Opinion
88 Civ. 7906 (PKL)
March 28, 1991
MEMORANDUM AND ORDER
Defendant Elders Futures Inc. ("Elders") has moved to compel plaintiffs George and Waleed Abu-Nassar (the "Abu-Nassars") to provide more complete answers to various interrogatories and document production requests relating to Elders' first, second and fifth counterclaims. Those counterclaims seek to hold the Abu-Nassars personally liable for the alleged indebtedness of Informative Investment Group, Ltd. ("Infovest"), a Lebanese corporation wholly owned by the Abu-Nassars. Besides opposing the discovery motion, the Abu-Nassars have cross-moved to dismiss these counterclaims, and the court is treating this motion as one for partial summary judgment. (See Order dated July 17, 1990.) For the reasons that follow, the motion for partial summary judgment is denied and the motion to compel discovery is granted.
At the time of the events relevant to this action, a third individual, Gabriel Manougian, owned a significant share of Infovest, which he subsequently sold to the Abu-Nassars in mid-1988.
The two motions are treated together. Pursuant to 23 U.S.C. § 636 (c)(1), the parties consented to my jurisdiction to decide the partial summary judgment motion in addition to the motion to compel discovery. (See Stipulation dated August 7, 1990.)
Statement of Facts
This case is the result of the deteriorated relationship between Elders, a registered futures commission merchant incorporated in New York, and the Abu-Nassars, who are citizens of Lebanon and sole shareholders and principals of Infovest. Infovest acted as an introducing broker for commodities futures and options transactions and was organized as a limited liability company under Lebanese law. In November 1983, Infovest entered into an agreement with Rudolf Wolff Commodity Brokers ("RWCB"), the predecessor of Elders, under which Infovest would solicit customers exclusively on behalf of RWCB and receive a share of the resulting commissions. Infovest and RWCB executed an Agency Agreement and a related letter agreement. The Agency Agreement provided, inter alia, that Infovest "guarantees the payment of all sums to RWCB in connection with or in any manner relating or resulting from the accounts, including, without limitation, margin calls and debit balances which may arise." (Agency Agreement dated November 25, 1983, annexed as Exh. A to Elders' Answer and Counterclaims, dated March 13, 1989, at ¶ 3(c).) This guarantee was originally secured by a $250,000 letter of credit of Infovest for the benefit of RWCB. (See letter of agreement dated November 25, 1983, annexed as Exh. B to Elders' Answer and Counterc1aims.)Various accounts were established at RWCB on behalf of Infovest and its principals. A portion of the commissions earned by Infovest was deposited in account 75001, to be used for Infovest's operating expenses in Beirut. (Memorandum of Plaintiffs-Counterdefendants at 6.) Account 75002 was opened as a joint account for the three individual principals of Infovest (the Abu-Nassars and Gabriel Manougian, an employee of Infovest), and was to be used as the depository of the remainder of the commissions earned by Infovest. (Complaint filed November 7, 1988 at ¶ 9.) As of October 30, 1987, account 75002 had a balance of $49,825.17. (Id. at ¶ 10.)
No claim has been made in this lawsuit regarding any funds in Account 75001.
In March 1985, the Infovest letter of credit to RWCB was replaced by account 75003, into which George Abu-Nassar deposited $250,000 of his personal funds as security for the performance of Infovest's guarantee to RWCB. Elders permitted George Abu-Nassar to withdraw excess interest or earnings whenever the amount on deposit in this account exceeded the required $250,000. (See letter agreement dated March 14, 1985, annexed as Exh. L to Affidavit of Barbara M. Roth, Esq., sworn to April 24, 1990.) George Abu-Nassar deposited additional personal funds into account 75003, and they were invested, together with the original $250,000 security deposit, in United States Treasury Bills. (Complaint at ¶ 12.) As of October 30, 1987, account 75003 had a balance of $451,726.25. (Id. at ¶ 13.) Finally, George Abu-Nassar opened account 75005 for his personal commodities futures investments. This account contained $30,854.84 as of October 30, 1987. (Id. at ¶ 19.)
