It's Complicated

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.