10-5049-cv (L)
Goldman Sachs v. Official Unsecured Creditors Committee



                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                         SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

        At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York,
on the 3rd day of July, two thousand twelve.

PRESENT:    JOSEPH M. McLAUGHLIN,
            ROBERT D. SACK,
            GERARD E. LYNCH,
                        Circuit Judges.
_____________________________________

GOLDMAN SACHS EXECUTION & CLEARING,
L.P., FKA SPEAR, LEEDS & KELLOGG, L.P.,
                        Appellant-Cross-Appellee,

                    v.                                                  10-5049-cv (Lead)
                                                                        11-2446-cv (XAP)

THE OFFICIAL UNSECURED CREDITORS’
COMMITTEE OF BAYOU GROUP, LLC, et al.,
on behalf of BAYOU GROUP, LLC, BAYOU
MANAGEMENT, LLC, BAYOU ADVISORS,
LLC, BAYOU EQUITIES, LLC, BAYOU
SUPERFUND, LLC, BAYOU NO LEVERAGE
FUND, LLC, BAYOU AFFILIATES FUND,
LLC, BAYOU ACCREDITED FUND, LLC,
                        Appellee-Cross-Appellant.*
_____________________________________

          *
              The Clerk of Court is respectfully requested to amend the caption as set forth above.

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FOR APPELLANT-CROSS-APPELLEE:               HOWARD SCHIFFMAN (Eric A. Bensky, on the
                                            brief), Schulte Roth & Zabel LLP, Washington, DC.


FOR APPELLEE-CROSS-APPELLANT:               JOHN G. RICH, (Ross B. Intelisano, Matthew W.
                                            Woodruff, on the brief), Rich & Intelisano, LLP,
                                            New York, NY.

FOR AMICUS-CURIAE:                          Henry F. Minnerop, Sidley Austin LLP, New York,
                                            NY.; Ira D. Hammerman, Kevin M. Carroll,
                                            Securities Industry and Financial Markets
                                            Association, Washington, DC, for Amicus Curiae
                                            Securities Industry and Financial Markets
                                            Association in support of Appellant-Cross-
                                            Appellee.

       Appeal from the judgment of the United States District Court for the Southern District of

New York (Jed S. Rakoff, J.).

       UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment of the district court is AFFIRMED.

       In 1999, Appellant-Cross-Appellee Goldman Sachs Execution & Clearing, P.C.

(“Goldman”) began serving as the sole clearing broker and prime broker for a hedge fund named

Bayou Fund, LLC. In February 2003, Goldman began serving in the same capacity for four new

Bayou hedge funds (collectively, with the original Bayou fund, the “Bayou Funds”).1 The

Bayou Funds, it turns out, were run as a massive Ponzi scheme. The scheme collapsed in August

2005, and the Bayou Funds filed petitions for bankruptcy in May 2006. On June 15, 2006, the

bankruptcy trustee appointed Appellee-Cross-Appellant The Official Unsecured Creditors’

Committee of Bayou Group, LLC (the “Committee”) to represent the interests of unsecured



       1
        The four new Bayou Funds were (1) Bayou Accredited Fund, LLC; (2) Bayou Affiliates
Fund, LLC; (3) Bayou No Leverage Fund, LLC; and (4) Bayou Superfund, LLC.

                                               2
creditors of the debtors. On May 29, 2008, the bankruptcy court authorized the Committee to

“prosecute and/or settle any and all claims the Debtors’ estate may have” against Goldman.

         Pursuant to an arbitration agreement between the Bayou Funds and Goldman, the

Committee prosecuted its claims against Goldman in an arbitration proceeding before the

Financial Industry Regulatory Authority (“FINRA”). On June 24, 2010, the arbitration panel

rendered an award in favor of the Committee in the amount of $20,580,514.52. Goldman

petitioned the United States District Court for the Southern District of New York to vacate the

award, and the Committee cross-petitioned to confirm the award. The district court denied

Goldman’s petition to vacate, and granted the cross-petition to confirm the award. Goldman

now appeals that decision, and the Committee cross-appeals the district court’s ruling with

respect to pre-judgment interest. For substantially the reasons given by the district court, we

affirm its rulings in all respects. We assume the parties’ familiarity with the underlying facts.

         Goldman argues that the arbitration award must be vacated because it was rendered in

manifest disregard of the law. Although the Supreme Court’s decision in Hall Street Associates,

L.L.C. v. Mattel, Inc., 

, 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.” T.Co Metals, LLC v.

Dempsey Pipe & Supply, Inc., 

, 339-40 (2d Cir. 2010) (internal quotation marks

omitted); see also Schwartz v. Merrill Lynch & Co., 

, 451-52 (2d Cir. 2011);

STMicroelectronics, N.V. v. Credit Suisse Securities (USA) LLC, 

, 78 (2d Cir.

2011).




                                                 3
       Our review under the manifest disregard standard, however, “is ‘highly deferential’ to the

arbitrators, and relief on such a claim is therefore ‘rare.’” 