On April 27, 1987, as a result of tremendous fluctuation in the price of silver futures contracts, a number of accounts at Elders for customers who had been introduced by Infovest sustained substantial deficits when their over-margined positions were updated. Elders covered the deficits, totalling $4,213,905.18, but the customers failed to deposit sufficient additional funds to balance their accounts. (Answer and Counterclaims at ¶ 82; id. at Exh. G.) Infovest subsequently refused to pay the deficit when Elders requested that Infovest fulfill its guarantee obligations under the Agency Agreement. (See telex annexed to Answer and Counterclaims at Exh. H.) At the same time, Elders refused to remit the balance of accounts 75002, 75003 and 75005 to plaintiffs and Infovest and froze the three accounts. (Memorandum of Plaintiffs-Counterdefendants at 9.)
On November 23, 1987, Elders commenced a breach-of-contract action against Infovest in New York State Supreme Court, seeking payment of the deficits in the accounts of customers introduced by Infovest. On February 18, 1988, Infovest filed an answer and counterclaim, which sought the withheld commissions and the funds in the various accounts at Elders, as well as over twenty million dollars in compensatory and punitive damages.
The present federal action was commenced by the Abu-Nassars on November 7, 1988, seeking damages under section 4(b) of the Commodity Exchange Act, 7 U.S.C. § 6(b), as well as section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 of the Securities and Exchange Commission. Plaintiffs also assert common law claims of conversion and breach of contract with respect to the funds held in accounts 75002, 75003 and 75005.
In its answer and counterclaims, Elders contends that the Abu-Nassars are the alter ego of Infovest, and that as a result they are personally liable for the deficits in the accounts of those customers introduced by Infovest. Elders also claims that the Abu-Nassars set up another entity to defraud Elders by rendering Infovest an empty shell, that Elders was entitled to set off the balance of the three frozen accounts against the deficits, that the Abu-Nassars agreed to forego any commissions earned in order to pay off the deficits, and that the Abu-Nassars were personally liable for an alleged breach of contract by Infovest.
The parties have undertaken substantial discovery in both the state and the federal actions, including a lengthy August 1989 deposition of the Abu-Nassars in London. Nonetheless, they have encountered a roadblock based on their divergent views as to the merits of Elders' effort to impose personal liability on the Abu-Nassars for the debts of Infovest. The specific source of contention is Elders' First Set of Interrogatories and a supplemental document request, which were served on November 3, 1989. The interrogatories comprised thirty-eight questions, each containing various subparts. The Abu-Nassars served their answers and objections to the interrogatories on February 27, 1990. Although the Abu-Nassars answered some of the questions, they refused to answer any questions relating to Elders' attempt to pierce the corporate veil of Infovest, arguing primarily that Elders had failed to make a preliminary showing with respect to its alter ego claim and that it was therefore not entitled to any discovery on that allegation. The Abu-Nassars also argued generally that the interrogatories were overbroad, duplicative and covered an excessive time period, that they violated Civil Rule 46, that Elders had already had an opportunity to obtain the requested information during discovery in the state court action, and that the information requested was subject to various privileges.
Elders' supplemental document production request consisted of requests addressing twelve areas, particularly documents that could substantiate Elders' allegation of alter ego liability. The Abu-Nassars served their response and objections to the document request on February 12, 1990, raising similar objections to the document requests as they were to raise in response to Elders' interrogatories.
On April 24, 1990, defendant moved to compel plaintiffs to provide more complete answers to its interrogatories and document production requests. On May 16, 1990 plaintiffs responded with a motion to dismiss Elders' first, second and fifth counterclaims, which incorporate allegations that Infovest was the alter ego of plaintiffs and that plaintiffs fraudulently stripped Infovest of its assets to avoid paying their obligations to Elders. The court converted plaintiffs' motion into one for partial summary judgment, and the parties were given the opportunity to supplement the evidentiary record.
ANALYSIS
I. Summary Judgment A. Standard for Summary Judgment
The court may enter summary judgment only if it concludes that there is no dispute as to any material fact and that, based on the undisputed facts, the moving party is entitled to judgment as a matter of law. See, e.g., Montana v. First Federal Savings Loan Ass'n of Rochester, 869 F.2d 100, 103 (2d Cir. 1989); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932 (1987); Falls Riverway Realty, Inc. v. City of Niagara Falls, 754 F.2d 49, 54 (2d Cir. 1985). It is axiomatic that the role of the court on such a motion "is not to resolve disputed issues of fact but to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight v. U.S. Fire Ins. Co., 804 F.2d at 11. See, e.g., Twin Laboratories, Inc. v. Weider Health Fitness, 900 F.2d 566, 568 (2d Cir. 1990); Montana v. First Fed. Sav. Loan Ass'n of Rochester, 869 F.2d at 103; Ramseur v. Chase Manhattan Bank, 865 F.2d 460, 465 (2d Cir. 1989); Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir. 1985).
