В статье рассматривается связь доктрины юридической тождественности корпорации и ее членов с практикой судов США по рассмотрению морских споров
It has been nearly eighteen (18) months since the Second Circuit Court of Appeals issued its decision in The Shipping Corporation of India v. Jaldhi Overseas Pte Ltd., and turned the legal side of the international shipping community upside down. At the time that Jaldhi was decided, the Southern District of New York was a hotbed for the Rule B attachment of electronic fund transfers (“EFTs”) as they passed through intermediary and/or Clearinghouse banks located in New York City. As the Second Circuit noted in Jaldhi, the Clearing House Association L.L.C. reported in its amicus brief that from October 1, 2008 to January 31, 2009 alone, “maritime plaintiffs filed 962 lawsuits seeking to attach a total of $1.35 billion. These lawsuits constituted 33% of all lawsuits filed in the Southern District . . . ” 585 F.3d 58, 62 (2d Cir. 2009). The effects of Jaldhi and Hawknet, Ltd. v. Overseas Shipping Agencies, 590 F.3d 87 (2d Cir. 2009) (holding that Jaldhi applied retroactively) were felt throughout the world as attachment orders were vacated and the very same judges were forced to “about face” and order the release of attached EFTs without regard to equity or the stage at which the underlying arbitration or litigation taking place abroad had progressed. Less than one (1) year after the shipping market crash, shipping companies, marine insurers, and foreign solicitors throughout the world found themselves without security, entangled in lengthy and costly arbitration or litigation with (often times) a non-viable counterparty, or otherwise with an uncollectible judgment.
As the shipping community struggled with the unexpected change in U.S. maritime law jurisprudence brought on by the Jaldhi decision, a new twist on Rule B emerged. While Jaldhi stopped the attachment of EFTs under Rule B, it did not eliminate or modify the rights and remedies available under traditional maritime attachment principals. Said another way, Rule B remained (and remains) very much alive and well with regard to “old fashioned attachment” of a party’s tangible or intangible property (i.e. – bunkers, vessels, freight, bank accounts, etc.) within a U.S. judicial district, provided that the other requirements of Rule B have been met and that the defendant cannot be “found” in the district where the attachment is sought. However, despite the continued availability of the Rule B attachment and Rule C arrest remedies, many claimants, judgment holders and other creditors still found themselves unable to recover amounts due and owing from their contractual counterparties who had not voluntarily posted security; were no longer viable; and/or otherwise had dissipated their assets. As a result, parties began to seek security and/or enforcement of uncollected arbitration awards and judgments from other parties as purported “alter-egos” of the defaulting party.
It is important to note that unlike many other jurisdictions, U.S. law does not allow for arrest of “sister ships” (i.e. – vessels owned by the same company). Some countries, such as France and South Africa, extend the right to arrest to associated ships as well (i.e. – vessels beneficially owned by the same company as the vessel on which debts and/or claims have arisen). U.S. law requires substantive allegations of an alter-ego relationship to be addressed by the Court before a party may pursue the arrest of sister ship or associated ship.
Imposing Alter-Ego Liability
It is well-established in U.S. law that in order to “pierce the corporate veil” and impose liability upon a party on an “alter-ego” theory, one party must have used the other party to perpetuate a fraud or have so dominated and disregarded the other party’s corporate form that the other party primarily transacted the alleged alter-ego’s business rather than its own. In determining whether such domination and control over the other party exists, Federal Courts throughout the country have established advisory guidelines as to when an alter-ego relationship may be found. The leading case from the Second Circuit Court of Appeals is MAG Portfolio Consultant, GMBH v. Merlin Biomed Group, LLC, which identified ten (10) factors to be considered in imposing alter-ego liability:
(1) disregard of corporate formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the entities are at arms length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of the corporation’s debts by the dominating entity, and (10) intermingling of property between the entities.
268 F.3d 58, 63 (2d Cir. 2001) (citing Freeman v. Complex Computing Co., 119 F.3d 1044, 1053 (2d Cir. 1997)). By contrast, some courts within the Fifth Circuit have applied a fifteen (15) factor test, looking at factors such as:
(1) common or overlapping stock ownership between the parent and the subsidiary; (2) common or overlapping directors and officers; (3) use of same corporate office; (4) inadequate capitalization of the subsidiary; (5) financing of the subsidiary corporation by the parent; (6) whether the parent existed solely as a holding company for its subsidiaries; (7) the parent’s use of the subsidiary’s property and assets as its own; (8) the nature of intercorporate loan transactions; (9) incorporation of the subsidiary being caused by the parent; (10) whether the parent and the subsidiary file consolidated income tax returns; (11) decision-making for the subsidiary made by the parent and its principals; (12) whether the directors of the subsidiary act independently in the interest of the subsidiary or in the interest of the parent; (13) the making of contracts between the parent and the subsidiary that are more favorable to the parent; (14) observance of formal legal requirements; (15) the existence of fraud, wrong-doing or injustice to third parties.
