Last week we blogged about the U.S. Supreme Court ruling on Vaden V. Discover Bank, No. 07-773, (U.S. Mar. 9, 2009). Justice Ginsburg delivered the opinion of the Court, joined by Scalia, Kennedy, Souter, and Thomas. Chief Justice Roberts concurred in part and dissented in part and was joined by Stevens, Breyer, and Alito. Here is a summary of the case. Discover Bank sued cardholder Vaden in Maryland state court to recover past due charges ($10,610.74 plus interest and attorneys fees). Discover’s pleading raised only state law issues and the parties did not qualify for diversity-of-citizenship jurisdiction (the amount in controversy did not exceed $75,000). Vaden answered with the affirmative defense of usury and filed several class-action styled counterclaims. Right after, Discover filed to compel arbitration in federal court, based on a clause in the credit card agreement providing for arbitration. The district court granted Discover’s request for arbitration and Vaden appealed. The Fourth Circuit remanded the case for determination on whether the controversy presented “a properly invoked federal question.” On remand, the district court held that the controversy presented a federal-question jurisdiction and ordered arbitration once again. The case was appealed to the Fourth Circuit for the second time and the Fourth Circuit affirmed. Now the U.S. Supreme Court granted certiorari and examined two questions concerning subject-matter jurisdiction over a petition under section 4 of the FAA: Whether a district court, if asked to compel arbitration, should “look through” the petition and grant the relief if the court would have federal-question jurisdiction of the controversy. The Court held that a court may “look through” a section 4 petition to make this determination. Whether a district court should exercise jurisdiction over the petition when the petitioner’s complaint rests on state law but an actual or potential counterclaim rests on federal law. Here, the Court held that a federal court may not entertain a section 4 petition based on the contents of a counterclaim, when the whole controversy between the parties does not qualify for federal-court adjudication. Thus, the Court refused to compel arbitration because the federal court did not have jurisdiction over the whole controversy. However, the Court noted that Discover may still petition a Maryland state court to enforce the arbitration agreement. The dissent argued that the “controversy” to be decided by the Court should be the subject matter of the arbitration. Whether Discover Bank charged illegal finance charges, interest, and late fees, which is controlled by the Federal Deposit Insurance Act. Not the complaint based on state law that Discover filed initially. It is worth noting an issue barely discussed on footnote 13. It was Discover who first sought court adjudication of the dispute, and it was not until Vaden countered with class-action allegations, when Discover invoked the arbitration clause contained in the cardholders’ agreement. Usually, it is the defendant party the one who files to compel arbitration to avoid litigating the dispute. Generally, courts find “forum-shopping” distasteful and some courts have held that a party has waived its right to arbitrate based on their invocation of the judicial process. See a recent case here. Technorati Tags: arbitration, ADR, law, U.S. Supreme Court, Vaden v. Discover Bank, federal question jurisdiction, arbitration jurisdiction, well-pleaded complaint

In Credigy Receivables, Inc., v. Holt, No. 05-07-01577-CV, (Tex. App.–Dallas March 17, 2009), a Texas appellate court did not confirm an arbitral award because of invalid service of process. In July 2007, Credigy sued Barbara Holt to recover the balance due on Holt’s credit card account, after an arbitrator awarded Credigy $10,558.36. However, Credigy’s petition served to Holt was not verified and Holt did not answer the lawsuit. On September 19, 2007, Credigy moved for default judgment, however, the trial court returned the unsigned motion citing “several substantive deficiencies.” In addition, the trial court returned the proposed judgment confirming the award, for “various deficiencies” including lack of showing jurisdiction. On October 12, 2007, the trial court dismissed the case. Credigy appealed and the Court of Appeals for the Fifth District of Texas at Dallas affirmed. The appellate court concluded that the service of process to Holt was invalid, thus the court did not have personal jurisdiction over Holt.

