Despite several creative arguments and “artful Monday-morning quarterbacking”, Goldman Sachs can not compel the National Credit Union Administrative Board (“NCUA”) to arbitrate a dispute over a failed credit union’s purchase of residential mortgage backed securities (“RMBS”).
In National Credit Union Administration Board v. Goldman Sachs & Co., No. 14-312-cv (2nd Cir. Dec. 23, 2014), NCUA sued Goldman in September 2013 alleging violations of federal and state securities laws in the offering and sale of the RMBS. NCUA is a federal agency which regulates federal credit unions and has the power to place a financially precarious credit union under conservatorship or liquidation. As liquidating agent, NCUA has the right to bring suit on behalf of the credit union. In 2010, NCUA placed Southwest Corporate Federal Credit Union (“Southwest”) into conservatorship and then involuntary liquidation after Southwest suffered substantial losses as a result of purchasing triple A-rated RMBS from Goldman which were later downgraded to below investment grade.
In October 2013, Goldman requested that NCUA submit the claims to arbitration based on a 1992 Cash Account Agreement (“CAA”) it had with Southwest which provided that “[a]ny controversy between [Southwest and Goldman] arising out of or relating to this Agreement or the accounts established hereunder, shall be settled by arbitration…”.
Nine days later, NCUA refused Goldman’s demand for arbitration and asserted it was repudiating the CCA pursuant to its statutory authority under 12 U.S.C. §1787(c). Section 1787 authorizes a liquidating agent to repudiate ‘any contract’ if it determines, in its discretion, that performance of the contract would be “burdensome” and repudiation of the contract would “promote the orderly administration of the credit union’s affairs.” Goldman moved to compel arbitration which the district court denied. Goldman then appealed.
Stating that §1787(c), on its face, appears to authorize the repudiation of an arbitration agreement, the Second Circuit rejected each of Goldman’s arguments. First, the court found that Goldman’s analogy to bankruptcy law does not compel the conclusion that the arbitration agreement survives NCUA’s repudiation. A failed credit union implicates the finances of the broader federal credit union system ‘as well as the public fisc’, thus a comparison of NCUA’s power to that of a trustee in bankruptcy is not pertinent.
The Second Circuit then addressed Goldman’s argument that while the repudiation of a contract constitutes a breach of that contract, the repudiating party is still bound by the contract’s terms, in this case, the arbitration clause. The court rejected this argument on the grounds that §1787(c), in contrast to the common law upon which Goldman relies, explicitly establishes NCUA’s right to repudiate “any contract” to avoid the ‘burdensome’ contractual obligations of the failed credit union.
Goldman then argued that the NCUA’s repudiation of a contract does not extend to its ‘purely procedural provisions’, and that arbitration clauses are procedural and thus not subject to repudiation. The Second Circuit found no reason to exclude arbitration agreements, as a class, from the NCUA’s repudiation power, even assuming they ought be considered ‘procedural’.
Goldman then challenged NCUA’s determination that the contract was, in fact, burdensome. But, as Goldman offered no reasonable argument why NCUA’s determination under §1787(c) was an abuse of discretion, the court rejected that contention. The court noted that because arbitration awards are reviewed on an ‘extremely deferential standard’, one might find arbitration burdensome if one found advantage in the availability of full appellate review. The court also rejected Goldman’s claim that NCUA did not repudiate the contract within a reasonable period of time.
Given the NCUA’s broad discretion to repudiate “any contract” it finds burdensome, the repudiation of which will promote the orderly administration of the credit union’s affairs, the court’s decision follows from a plain reading of §1787(c) and the powers vested in liquidating agents for failed credit unions to promote the public good.