The movant bears the initial burden of informing the court of the basis for its motion and identifying those portions of the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the movant fails to meet its burden, the motion will fail even if the opponent fails to submit any evidentiary matter to establish a genuine factual issue for trial. Adickes v. S.H. Kress Co., 398 U.S. 144, 160 (1970).
If the movant carries its initial burden, the burden shifts to the party opposing the motion to demonstrate a genuine dispute as to one or more of the material facts. Celotex Corp. v. Catrett, 477 U.S. at 322. See also Greater Buffalo Press, Inc. v. Federal Reserve Bank of New York, 866 F.2d 38, 42 (2d Cir.), cert. denied, 490 U.S. 1107 (1989). In doing so, the opposing party cannot simply rely on its pleadings or on conclusory factual allegations, or conjecture as to the facts that discovery might disclose. See, e.g., Gray v. Town of Darien, Dkt. No. 90-7660, slip op. 2277, 2287 (2d Cir. March 1, 1991). Rather, the opposing party must present specific evidence in support of its contention that there is a genuine dispute as to the material facts. See, e.g., Celotex Corp. v. Catrett, 477 U.S. at 324; Twin Laboratories v. Weider Health Fitness, 900 F.2d at 568; Montana v. First Fed. Sav. Loan Ass'n of Rochester, 869 F.2d at 103; Knight v. U.S. Fire Ins. Co., 804 F.2d at 12; L L Started Pullets, Inc. v. Gourdine, 762 F.2d 1, 3-4 (2d Cir. 1985); Eastway Constr. Corp. v. New York, 762 F.2d at 251. To demonstrate a "genuine dispute," the opposing party must come forward with enough evidence to justify a reasonable jury in returning a verdict in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86 (1986); Cinema North Corp. v. Plaza at Latham Associates, 867 F.2d 135, 138 (2d Cir. 1989). Furthermore, if "the party opposing summary judgment propounds a reasonable conflicting interpretation of a material disputed fact," summary judgment must also be denied. Schering Corp. v. Home Ins. Co., 712 F.2d 4, 9 (2d Cir. 1983) (citing New York State Energy Research Dev. Auth. v. Nuclear Fuel Serv. Inc., 666 F.2d 787, 790 (2d Cir. 1981)).
In the present case, after resolving all ambiguities and drawing all inferences in favor of defendant, I conclude that plaintiffs' motion for partial summary judgment on defendant's first, second and fifth counterclaims must be denied. Elders has presented enough evidence to demonstrate the existence of a number of genuine disputes as to material facts regarding its contention that plaintiffs may be held personally liable to Elders as the alter egos of Infovest. The fact that the Abu-Nassars have refused to comply with Elders' request for further discovery that might substantiate its allegations further supports denial of partial summary judgment without prejudice to renewal after the completion of Elders' requested discovery. See, e.g., Schering Corp. v. Home Ins. Co., 712 F.2d at 10 ("summary judgment should not be granted while the party opposing judgment timely seeks discovery of potentially favorable information."); see also Melikian v. Corradetti, 791 F.2d 274, 282 (3d Cir. 1986) (party "should be permitted to proceed with discovery to further develop the factual record."); Galgay v. Gangloff, 677 F. Supp. 295, 300 (M.D. Pa. 1987) (plaintiff "made sufficient allegations" to withstand dispositive motion, but "defendants are free to challenge the applicability of the alter ego doctrine once a proper factual foundation has been established."); Berne Street Enterprises, Inc. v. American Export Isbrandtsen Co., 289 F. Supp. 195, 197 (S.D.N.Y. 1968).
