The Southern District of New York recently held that it did not have subject matter jurisdiction under the New York Convention to enforce an unconfirmed arbitration award against an alter ego or successor-in-interest to the liable party named in the award. CBF Industria de Gusa S/A v. AMCI Holdings, Inc., 2014 WL 1388519 (S.D.N.Y. Apr. 9, 2014). But the Court suggested it would have exercised jurisdiction had the successor/alter-ego issue been straightforward.
The plaintiffs, Brazilian iron companies, won a $48 million International Chamber of Commerce (“ICC”) arbitration award in Paris against Steel Base Trade, AG (“SBT”). Contrary to representations it had made early in the arbitration, SBT allegedly transferred all of its business assets to Prime Carbon GMBH during the arbitration and subsequently went into bankruptcy proceedings in Switzerland. Plaintiffs were thus unable to collect any money from SBT.
Plaintiffs then sought to enforce the arbitration award against Prime Carbon, its individual owners, and related entities, as SBT’s successors in interest or alter egos. None had been parties to the arbitration. Plaintiffs asserted jurisdiction under Chapter 2 of the Federal Arbitration Act, which empowers federal courts to enforce arbitral awards governed by the New York Convention.
Granting Defendants’ motion to dismiss, the Court ruled that it did not have jurisdiction to modify the arbitration award in order to name different or additional award debtors. Proceedings to modify an arbitration award must be brought in a court with primary jurisdiction, i.e., the jurisdiction in which the arbitration took place or was seated– in this case, France. The Court noted that Plaintiffs had raised allegations of fraud in the arbitration, but that the tribunal declined to rule on those allegations.
The Court also rejected Plaintiffs’ argument that it was seeking to enforce the award against the successors to or alter egos of SBT rather than modify its award. The Court did acknowledge that “[d]etermining alter-ego liability against a non-party is within the purview of a court sitting in secondary jurisdiction under the New York convention as it is within the scope of an enforcement action.” CBF Industria, 2014 WL 1388519, at *11. The court suggested that it could determine successor or alter-ego liability against a non-party if the arbitration agreement expressly provided that any award shall bind successors and assigns and a simple review of transaction documents could resolve the issue, such as when the non-party acquired the award debtor by means of a stock purchase or the non-party merged with the award debtor.
In this case, Plaintiffs argued there should be successor liability based on a transfer of assets and liabilities from SBT to Prime Carbon, some of which Prime Carbon no longer retained, and on certain alleged representations SBT made about Prime Carbon’s being its successor. Because the arbitration agreement did not bind successors and assigns and the issue of successor or alter-ego liability was not straightforward, the court refused to enforce the award against the alleged alter egos/successors. In reaching its result, the Court relied on Orion Shipping & Trading Co. v. Eastern States Petroleum, 312 F.2d 299 (2d Cir. 1963), which held that courts must avoid complex factual determinations regarding alter-ego or successor-in-interest theories in actions to confirm arbitration awards because they are abbreviated proceedings.
Finally, the Court rejected Plaintiffs’ argument that the award had already been confirmed against SBT in an earlier bankruptcy proceeding because they were only seeking enforcement and not confirmation. The Court reasoned that the bankruptcy administrator’s recognition of Plaintiffs’ arbitration claims was not a confirmation of the arbitration award because it had preceded the date of the award. Because the award was unconfirmed, the Court, again relying on Orion, held that a finding of alter-ego theory in an enforcement action was not permissible on an unconfirmed arbitral award because it would bypass the recognition and enforcement scheme of the Federal Arbitration Act and the New York Convention.
This decision demonstrates the importance of having: (1) an arbitration agreement that expressly provides that any award shall bind successors and assigns; and (2) an arbitration award that establishes who the successors and assigns are. When the successor or alter-ego issues are not straightforward, an award creditor should confirm the award against the award debtor where possible before attempting to enforce against any other party.