Marc J. Goldstein Arbitrator & Mediator NYC
March 11, 2010

Application of “Estoppel” and “Alter Ego” Theories to Nonsignatories

In a practical demonstration of how rigorous are the standards under New York law for compelling a non-signatory to arbitrate under the “estoppel” and “alter ego” doctrines, the Chief Judge of the U.S. District Court in Manhattan has issued a decision denying a motion to compel Deutsche Bank AG (“DB”) to arbitrate before a FINRA panel claims relating to the marketing of Auction Rate Securities (“ARS”). (Oppenheimer & Co. v. Deutsche Bank AG, 2010 U.S. Dist. LEXIS 19655 (S.D.N.Y. Mar. 2, 2010).

The case is one of many that arose in the wake of the collapse of the ARS market. Here, US Airways brought its claims in arbitration against Oppenheimer & Co., for damages resulting from sale of ARS to US Air allegedly in violation of the company’s investment policies. Oppenheimer asserted third-party claims in the same arbitration against DB and its affiliate Deutsche Bank Securities, Inc., a FINRA member firm that was required, by reason of such membership, to arbitrate the dispute.

First analyzing estoppel as a basis for requiring DB to arbitrate , the court noted that New York law requires that the party knowing accepted the benefits of an agreement with an arbitration clause, and those benefits must “flow[] directly from the agreement.” Here, the question was whether to view DB’s benefits from the FINRA membership of its securities broker-dealer affiliate as “direct” or “indirect.” Whereas DB did not avail itself of any rights created by the agreement, but rather benefitted mainly from the client relationships established by its affiliate, the benefits were viewed as “indirect,” and so estoppel did not furnish a basis to require DB to arbitrate.

The direct/indirect distinction may appear to be somewhat artificial, and difficult to apply, but what the courts do in such cases turns on the perceived legitimacy of boundaries internally created among separate business units in multi-tiered, multi-national corporation. Reliance on separate entities will be ignored when one entity enters into a contract essentially as a proxy for its parent or one or more other affiliates.

Turning to the contention that DB and its U.S. securities broker-dealer affiliate — an indirect subsidiary — were “alter egos” and that their “corporate veil” should be “pierced,” the Court held that mere ownership control and direction of policies and management was insufficient to justify compelling arbitration under these theories. Lacking was proof of “actual domination” in the affiliate’s affairs, any indication that the affiliate was undercapitalized, or evidence that the parent entity disregarded corporate formalities or made improper use of the affiliate’s funds.

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