B. Choice of Law
The first issue we face is the choice of law governing a suit in an American court attacking the corporate status of a foreign corporation. This question is relevant to both the substantive law governing requirements of corporate form and the applicable standards for piercing the corporate veil. This court looks to foreign law regarding requirements of corporate status for a foreign corporation, see, e.g., Oriental Commercial Shipping Co. v. Rosseel, N.V., 702 F. Supp. 1005, 1019-21 (S.D.N.Y. 1988), but with respect to piercing the corporate veil of a foreign corporation, different choice of law principles may be applicable. See Itel Containers Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 1988 WL 75262, *4 (S.D.N.Y. July 13, 1988) ("As a general matter, the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation. . . . Different conflicts principles, however, apply where the rights of third parties external to the corporation are at issue.") (citing First Nat'l City Bank v. Banco Para el Comercio Exterior, 462 U.S. 611, 621 (1983)) (emphasis in original). See also Noto v. Cia Secula di Armanento, 310 F. Supp. 639, 647 n. 22 (S.D.N.Y. 1970) (foreign law governs piercing the corporate veil of a foreign corporation F although New York law also analyzed) (citing cases).
Elders asserts that New York law is controlling on all issues, since the Agency Agreement between Elders and Infovest stated that New York law would govern "[t]his agreement and all matters relating hereto." (See Agency Agreement dated November 25, 1983, annexed to Elders' Answer and Counterclaims as Exh. C, at ¶ 15.) Plaintiffs counter that the "governing law" provision in the Agency Agreement applies only to issues of interpretation regarding the rights and obligations of the parties under the agreement and does not cover issues of corporate status. Plaintiffs contend that since Infovest was organized as a Lebanese limited liability company, Lebanese law should govern issues of corporate organization and alter ego liability.
There is no need to resolve this issue at this stage, however, since partial summary judgment is not appropriate under either Lebanese or New York law. Genuine issues of material fact exist regarding Infovest's compliance with the statutory requirements of a limited liability company under Lebanese law, thereby precluding summary judgment on the issue of the personal liability of the principals. Moreover, if New York alter ego liability law were applicable, material factual disputes would still exist regarding the control and operation of Infovest by the Abu-Nassars and their possible disregard of Infovest's separate corporate identity. Depending upon how these disputes are resolved E1ders might prevail on its claim to pierce Infovest's corporate veil. Accordingly, partial summary judgment in favor of plaintiffs is inappropriate.
Both parties have submitted legal opinions from experts an Lebanese law regarding the interpretation of certain Lebanese statutory requirements for limited liability companies. The expert opinions, in the form of letters to counsel, are brief, incomplete and without substantiation, especially that of plaintiffs' expert, Salah M. Dabbagh. In reaching their respective conclusions, the experts fail to resolve to the court's satisfaction all relevant issues of Lebanese law. Moreover, the parties differ over which party has the burden of proof on the determination of foreign law under Fed.R.Civ.P. 44.1.
Since under Rule 44.1 the determination of foreign law is a question of law for the court, summary judgment may be an appropriate remedy in some cases, even if the opposing party offers the affidavit of an expert witness on foreign law in support of its claims. See, e.g., Bassis v. Universal Line, S.A., 436 F.2d 64, 68 (2d Cir. 1970); Kashfi v. Phibro-Salomon, Inc., 628 F. Supp. 727, 737 (S.D.N.Y. 1986) (citing cases). Nonetheless, in the absence of any additional basis to challenge the validity of either legal opinion, the court is not prepared at this time to rule definitively on issues of Lebanese limited liability company law. For purposes of analysis, the court will look to the text of the relevant provisions of the Lebanese Code as provided by counsel (see Roth Affidavit at Exh. F), and will refer to the expert opinions to highlight certain issues of material fact that are still in dispute.
Under Lebanese law, shareholders of a limited liability company are generally not liable for any obligations of the company above their initial capital contributions. (See Lebanese Code, Title VII, Book II, Art. 1.) There are, however, certain statutory requirements that must be satisfied for the company to qualify as a limited liability company. Among others, the name of the company must reflect its object or the adoption of a "style" comprising the name of one or more of its partners (id., Art. 6); the object or purpose of the company must not fall into one of several prohibited categories, including "capital investment operations for the account of Third Parties" (id., Art. 4); the capitalization must exceed 50,000 Lebanese pounds (id, Art. 7); the phrase "limited liability company" and the amount of the company's capital "are to figure prominently on all printed matter, advertisements, publications and other documents emanating from the company" (id., Art. 6); and the company must hold an annual meeting to review the company's business affairs prior to the declaration or distribution of profits. (Id., Art. 21.) Finally, Article 12 provides that "[a]ny limited liability company is void and of no effect among its partners when formed in violation of the conditions required in the preceding articles." Moreover, "[w]hen nullity of the company is pronounced [under these provisions], the partners who have been the cause of nullity . . . are jointly responsible to Third Parties . . . for the damage resulting from such nullity." (Id., Art. 13.
