Alter ego entities are a pervasive presence in complex international commercial arbitrations
If those entities are named as Respondents, and they are non-signatories of the arbitration agreement, two procedural courses are possible. The first, and perhaps the more common, is that the alter egos will raise an objection to arbitral jurisdiction, and participate in the arbitration subject to that objection. This participation may or may not entail an express submission of the alter ego issue to the arbitrators – and whether there has been such a submission of course affects the scope of judicial review of the Tribunal’s decision on the alleged alter ego’s jurisdiction objection. Much less often (so it seems based on experience and the dearth of reported decisions), the alleged alter ego will seek a judicial determination at the start of the arbitration to declare that they are not bound to participate, or the Claimant will move in a competent court to compel the reluctant alter ego to arbitrate.
But in many cases the Claimant may elect to leave the alleged alter egos off the roster of named Respondents, reserving the question of their responsibility to satisfy a favorable award for later determination in the courts. In that setting, US arbitration law has for 60 years remained under the influence (and here in New York, the control) of a US Second Circuit Court of Appeals decision, the Orion Shipping case (Orion Shipping & Trading Co. v. Eastern States Petroleum Corp., 312 F.2d 299 (2d Cir.), cert. denied, 373 U.S. 949 (1963)).
In Orion Shipping, the Court held that an arbitration award – a US-seated international award that was treated under FAA Chapter 1 because this was seven years before the US incorporated the New York Convention into domestic law through FAA Chapter 2 — could not be confirmed under the FAA, under an alter ego theory, against the parent company of one of Respondents named in the arbitration and in the award, and observed that an award confirmation action under FAA Chapter 1 was not the proper time to attempt to pierce the corporate veil, due to the potentially complex fact-finding this inquiry would involve.
While Orion Shipping has survived as the law in the Second Circuit, not even one other federal court of appeals has ruled on the same issue, and Orion Shipping has had a very mixed reception in federal district courts outside the Second Circuit where it is not a controlling precedent. Two dimensions of Orion Shipping raise questions about the wisdom of its holding: first, it was based on pragmatic concerns rather than an authoritative construction of the Federal Arbitration Act, and second, the pragmatic concern of saddling confirmation actions with the complex evidentiary issues that an alter ego adjudication might involve arguably call for a discretionary rule not per se rule requiring two consecutive post-award lawsuits.
Orion Shipping is back in arbitration world “headlines” again, courtesy of a recent award enforcement case in the Southern District of New York, Eletson Holdings, Inc. v. Levona Holdings Ltd., 2024 WL 1702397 (S.D.N.Y. Apr. 19, 2024). In the Eletson arbitration, Claimant did not name the alter egos as Respondents but only as the collaborating miscreants of the named Respondent. Claimant did however seek to arbitrate the alter ego issues; this was done; and the final award made comprehensive factual and legal determinations of the existence of the alter ego relationships. The Eletson confirmation/vacatur case was complex and multi-faceted, and in this Post you will be mercifully spared discussion of everything other than the alter ego issue!
When the time came to seek confirmation of the award, Claimant’s counsel did not seek confirmation against the alter egos. At that point (if not sooner), we may surmise that Claimant had come into contact with the Orion Shipping case law. So instead of asking the Court to confirm the award against the alter egos, Claimant asked the Court to confirm the award’s alter ego determinations – an understandable play for some potential issue preclusion against the alter egos, in an eventual separate litigation to enforce against the award confirmation judgment against them. But the Court (correctly) rejected this out of hand – saying, in substance, “the FAA puts us in the business of confirming awards, not findings of fact in awards uncoupled from the party bound by the award.” And to quote rather than paraphrase the Court: “Eletson may yet have the opportunity to seek to hold the alter egos responsible for Levona’s obligations under the award. But not having sought to make the alter egos a party to the arbitration, they must do so through a separate action for veil piercing. They may not do so through findings and an award as to which the alter egos had no opportunity to be heard.”
Before I unleash my diatribe on why “a separate action for veil piercing” should be consigned to the dustbin of outdated arbitration law, let’s pause for a moment to ask what the arbitrator in Eletson might have done to make this situation better. This is a “what makes a good arbitrator?” question.
We might all (or almost) agree that it is not for the Tribunal to advise a Claimant to make a judicial motion to compel arbitration, or to advise a Claimant to join new parties as Respondents. But when the Claimant asks for an award against non-parties on an alter ego theory, or an award against the named Respondent determining that certain non-parties are its alter egos, and the Respondent counters by contesting veil-piercing on the facts, why should the arbitrator only resolve the disputes as the Parties have framed them? The Parties’ framing of the issue may leave gaps that would encumber effective award enforcement. Should the “good arbitrator” merely take the arguments as presented by the Parties and leave the Parties to worry about award confirmation and enforcement? Or would it be preferable for the “good arbitrator” to ask: “Claimant seeks an award against non-parties B and C on the basis that they are alter egos of Respondent A, or in the alternative at least an award binding Respondent A on this issue. The Parties are invited to address in the Pre-Hearing Memorials (i) the legal basis for the Tribunal’s power to make an award against entities that are neither parties to the arbitration nor signatories of the arbitration agreement, and (ii) if such power were found not to exist, the reasons justifying the Tribunal making alter ego determinations that bind only the named parties?”
