The U.S. Court of Appeals for the Second Circuit upheld a district court’s ruling that despite the existence of a mandatory arbitration clause, Goldman Sachs & Co. cannot compel the National Credit Union Administration (“NCUA”) to arbitrate a dispute between the parties over the sale of mortgage-backed securities.
The suit — National Credit Union Administration Board v. Goldman, Sachs & Co., No. 14-312 (2d Cir. 2014) — involves NCUA’s takeover of Southwest Corporate Federal Credit Union in 2010 as the government agency tasked with supervising federally chartered credit unions and acting as liquidating agent for credit unions that have failed.
In 2013, the NCUA filed suit against Goldman Sachs alleging that Goldman misrepresented the quality of residential mortgage-backed securities it sold to Southwest for $40 million in 2006 and 2007. Goldman attempted to force the dispute into arbitration on the basis of a cash account agreement (“CAA”) that Southwest signed in 1992 that required arbitration of all disputes.
The NCUA disputed Goldman’s right to force arbitration, saying that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) allows the agency to reject any contract of a failed credit union that is burdensome. Goldman contended that this power does not apply to arbitration agreements, but the Second Circuit disagreed in its December 23, 2014, ruling, stating that,
“As NCUA in its role as liquidating agent of failed institutions represents the public interest, the statute gives it wide discretion in deciding whether to repudiate those institutions’ contracts. The record reveals no basis whatever for us to conclude that NCUA’s decision to repudiate this arbitration agreement was not within the discretion granted to it by the statute.”
The Second Circuit also rejected Goldman’s argument that NCUA’s repudiation of the arbitration agreement was untimely, saying that the record showed that once the CAA was brought to the NCUA’s attention, the agency repudiated the contract within nine days.
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