The parties' Lebanese law experts apparently translate Article 4 differently, but this does not alter the analysis. Plaintiffs' expert, Salah M. Dabbagh, quotes Article 4 as prohibiting "investment of capital funds for the account of others." (See Dabbagh opinion, annexed to Reply Memorandum of Plaintiffs-Counterdefendants as Exh. 1, at 1). Defendant's expert, Samir J. Saade, quotes the Lebanese Code as prohibiting "investments for the account of others." (See Saade opinion, annexed to Defendant's Reply Memorandum as Exh. A, at 5).
Mr. Saade quotes article 13 as providing that when a nullity is obtained under article 12 "the partners who caused the nullity . . . are severally and jointly liable towards third parties for damages resulting from the nullity. . . ." (Saade opinion at 7.)
Defendants appear to contend that Infovest failed to comply with Articles 4, 6, 7 and 21, and that therefore its limited liability status may be set aside under Article 13 and personal liability imposed on the Abu-Nassars. At a minimum, they argue, there are genuine disputes as to these matters that preclude summary judgment for plaintiffs and justify defendant's request for further discovery.
The appropriate analysis is not as clear as defendants suggest, particularly in view of the failure of either party's expert to address this matter in detail. The principal uncertainty does not concern the substantive and procedural requirements imposed by the Lebanese Code on a limited liability company, but rather the specific consequences that may follow in this case from proof of non-compliance. Before addressing that issue, however, I briefly discuss the state of the record with respect to whether Infovest may be deemed to have violated the applicable Lebanese Code provisions.
In accordance with Article 6 of the Lebanese Code, the full name of Infovest, Informative Investment Group, Ltd., unquestionably reflects the company's object. What is less clear is whether Infovest's activities as an introducing broker were permissible under Article 4 of the Lebanese Code. Elders' legal expert, Mr. Saade, contends that by conveying client instructions and channelling funds, Infovest is acting as a broker, and that this constitutes "a business in investments for the account of others which is forbidden by [Article] 4." (Saade Opinion at 5.) Moreover, Saade claims that if Infovest "intervene[s] directly in the operations" or "decide[s] when to buy or when to sell [its] clients['] positions," this would also constitute a violation of Article 4. (Id.) In contrast, plaintiffs' legal expert, Mr. Dabbagh, argues that the prohibition of Article 4 only applies if Infovest
acts as a trustee for these funds and it, itself, chooses the investment outlets for these funds. The prohibition does not apply when the company acts as a mere broker, where the client himself chooses the investment outlet and the stocks or commodities to buy, and the company merely executes his order against a commission.
(Dabbagh Opinion at 1) (emphasis in original).
Although the parties clearly disagree as to whether Infovest's futures brokerage business violated article 4, there is no question that if Infovest made any substantive investment decisions on behalf of its clients, this would violate article 4. In the present case, there is a genuine factual dispute as to whether Infovest acted as an ordinary broker, merely transmitting orders received from others, or whether it ever played a more active role in making investment recommendations. (See Deposition of Waleed Abu-Nassar, annexed to Defendant's Supplemental Memorandum as Exh. A, at 60; deposition of Waleed Abu-Nassar, annexed to Plaintiffs' Reply Memorandum as Exh. 3, at 56-57.) In particular, there is a factual dispute as to the role played by the Abu-Nassars with respect to their decision to liquidate the accounts of a Mr. Kouyoumjian and other Infovest customers on April 27, 1987, which gave rise to the deficiency underlying this lawsuit. (See Deposition of Waleed Abu-Nassar, annexed to Supplemental Declaration of Frederic T. Spindel, Esq., as Exh. 3, at 123, 126-28, 143-44.)
Moreover, there is an additional material factual dispute as to whether Article II of Infovest's Articles of Association and the Agency Agreement between the parties contemplated greater involvement by Infovest in managing the accounts of its customers than merely acting as a broker. Article II of the Articles of Association provided that "[t]he object of the Company is to carry out for its own account or for the account of other parties commercial operations and investment services within and without Lebanon." (Roth Affidavit, Exh. G at 1.) In addition, the Agency Agreement between Elders and Infovest provided that Infovest "shall direct, and consequently be solely responsible for, the trading activities in [its customers'] accounts." (Roth Affidavit, Exh. C at Exh. A ¶ 3(b); see also Infovest Customer Agreement, annexed to Spindel Supplemental Affidavit as Exh. 9, at ¶ 4.) These documents sufficiently raise a material question of fact as to the true scope of Infovest's business activities, which may be in violation of Article 4 of the Lebanese Code.