Sabine Towing & Transportation Co., Inc. v. Merit Ventures, Inc., 575 F. Supp. 1442, 1446-48 (E.D. Tex. 1983). More recently, the Fifth Circuit Court of Appeals established twelve (12) non-exhaustive factors to be weighed by its Courts, many of which overlap with the factors set forth in Sabine Towing:
(1) the parent and subsidiary have common stock ownership; (2) the parent and subsidiary have common directors or officers; (3) the parent and subsidiary have common business departments; (4) the parent and subsidiary file consolidated financial statements; (5) the parent finances the subsidiary; (6) the parent caused the incorporation of the subsidiary; (7) the subsidiary operated with grossly inadequate capital; (8) the parent pays salaries and other expenses of the subsidiary; (9) the subsidiary receives no business except that given by the parent; (10) the parent uses the subsidiary’s property as its own; (11) the daily operations of the two corporations are not kept separate; (12) the subsidiary does not observe corporate formalities.
Oxford Capital Corp. v. U.S.A., 211 F.3d 280, 284 (5th Cir. 2000) (citing Century Hotels v. United States, 952 F.2d 107, 110 (5th Cir. 1992)). See also Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 360 (5th Cir. 2003) (Additional factors include “(1) whether the directors of the ‘subsidiary’ act in the primary and independent interest of the ‘parent’; (2) whether others pay or guarantee debts of the dominated corporation; and (3) whether the alleged dominator deals with the dominated corporation at arm’s length.”) (citing Markow v. Alcock, 356 F.2d 194, 197-98 (5th Cir. 1966);
Similarly, the First Circuit Court of Appeals, while not establishing a distinct set of factors to be considered, has ruled that alter-ego liability may be found “when these is evidence of a confused intermingling between corporate entities or where one corporation actively and directly participates in the activities of the second corporation, apparently exercising pervasive control.” Hiller Cranberry Prods. v. Koplovsky, 165 F.3d 1, 10 (1st Cir. 1999) (citing Dale v. H.B. Smith Co., Inc., 910 F. Supp. 14, 18 (D. Mass. 1995)). Although the factors to be considered vary from Circuit to Circuit, all courts agree that no one (1) factor is determinative and that many of the above-referenced factors relate to routine business practices. Rather, the courts will look to the totality of the circumstances and, upon balancing the relevant factors, will decide whether (or not) to impose alter-ego liability.
It is, of course, the Plaintiff’s burden to establish that it has a prima facie maritime claim against the Defendant(s), whether based on an alter-ego theory or otherwise, in seeking to sustain a Rule B attachment. However, even in cases where this burden cannot ultimately be met, recent cases show that seeking to vacate the Rule B attachment of a vessel or other property that was attached on the basis of alter-ego allegations can – and often is – a lengthy and costly process.
Recent Cases and Decisions
In the past twelve (12) months, a number of high profile Rule B attachments of vessels and/or other tangible property have taken place throughout the country based upon the Plaintiff’s (express or implied) allegations of alter-ego liability.
- Flame S.A. v. M/V LYNX, 1:10-cv-00278-RC (E.D. Tex.) In the LYNX case, the Plaintiff pursued a Rule B attachment of the M/T LYNX on an alter-ego basis, seeking to enforce a foreign judgment it had obtained concerning the alleged default of a Forward Freight Swap Agreement (“FFA”). The Judge sustained the attachment of the M/T LYNX in Beaumont, Texas at the initial Rule E(4)(f) hearing, finding that sufficient evidence had been presented that the debtor company was the alter-ego of the vessel’s registered owner. Following expedited discovery, a series of hearings, and a final evidentiary hearing in which the defendant vessel owning company presented live testimony, the Judge reversed his preliminary decision. In his thirty-one (31) page decision, the Judge balanced the evidence for every one of the twelve (12) Oxford Capital factors and found that there was insufficient evidence to establish by a preponderance of the evidence that the two (2) companies were alter-egos. The M/T LYNX was released in early August, after being detained for nearly five (5) months.
- N.E. Vernicos-Argonaftis Salvage & Towing Consortium v. Ocean Tankers Holdings Public Company Limited, 1:10-cv-00441-ML-LDA (D. R.I.) This action was commenced in October 2010 against, inter alia, Ocean Tankers and twenty-one (21) other companies and individuals within the Ocean Tankers group of companies, seeking the Rule B attachment of the M/T STAVRODROMI. A variety of claims were alleged by the Plaintiff and other intervening parties against the shipowner, on an alter-ego basis, including claims of unpaid hire, unpaid tug/tow services, and non-payment for other maritime necessaries. The Magistrate Judge sustained the attachment at the initial Rule E(4)(f) hearing, finding that various facts were indicia of an alter-ego relationship, such as overlapping ownership, directors, and officers; a common business address; and the fact that the corporate fleet name “Ocean Tankers” appeared emblazoned in large letters on the side of the vessel. The M/T STAVRODROMI remains under attachment in Rhode Island. A motion is currently pending for the interlocutory sale of the vessel.