A closely-related question: Should “the good arbitrator” know or find out the law bearing on judicial enforcement of awards against alleged alter egos of the named party that the award would bind? If the arbitrator knows about the Orion Shipping line of cases but the Parties – as indicated by their briefs – do not, shall the arbitrator remain silent and only “call balls and strikes” among Parties’ pitches? Suppose the Tribunal adds to its request for briefing “Please give consideration, to the extent relevant, to the Orion Shipping line of cases.” Is that out-of-bounds proactivity? Or precisely the kind of reservoir of arbitration-specific legal knowledge that the effective Tribunal should bring to bear if the Parties do not do so and it matters?
In the not-to-be-forgotten de Gusa case in the Second Circuit in 2017 (CBF Industria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58 (2d Cir. 2017), the Court somewhat re-shaped the Orion Shipping doctrine by allowing — at least — a narrow exception in the context of New York Convention recognition and enforcement of an award made outside the United States: such recognition and enforcement may be pursued under the Convention and FAA Chapter Two directly against alleged alter egos of the award debtor where the award debtor itself is a defunct entity not capable of being a Respondent in the recognition and enforcement case. I refer to “at least … a narrow exception” not because this is what the Second Circuit said, but because alter ego entities seeking to avoid having awards enforced against them under the New York Convention and FAA Chapter Two, and seeking to retain the procedural advantages of playing out a more labored two-litigation process under Orion Shipping, may argue that this is the actual “holding” of de Gusa. And by “holding” I mean to say the narrowest discernible legal principle required to resolve the case. Arguably that narrow principle is that there is no reason to require (i) first, a successful Convention/FAA enforcement case (somewhere) against the award debtor, resulting in a Judgment, and then (ii) an action to enforce the Judgment against the alter egos under applicable state law, where the legal extinction of the award debtor as an entity capable of being sued makes enforcement against the award debtor impossible.
Deciphering the holding of de Gusa – “holding” in the broader sense of what the Court was telling us about the law — is a tall order for a mortal lawyer. I confirmed my mortality in an earlier long-form effort, titled (in short-form) “Deciphering De Gusa,” and published at Volume 29 No. 4 of the American Review of International Arbitration at p. 475 (2018).
But here is my 2024 interpretation: Whether to apply the rule of Orion Shipping to the recognition and enforcement under the Convention of a foreign award — that is to say, whether a US Court sitting as a “secondary jurisdiction” should apply Orion Shipping, is not mandated by the Convention or the Orion Shipping case itself, and therefore is a matter of discretion in the District Court. (On remand in de Gusa, the District Court exercised that discretion to permit Convention recognition and enforcement of the award against the alter egos of the defunct award debtor, even though that award debtor was a party to the enforcement case and the award had not been recognized and enforced anywhere else (316 F.Supp.3d 635 (S.D.N.Y 2018)). By implication, rather than by affirmative statement by the Second Circuit panel, that panel’s decision leaves Orion Shipping as “good” Second Circuit law, binding on the US district courts in the Second Circuit (i) in a domestic arbitration where award confirmation is governed entirely by FAA Chapter 1, and (ii) as the Eletson case indicates, probably also in US-seated international arbitrations.
But there is more. Per the Second Circuit in de Gusa, the rule in Orion Shipping fits into the enforcement regime of the New York Convention (and in turn FAA Chapter 2) because it is a ” rule[] of procedure of the territory where the award is relied upon.” (Art. III of the Convention). But the “rule of procedure” when a district court in the Second Circuit sits as a “secondary jurisdiction” to recognize and enforce a foreign award is no longer the rule of Orion Shipping, but instead the newer rule of de Gusa: that Orion Shipping is not a mandatory rule but a rule of discretion. That is to say, the district court may decide to permit, or to disallow, direct enforcement of the award under the Convention against alter egos of the award debtor. On the Second Circuit’s remand of the de Gusa case to the US District Court for the Southern District of New York, that Court declined to apply Orion Shipping and gave recognition and enforcement to the Award against alter egos of the award debtor (316 F.Supp.3d 635 (S.D.N.Y 2018) and, at a later stage, 650 F.Supp.3d 228 (S.D.N.Y. 2023). What is mandatory when a foreign award is brought to the US for recognition and enforcement under the Convention, said the Second Circuit, is that refusal of recognition and enforcement may only be based on one of the defenses stated in the New York Convention. Consider just how sensibly this might play out: the alter ego Respondents invoke Convention Art. V(1)(b) and say they were unable to present their case; the Petitioner (award creditor) argues that they are alter egos and their case was therefore effectively presented by the award debtor; and the alter ego issue thus becomes a Convention defense issue and is fully resolved in the enforcement case.