(quoting Porzig v. Dresdner, Kleinwort, Benson, N. Am. LLC, 

, 139 (2d Cir.

2007)); see also Duferco Int’l Steel Trading v. T. Klaveness Shipping A/S, 

, 389

(2d Cir. 2003) (noting that we have found manifest disregard for the law only in “those

exceedingly rare instances where some egregious impropriety on the part of the arbitrators is

apparent”). 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, 

, 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.” 

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.’” Jock v. Sterling Jewelers Inc.,

, 121 n.1 (2d Cir. 2011) (quoting Westerbeke Corp. v. Daihatsu Motor Co., 

, 209 (2d Cir. 2002)). Arbitrators “obviously cannot be said to disregard a law that is

unclear or not clearly applicable. Thus, misapplication of an ambiguous law does not constitute

manifest disregard.” 

; see also 

(noting that we will not vacate an arbitral award unless “a party clearly demonstrates that the

panel intentionally defied the law” (internal quotation marks omitted)). Where, as here, an

arbitration panel does “not explain the reason for [its] decision, we will uphold it if we can

discern any valid ground for it.” 

.

                                                  4
       The manifest disregard standard is, by design, exceedingly difficult to satisfy, and

Goldman has not satisfied it in this case. We turn first to the $6.7 million that was transferred

into the four new Bayou funds from outside accounts from June 2004 to June 2005. The

Committee alleged in the arbitration that these deposits were “fraudulent transfers” under 11

U.S.C. § 548, and were recoverable from Goldman because it was an “initial transferee” under

11 U.S.C. § 550(a). Goldman does not contest that the transfers were fraudulent, or even that it

was on inquiry notice of the fraud, but it vigorously argues that it is not an “initial transferee”

under Section 550(a), and that the panel manifestly disregarded the law in concluding that it was.

       We agree with the district court that Goldman’s argument for manifest disregard fails

because the most recent case on point in the Southern District of New York, where the

arbitration was held, “cuts in favor of the Creditors’ Committee.” Goldman Sachs Execution &

Clearing v. Official Unsecured Creditors’ Comm. of Bayou Group, LLC, 

,

228 (S.D.N.Y. 2010). The facts in that case, Bear, Stearns Securities Corp. v. Gredd (In Re

Manhattan Inv. Fund, Ltd.), 

(S.D.N.Y. 2007), bear striking similarities to the facts

here. The debtor in Gredd was a hedge fund involved in a Ponzi scheme that deposited monies

into a margin account at Bear Stearns, and the bankruptcy trustee sought to recover from Bear

Stearns the amount the debtor hedge fund had transferred into its margin account in the year

prior to filing a bankruptcy petition. 

Gredd court distinguished cases holding that

“mere conduits” of funds do not quality as initial transferees, noting that the hedge funds

transfers “did not go from the Fund’s bank account to the account at Bear Stearns in order to be

transferred to a third party.” 

In re Finley, Kumble, Wagner, Heine, Underberg,

Manley, Myerson & Casey, 

(2d Cir. 1997); Bonded Fin. Servs. v. European Am.


                                                  5
Bank, 

(7th Cir. 1988)). Moreover, the Gredd court found Bear Stearns had

“dominion and control” over the transferred funds because, although Bear Stearns “was not able

to use the transfers to make a separate profit,” it was able to “use the funds to protect itself” from

suffering losses due to the hedge fund’s short trading. 

also 

that “the degree of decision-making authority Bear Stearns possessed with respect to the funds

demonstrates a level of ‘dominion and control’ sufficient to create transferee liability”).

       Much like Bear Stearns, Goldman possessed considerable control with respect to Bayou’s

deposits under the relevant account agreements. Not only did Goldman possess a “security

interest for payment of all of [Bayou’s] obligations and liabilities,” but it also had the rights

(1) to require the Bayou Funds “to deposit cash or collateral with [Goldman] to assure due

performance of open contractual commitments”; (2) to require the Bayou Funds to maintain such

“positions and margins” as Goldman deemed “necessary or advisable”; (3) to “lend either to

itself or to others any of [Bayou’s] securities held by [Goldman] in a margin account”; and (4) to

“liquidate securities and/or other property in the account without notice . . . to ensure that

minimum maintenance requirements are satisfied.” Joint Appendix at 135-36 (Bayou Superfund

LLC account agreement). These provisions – which are similar, if not identical, to the

provisions at issue in Gredd – gave Goldman broad discretion over the funds in the Bayou

accounts and allowed Goldman to “use the funds to protect itself.” 

.

While we have not previously endorsed the district court’s decision in Gredd – and do not do so

here – neither have we rejected it. It is enough, under the “manifest disregard” standard, for us

to note that Gredd reveals considerable uncertainty as to whether cases like this one come within

an exception to the “mere conduit” principle of In re Finley, Kumble on which Goldman relies.


                                                  6
Under these circumstances, we cannot conclude that the arbitrators manifestly disregarded the

law in applying the legal principles set forth in Gredd to impose transferee liability on Goldman.