Last week, the Fifth Circuit decided whether manifest disregard of the law remains a valid ground for vacating an arbitration award in light of last year’s U.S. Supreme Court case Hall Street Associates, L.L.C. v. Mattel, Inc., 128 S.Ct. 1396 (2008). For background and commentary on that case, visit our previous posts: Dead? Alive? Matter of Opinion? Dec. 4, 2008 Rau Responds Jun. 9, 2008 Rau Gives Souter a C-minus Jun. 5, 2008 Glen Wilkerson on Hall Street v. Mattel April 19, 2008 No Longer Can You Craft Your Own Arbitral Standard of Review March 26, 2008 The facts of the new case, Citigroup Global Markets Inc. v. Bacon (No. 07-20670) (5th Cir., 2009), are as follows. In 2002, Debra Bacon discovered that her husband had withdrawn a total of $238,000 from her Citigroup Individual Retirement account without her authorization (her husband forged her signature to obtain the funds). Bacon notified Citigroup as soon as she discovered what happened and filed for divorce. But Citigoup refused to reimburse her, and in 2004, Bacon submitted her claim to an arbitration panel. The panel ordered Citigroup to pay Bacon $256,000 ($218,000 in damages and $38,000 in attorneys’ fees). Citigroup sued Bacon in district court claiming that the arbitration panel had manifestly disregarded the law, citing section 10 of the FAA. It is worth noting that, when that court decided the case, (Aug. 2, 2007) Hall Street (March 25, 2008) had not been decided by the U.S. Supreme Court just yet. In 2007, the U.S. District Court for the Southern District of Texas vacated the award, (Citigroup Global Markets, Inc. v. Debra Bacon (No. H-05-3849), 2007 U.S. Dist. LEXIS 56779) on the grounds that: Bacon was not harmed by the withdrawals because her husband used the money for their benefit and subsequently promised to pay her back; Bacon’s claims were barred by Texas law, which permits such claims only if the customer reports unauthorized transactions within thirty days of the withdrawal; and Texas law requires apportionment among liable parties, which in this case, includes Bacon’s husband. Here, the Fifth Circuit first explained the reasoning behind limited judicial role in the arbitration process. Then, citing Hall Street, the court stated that the grounds for vacatur and modification provided by sections 10 and 11 of the FAA are exclusive. Next, the court mentioned case law history from the Fifth Circuit recognizing the doctrine of manifest disregard and how it was a “standard difficult to satisfy.” The court also noted that the Fifth Circuit was “among the very last to adopt manifest disregard.” Finally, the court concluded that “to the extent that manifest disregard of the law constitutes a nonstatutory ground for vacatur, it is no longer a basis for vacating awards under the FAA. “ In addition, the Fifth Circuit surveyed the other circuits’ decisions subsequent to Hall Street, focusing on whether manifest disregard survived after Hall Street. In particular, whether manifest disregard could be a shorthand for statutory grounds (section 10(a)(3) or 10(a)(4), when the arbitrators were “guilty of misconduct” or “exceeded their powers” as Hall Street hinted). But the circuits are split on this issue. At the end, the Fifth Circuit made clear that manifest disregard, “as a term of legal art, is no longer useful in actions to vacate arbitration awards.” And it stated that ” from this point forward, arbitration awards under the FAA may be vacated only for reasons provided in section 10.” The court, however, remanded the case for the district court to decide whether the award could be vacated under statutory grounds. It is clear by this opinion that the use of manifest disregard will not go well when trying to vacate an arbitral award in the Fifth Circuit. But it remains to be seen how the Fifth Circuit would rule, if an arbitral panel, like the one in Citigroup, “exceeded their power” by knowing the law and refusing to apply it? Technorati Tags: arbitration, ADR, law, FAA,

A new bill related to arbitration was filed last week by the 81st Texas Legislature. S.B. 1650, authored by Senator Duncan (R-Lubbock), would grant Texas appellate courts jurisdiction over certain interlocutory appeals arising under the FAA. Status: Filed on 03/10/2009. Technorati Tags: arbitration, ADR, law, Texas S.B. 1650, FAA