And while the de Gusa Second Circuit panel did not elaborate on this point, that would appear to imply that an alter ego respondent might succeed in resisting enforcement — but only if the implications of its alter ego status can be situated in a New York Convention Article V defense. And indeed that was the framework for further litigation on enforcement of the award in de Gusa, the most recent chapter of which was in January 2023, when the alter egos failed on their motion for summary judgment, seeking determinations without trial that (i) they lacked “capacity” under Convention Article V(1)(a) and that they had been “unable to present their case” to the Arbitral Tribunal, under Convention Article V(1)(b). (650 F.Supp.3d 228 (S.D.N.Y. 2023)).
If one is a judicial tea leaf reader, one might well conclude that the Second Circuit panel that decided de Gusa was prepared to dispose of Orion Shipping as a mandatory rule in all US-seated arbitrations, domestic and international. One might well conclude that the only reason it did not do so was judicial restraint: the Court elected to decide only the case that was before it . And perhaps that explains why, six years later, we still have Orion Shipping as a mandatory rule for US-seated arbitrations, and why that rule was enforced — without discussion of its virtues or vices — by the US district court judge in the Eletson case. Eventually some aggrieved award creditor pursuing alter egos will take the issue to the Second Circuit and — if you believe the indications in my crystal ball — the Second Circuit will convert the Orion Shipping rule into a rule of discretion in all award confirmation cases under FAA Chapters 1 and 2.
If the alter ego defendant, in an enforcement case brought on a US-made Convention award, also must fit its defenses into the framework of Convention Article V, little or nothing remains of the Orion Shipping rule. The Second Circuit did not say this with clarity in de Gusa. But a distinction for US-made Convention awards, where the US district court sits in “primary jurisdiction,” is not meaningful. The Convention’s Article V defenses become the focus of the enforcement case, unless there is a separate “rule of procedure” recognized by Article III of the Convention that makes the alter egos an improper party to the enforcement case until an unless there has been an award enforcement — whether in the same case or elsewhere – against the award debtor. But in de Gusa the Second Circuit stated that such a “Texas Two-Step” looks too much like the “double exequatur” that the New York Convention was adopted to abolish. I see no reason why that principle has less force in regard to a US-made Convention award than a foreign-made Convention award. Judicial restraint can be problematic when an appellate court with great influence in international arbitration solves a problem for only a portion of the cases wherein the problem arises. The Eletson case appears to be the first post-de Gusa case in a federal district court in the Second Circuit, but the frequency of published decisions is only one measure of the scope of the problem. Those of you who arbitrate regularly as counsel or arbitrators know that alter egos of the contract-signatory respondent are a regular feature of international arbitrations.
What is the prescription for the law in the Second Circuit? Probably to abrogate Orion Shipping, entirely and conclusively. One of the main reasons alter egos exist is to create legal separation between the potential obligor (whether of an arbitration award or otherwise), and the nominal owner of the obligor’s assets. Orion Shipping sought to promote prompt and efficient confirmation of awards, by shutting out the fact-intensive and potentially time-consuming process of litigating the existence, or not, of an alter ego relationship. The point of prompt and efficient confirmation is to move the award creditor swiftly to eligibility to use the enforcing state’s methods for execution on judgments. But if the award-debtor has arranged to be judgment-proof, and the main hope for execution is against the alter egos, the “Texas Two-Step” mostly serves to delay the award-creditor’s ability to move on from enforcement to execution. If only the named award debtors may be respondents in the enforcement case, while the alter egos remain on the sidelines pending entry of an award enforcement judgment, the award debtor who is keen on a shell game to move assets from one alter ego entity to another to stay at least one step ahead of execution against assets, gains undue advantages — the systemic advantages of crowded federal court dockets where Convention award enforcement is rarely a top priority, and award enforcement judgments may be challenged on appeal to buy more time, and the additional opportunities to buy time by raising Convention defense issues under Article V that may ultimately lack merit but do require careful briefing and study by the Courts. From a public policy perspective — viewing satisfaction of enforced awards as an element of public policy — bringing the alter ego shell game under early judicial control in the award-enforcing court makes a great deal of sense. This solution also takes into account the limited ability of Tribunals to solve the alter ego issue within the arbitral procedure. The Claimants either will or will not seek to join the alter egos as Parties (Thoughtful counsel in many arbitrations will name the alter egos as Respondents and seek to have those issues resolved by the Tribunal. If the alter egos object to jurisdiction, but do not immediately go to court, the issue gets arbitrated, and if the alter egos are unhappy with the Tribunal’s determination that they were indeed alter egos and therefore bound to arbitrate the merits, that displeasure can become part of the confirmation/vacatur process. The competent court then decides the alter ego issue, whether under a deferential standard because the issue was submitted to arbitration, or under a de novo standard if the issue was arbitrated over the alter ego parties’ objection that it should not have been arbitrated. In either case, the alter ego issue is resolved in the confirmation/vacatur case, not deferred to a later separate lawsuit.)
Let’s look hopefully toward an early opportunity for the Orion Shipping rule to to meet its final demise.