- Star Reefers Pool Inc. v. Kalistad Limited, 1:11-cv-10136-GAO (D. Mass.) The Plaintiff in Star Reefers sought an Order of Attachment and Warrant of Arrest in January 2011 for its alleged breach of charter claims. Plaintiff sought the attachment and arrest of ninety-six (96) reefer containers, which had been held by the Plaintiff without a court order since late 2010. Although the Plaintiff did not articulate any alter-ego allegations within its Complaint, the lessee of the containers appeared in the action and moved to vacate the attachment and arrest on the basis that the containers were owned and leased by third-parties (i.e. – GESeaCo) with no connection to the charter party dispute referenced in the Plaintiff’s Complaint. The motion to vacate remains sub judice and the reefer containers remain under attachment/arrest in New Bedford, Massachusetts pending the Judge’s ruling.
- Naftomar Shipping & Trading Co Ltd. v. KMA International S.A., 6:11-CV-00002 (S.D. Tex.). In January 2011, the Plaintiffs in Naftomar sought and obtained the Rule B attachment of the M/V PRETTY LADY in Victoria, Texas, alleging non-performance claims under a charter party by the vessel owner’s purported alter-ego. After denying the shipowner’s motion to vacate the attachment on the grounds that an alter-ego relationship did not exist, the Judge ordered limited discovery to take place. Depositions were taken and the shipowner filed a supplemental motion to vacate the attachment of the vessel. The Court denied the supplemental motion to vacate, but ordered that an expedited trial would be held on the merits of Plaintiffs’ alter-ego allegations once the parties completed discovery on the issue. In finding that the Plaintiffs had presented reasonable grounds to believe the companies were alter-egos, the Court looked to the Oxford Capital factors and found that the vessel owner’s common offices, addresses, and telephone numbers from those of the primary defendant; common directors; and grossly inadequate capitalization were all indicia of an alter-ego relationship. The M/V PRETTY LADY remains under attachment.
Although each of the above cases involved different facts and different Courts, they all illustrate the potential dangers that companies may face when there is the appearance of a non-arms length relationship with another company. There appears to be a trend wherein District and Magistrate Judges are issuing orders of attachment and allowing vessels and other property to be detained for months based upon the minimal – and, often times, unsubstantiated – assertions contained in a maritime plaintiff’s verified complaint. This is especially common in jurisdictions outside of the Southern District of New York, where Rule B attachment and Rule C arrest actions are far less frequent and the judges are less familiar with the requirements to obtain and sustain an attachment based upon alter-ego allegations.
Countersecurity
Although a Rule B attachment of a vessel or other property will often pose a financial hardship to the defendant, Courts routinely will award countersecurity to parties who have had their assets attached. Supplemental Admiralty Rule E permits a defendant who asserts a counterclaim arising from the same transaction or occurrence that is the subject of the original action to obtain security for damages demanded in the counterclaim. The Court has broad discretion in determining whether, and in what amount, countersecurity should be posted. While any request for countersecurity must be based on something more than a claim for wrongful attachment, the court’s review of the merits of the counterclaim is limited to screening out “totally frivolous” claims by the counterclaimant. In addition, frequently, the amount of countersecurity ordered is not limited to the amount of security provided by the defendant to secure the plaintiff’s claim.
Conclusion
There is nothing wrong with companies having common officers and/or directors, provided that certain corporate formalities are observed. In fact, it is well established that there is a strong presumption in favor of corporate separateness. American Renaissance Lines, Inc. v. Saxis Steamship Co., 502 F.2d 674, 677 (2d Cir. 1974); see also, International Marine Consultants, Inc. v. Karavias, 1985 U.S. Dist. LEXIS 19272, at *14 (S.D.N.Y. 1985); Freeman v. Complex Computing Company Inc., 119 F. 3d 1044, 1052 (2d Cir. 1997) (“The presumption of corporate independence and limited shareholder liability serves to encourage business development.”). Ultimately, it is the Plaintiff’s burden to overcome this presumption and to establish with specific factual allegations that the relevant factors weigh in favor of piercing the corporate veil.
Notwithstanding, it is important for corporations to be mindful of the factors considered by U.S. Courts in imposing alter-ego liability, particularly when they are part of a large group of companies. As noted above, many of these factors are indicative of routine business practices and, in the absence of fraud, are insufficient to overcome the presumption of corporate separateness. However, companies and the individuals who run such companies must be aware of the importance of carefully following corporate formalities to maintain each entity’s separate and distinct corporate identity, such as maintain separate books and bank accounts. Overlapping officers and directors should take caution to truly “wear separate hats” when acting on behalf of the different companies, by using different letterhead and e-mail signatures for each company, and all corporate representatives should take heed to keep the companies’ documents in good order.
For more information about corporate veil piercing and/or how the relevant U.S. law applies to any specific set of facts or circumstances, please feel free to contact Chalos & Co, P.C. – International Law Firm at: info@chaloslaw.com.