Marc J. Goldstein Arbitrator & Mediator NYC
May 02, 2014

US Award Enforcement Against Alter Egos of the Award Debtor: Some Clarity Emerges

With an important assist from a senior US District Judge in New York of high distinction and regard, US law concerning recognition and enforcement of foreign awards under the New York Convention against non-parties to the award has taken a constructive step forward. In CBF Industria de Gusa S/A v. AMCI Holdings, Inc. , 2014 WL 1388519 (S.D.N.Y. Apr. 9, 2014), the Court held that where the award has yet to be recognized in any jurisdiction, and confirmation against the award debtor (as named in the award) is not being sought here, the Court will ordinarily lack subject matter jurisdiction under FAA Chapter Two to enforce the award against an alter ego or successor to the award debtor.

This decision builds upon a pre-Convention Second Circuit decision from 1963, the Orion Shipping case, in which the federal Court of Appeals held that confirmation actions under the FAA are generally not appropriate occasions to extend confirmation of the award to non-parties such as alleged alter egos, because the factual and legal issues involved in the determination of whether the non-party is bound by the award will tend to bog down in complexity what is intended to be a simple summary proceeding. (Orion Shipping & Trading Co. v. Eastern States Petroleum Corp., 312 F.2d 299 (2d Cir. 1963)). Orion Shipping was a domestic FAA case, and the guideline it established was not jurisdictional but simply a rule of case management: that the claim to hold a successor or alter ego liable for the award debtor’s obligation is really a separate cause of action from the confirmation itself, and should be handled separately so that award confirmation might remain a streamlined summary proceeding.

The Orion Shipping principle came into play, indirectly and in a controversial way, in two much-criticized Second Circuit decisions that held that the doctrine of forum non conveniens (FNC) may be applied in award recognition proceedings under FAA Chapter Two to dismiss the entire case even if the named award debtor is a party and confirmation against that party is sought, as it was in both the Monde Re and Figueiredo cases. (Readers desiring a quick refresher on Monde Re and Figueiredo are encouraged to use the word search function in the northwest corner of this web page, to access archived posts). Both of those cases involved attempts to extend the award’s obligations to non-parties alleged to be alter egos of the award debtor, and the factual and foreign law questions involved in the alter ego determinations were arguably better suited for resolution by a foreign court. Those decisions have been criticized in many sectors of the arbitration community because they dismissed the entire action including the request for recognition as against the award debtor, and thus appeared to violate the US’s treaty obligation to enforce foreign awards, appearing to make the exercise of jurisdiction under FAA Chapter Two discretionary rather than mandatory.

Some careful reading and analysis of the CBF Industria decision is needed to be satisfied that it is indeed a decision concerning the requirements for subject matter jurisdiction under FAA Chapter Two. The respondents’ motion to dismiss was framed in those terms, and also in the alternative as a motion to dismiss for failure to state a claim on which relief may be granted. The Court did not clearly state which branch of the motion it was granting, so it may be important to sort out whether the decision is best understood as having granted one or the other branches of the motion or perhaps both.

The Court’s ultimate holding was stated as follows: “If Plaintiffs were allowed to bring an enforcement action based on alter-ego theory without the confirmation of the Award in any court it would effectively act as a bypass on the recognition and enforcement scheme contemplated by the Second Circuit in Orion.”

Of course Orion Shipping, a 1963 domestic FAA case, seven years before US accession to the New York Convention, did not take into consideration what would be the effect of a prior recognition of a foreign award by a foreign court. But at least where there has been no prior recognition of the award anywhere, Orion Shipping provides a sensible rule under FAA Chapter Two: that an application to enforce a foreign award against a non-party, not accompanied by an application to recognize the award against the award debtor, does not fall under the Convention. Such an action simply seeks a declaration of the legal equivalence of the putative alter ego and the award debtor, and belongs in US federal court only if there is a basis for federal subject matter jurisdiction other than the Convention. If diversity of citizenship is lacking — as it is where both sides are aliens — and there is no US federal statutory cause of action, the pre-confirmation alter ego claim belongs in a court of one of the 50 States.

This much seems completely clear from CMF Industria, save for one frayed edge. That is where the alter ego or successor claim involves a simple and non-controversial adjudication, as where the contract or the award specifies that the award will be binding on successors to the award debtor, and there is no genuine factual dispute over succession. The CMF Industria case indicates that scenario is jurisdictionally sound under the Convention and FAA, but leaves one to suppose that perhaps jurisdiction then depends on a court’s subjective view of whether the alter ego or successor issue is simple or complicated. A better reading, I suggest, is that where the legal relationship of the non-party to the award debtor is established by the arbitration agreement or the award, recognition of the award against that non-party is a Convention issue not an issue of domestic law, and so jurisdiction under the Convention and FAA Chapter Two exists.

Things get more interesting when other scenarios are considered. Suppose there has indeed been a judicial recognition elsewhere of the foreign award, and the applicant joins his alter ego claim to a non-Convention application to recognize the foreign judgment under a US State’s version of the Uniform Foreign Money Judgments Recognition Act? This should be non-controversial, as both claims belong normally in the courts of the US State. The FAA is not implicated (See Post below, of today’s date, regarding a recent case where the applicant failed to appreciate this).

Now suppose the Monde Re or Figueiredo scenario, where recognition and enforcement are sought against the foreign award debtor and its putative alter egos. If the alter ego claim is viewed, as CMF Industria indicates it should be, as a non-Convention cause of action, federal subject matter jurisdiction under principles of “ancillary jurisdiction” is discretionary. Dismissal of that cause of action for lack of subject matter jurisdiction, or remand to a State court in a removed action, while retaining jurisdiction to recognize and enforce the award against the named award debtor, gives no offense to the Convention. The disquieting recent holding in Figueiredo that the doctrine of forum non conveniens (FNC) applies to a Convention/FAA Chapter Two proceeding should not come into play, as the application of the FNC doctrine is based on the assumption that the court could exercise jurisdiction under the Convention/FAA Chapter Two. To be sure, the factors of convenience and public interest that inform FNC analysis may well come into play when the court considers whether to exercise “ancillary jurisdiction” over the alter ego claim. But the lesson of CMF Industria is that the alter ego claim normally does not fall under the Convention, and so the rejection or retention of jurisdiction over that claim is not governed by the Convention. The claim is a separate cause of action governed by non-arbitration law; federal jurisdiction should be analyzed under non-arbitration jurisdiction criteria, and any discretionary component of accepting jurisdiction may be analyzed on a case by case basis according a number of factors including whether the objectives of the Convention and FAA Chapter Two will be well served.

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