       Nor did the arbitrators manifestly disregard the law with respect to the $13.9 million in

transfers from the original Bayou fund to the four new Bayou funds on March 5, 2003. The

Committee asserted in the arbitration that these transfers were fraudulent conveyances under

New York’s Debtor and Creditor Law.2 In this appeal, Goldman argues that the transfer of

money from the original Bayou fund to the four new Bayou funds was not a “conveyance”

because all the funds were really just a single entity, and were treated as such for purposes of the

bankruptcy proceedings.

       We agree with the district court that the “two cases Goldman Sachs cites in support of

this theory are hardly dispositive.” Goldman 

. One of those

decisions, Feltman v. Gulf Bank, No. 02-1514-bk (Bankr. S.D. Fla. Oct. 1, 2003), was a

bankruptcy court decision from another circuit construing federal law, not New York law, and

thus can hardly be deemed controlling law. The other case, B.W. Dyer & Co. v. Monitz,

Wallack & Colodney, 

, 453 (Sup. Ct. New York Co. 1959), was a single trial

court decision from half a century ago that involved an individual commodities dealer who

commingled funds between his personal and corporate accounts, leading the trial court to hold

that transfers between the accounts were not conveyances. Here, by contrast, Goldman observed

all corporate formalities with respect to the Bayou hedge funds, raising a question of whether the


       2
          The Bankruptcy Code provides that a bankruptcy trustee may “avoid any transfer of an
interest of the debtor in property or any obligation incurred by the debtor that is voidable under
applicable law.” 11 U.S.C. § 544(b). As we have noted, “[a]pplicable law includes various
state fraudulent conveyance statutes.” In re NextWave Personal Commc’ns, Inc., 

,
49 (2d Cir. 1999).

                                                 7
Bayou funds can properly be treated as a single entity for purposes of the transfers. The district

court characterized that as a factual question. To the extent it is properly so characterized, it lay

within the arbitrators’ province to answer it. But even if Goldman is correct in characterizing it

as a legal question, Goldman has identified no clear, on-point authority governing it, and thus

Goldman has failed to satisfy the difficult standard for demonstrating that the arbitrators

manifestly disregarded the law.

       Goldman also argues that the arbitration panel manifestly disregarded the law because the

transfers between the Bayou funds cannot constitute conveyances to Goldman under New York

law. As the Committee notes, however, New York law provides for a broad definition of

“conveyance,” including “every payment of money, assignment, release, transfer, lease,

mortgage or pledge of tangible or intangible property, and also the creation of any lien or

incumbrance.” N.Y. Debt. & Cred. Law § 270. Thus, as the Committee contends, there is a

colorable argument that each time funds were moved from one Bayou account to another, a new

security interest was created, and a conveyance to Goldman thus occurred. Again, we need not,

and do not, decide whether we would agree with that argument if the issue were ours to decide.

Goldman points us to no decision by a New York court suggesting that these transfers would not

be treated as conveyances to Goldman. See Appellant-Cross-Appellee’s Br. at 48-50. Thus,

even if Goldman’s argument might have merit were we addressing it de novo, Goldman cannot

satisfy the extraordinarily demanding showing required to prove manifest disregard by the

arbitration panel. See 

(an arbitrator “obviously cannot be said to

disregard a law that is unclear” and that “misapplication of an ambiguous law does not constitute

manifest disregard”); 

(a party seeking to vacate an arbitral


                                                  8
award must show that “the panel intentionally defied the law” (internal quotation marks

omitted)).

       Much the same is true for Goldman’s argument that the arbitration award permitted the

Committee to obtain double recoveries. As the district court recognized, the accounting for the

Bayou Funds was complex, and the arbitration panel’s apparent conclusion that Goldman had

failed to prove that the funds were returned on a dollar-for-dollar basis was therefore a factual

finding to which we owe deference. See Goldman 

.

       Finally, with respect to the Committee’s cross-appeal, we affirm the district court’s

determination that prejudgment interest should be awarded according to the federal rate set forth

in 28 U.S.C. § 1961, rather than the New York statutory rate. We have recognized that while

there is “no federal statute that purports to control the rate of prejudgment interest,” the post-

judgment rate set forth in Section 1961 may be suitable for an award of prejudgment interest

“depend[ing] on the circumstances of the individual case.” Jones v. UNUM Life Ins. Co. of

Am., 

, 139 (2d Cir. 2000). Like the district court, we find the federal rate

appropriate because the Committee’s claims arose under federal bankruptcy law. See In re CNB

Int’l, Inc., 

, 335-36 (Bankr. W.D.N.Y. 2008) (applying rate established in Section

1961 to prejudgment interest in bankruptcy proceeding and holding that “the plaintiffs may not

recover interest based per se on the New York legal rate”). Further, as Goldman notes, the

Committee has waived its argument that FINRA Rule 12904(j) requires application of New

York’s rate because the Committee never presented it to the district court.




                                                  9
       We have considered all of the parties’ remaining attacks on the district court’s judgment

and find them to be without merit. Accordingly, we AFFIRM the judgment of the district court.

                                            FOR THE COURT:
                                            Catherine O’Hagan Wolfe, Clerk




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