. 06-2596 (USCA 8th Cir. Apr. 4, 2007), the Court affirmed a District Court judgment, which compelled arbitration of tort claims and denied a motion to vacate an arbitration award, finding that the claims of the party were barred by res judicata. The arbitrability of the tort claim was based upon the language of the agreement containing the arbitration clause, and both state and federal law, while the Court rejected the contention that the arbitration award amounted to manifest disregard of law.
• In Riddle v. Wachovia Securities, No. 06-1177 (USCA 8th Cir. Mar. 30, 2007), a very short opinion, the Court affirmed a District Court decision holding that a party had failed to carry its burden to support vacature of an arbitration award on the ground that the arbitration panel was guilty of misconduct in failing to postpone the final hearing. While the opinion does not disclose the reason for the Panel's action, it appears from the District Court filings that the request was based upon the last minute attempted withdrawal of counsel for Riddle, which Wachovia contended had occurred in two prior arbitrations as a delaying tactic. While denying Riddle's motion to vacate the award, the District Court dismissed the action, denying Wachovia's motion to modify the Order to confirm the award, because Wachovia had not moved for confirmation of the award within the time provided in the Federal Arbitration Act.
• In State Farm Ins. Co. v. Penn. Mfgr's Assn. Inc. Co., Index 8923/05 (NY Supreme Court, App. Div. Mar. 27, 2007), the Court vacated an arbitration award as being against public policy, because the claim for contribution was barred by a prior settlement and releases, and General Obligations Law section 15-108.

After losing several million dollars in high-risk investments, Michael Lessin filed a statement of claim alleging misrepresentation and negligent supervision against his broker, Brett Bernstein and investment firm, Merrill Lynch. A panel of three NASD arbitrators heard evidence over a six-day period and found Merrill Lynch, but not Bernstein, liable to Lessin for compensatory damages of $32,975. Lessin sought to vacate the arbitration award on the basis that the arbitration panel refused to hear one of his expert witnesses and demonstrated a manifest disregard of the law in awarding compensatory damages.

The D.C. District Court affirmed the arbitration award and Lessin appealed to the D.C. Circuit Court of Appeals. Lessin argued that the arbitration panel engaged in misconduct by refusing to hear pertinent evidence from one of his two designated expert witnesses. Lessin proffered two expert witnesses to show that certain notes regarding his investments stored in a Merrill Lynch computer system were fabricated after the fact. While the Court of Appeals recognized that the experts were testifying to different aspects of the computer system (one on personal observation/testing and the other on methodology), the court concluded that “[e]very failure of an arbitrator to receive relevant evidence does not constitute misconduct requiring vacatur of an arbitrator’s award.” The Court of Appeals also rejected Lessin’s claim that the panel manifestly disregarded the law because Lessin was unable to demonstrate that the panel acted beyond its authority or that the award violated an explicit public policy.

This is yet another, in a long line of cases, demonstrating the limited judicial review of arbitration awards, and the limited success that parties have in overturning arbitration awards. Lessin v. Merrill Lynch, Case No. 06-7067 (D.C. Cir. Mar. 16, 2007).

A District Court has confirmed an arbitration award finding no coverage under an insurance policy due to the presence of an absolute pollution exclusion. The policy did not have a choice of law provision, and the arbitration grew out of a declaratory judgment action filed by the insurer in US District Court in Indiana. Indiana law does not enforce the absolute pollution exclusion. Since the arbitration agreement provided for arbitration under the rules of the American Arbitration Association, which did not require that any substantive law apply, the arbitration panel declined to apply Indiana law, and arrived at what it viewed to be a fair and just decision. The District Court found no error in this decision. Reliance Ins. Co. v. Raybestos Products Co., Case No. 97-0027 (USDC S.D. Ind. Jan. 27, 2007). Additional background information may be found in the memoranda filed by Reliance and Raybestos as to whether the award should be confirmed or vacated.

In a non-insurance arbitration, the United States Court of Appeals for the Tenth Circuit has affirmed the confirmation of an arbitration award, rejecting an argument that the arbitrator had acted in manifest disregard of law. The Court found that while the arbitrator's decision on liability “may be a close call,” it did not constitute manifest disregard of law. The Court also rejected an argument by a party against which an award had been entered that it was not a proper party to the arbitration, since it was not a party to the underlying note. This argument was rejected, in part because the party had vigorously participated in the arbitration without making any objection to its being named as a party. Hicks v. Bank of America, Case No. 05-1399 (10th Cir. Feb. 21, 2007).