As noted, the Lebanese Code also requires a minimum capitalization of 50,000 Lebanese pounds. (Lebanese Code, Art. 7.) Infovest's original capitalization was 200,000 Lebanese pounds, (see Articles of Association at Art. VIII, annexed to Roth Affidavit as Exh. G), and was significantly in excess of that figure through 1986. (See Spindel Supp. Declaration, Exh. 11.) Nonetheless, plaintiffs admit that since at least July 1987, Infovest's liabilities have exceeded its assets, Infovest has been required to borrow funds from plaintiffs in order to pay its obligations, and George Abu-Nassar has personally paid certain debts of the company. (See, e.g., Answer to Interrog. No. 25, Roth Affidavit Exh. I at 28; deposition of George Abu-Nassar, Roth Affidavit, Exh. J. at 234-35.) Although the Lebanese legal experts do not address whether these factors constitute undercapitalization and what the consequences might be, I note that if Infovest has in fact been undercapitalized since July 1987 F Article 7 of the Lebanese Code provides an opportunity for a company to recapitalize within one year before any negative consequences could be imposed. In the present case, more than three and one-half years has elapsed since July 1987, and plaintiffs have not only failed to recapitalize Infovest, but it appears that the company is essentially out of business. Thus, if Infovest is in fact undercapitalized, it appears that under Article 7 plaintiffs may be exposed to personal liability based on this undercapitalization. As a result of unresolved issues as to Infovest's capitalization and the implications of a possible undercapitalization, there are material issues of fact concerning whether Infovest was in compliance at the relevant time with Article 7 of the Code.
The negative consequences include transforming the limited liability company into another corporate form in which the individual shareholders could be liable, or allowing any rightful claimant to petition for the dissolution of the company. (See Lebanese Code, Art. 7.)
The Lebanese Code also requires that "[i]mmediately after the name of the company the following phrase: `limited liability company' and the amount of its capital are to figure prominently on all printed matter . . . emanating from the company." (Lebanese Code, Art. 6.) It is clear that the Infovest letterhead did not state its capitalization or use the required phrase, but rather used the term "Ltd." (See, e.g., Roth Affidavit at Exh. K.) The parties agree that the abbreviation "Ltd." is a permissible alternative to the required language. (See Saade Opinion at 2; Dabbagh Opinion at 2.) Elders' expert contends, however, that the statement of capitalization is an important warning to third parties as to the limited liability of the partners. Without such a statement, there may be a presumption of deceit by the company, which could lead to the personal liability of the partners if a third party were induced into a transaction based on a violation of this provision. (See Saade Opinion at 3; Lebanese Code, Art. 6.) Mr. Saade recognizes an exception to this rule when "the company has duly notified the claimant by other means of [the company's] juridical nature and capital." (Saade Opinion at 4.)
Defendant's expert translates Article 6 as requiring that "[n]ext to the name of the company and on all its printed matters . . . issued by the company, the following expression shall be clearly mentioned: `Limited Liability Company' with an indication of the amount of the capital." (Saade opinion at 1-2.) This translation is not materially different from the translation of the Lebanese Code provided to the court.
Plaintiffs' expert does not discuss the importance of including a statement of capitalization on all printed material of the company, but claims that shareholders in a limited liability company cannot be held personally liable to third parties if the company states explicitly that it is a limited liability company, as Infovest clearly did. Mr. Dabbagh agrees that deceit is the relevant standard for imposing personal liability under this provision, but asserts that such deception must be "as to the nature of the company." (Dabbagh Opinion at 2.) Thus, there is an open question under Lebanese law as to whether failure to state the company's capitalization leads to a presumption of deceit, what evidence could be introduced by plaintiffs to rebut the presumption, and the effect of including "Ltd." in the company's title. Furthermore, there is an open factual question as to whether plaintiffs' failure to state Infovest's capitalization in any way deceived Elders as to Infovest's nature and capitalization.
Finally, the Lebanese Code requires that a limited liability company hold an annual meeting prior to declaring and distributing profits. (Lebanese Code, Art. 21.) In the present case, plaintiffs admit that no formal annual meetings were held, but rather state that meetings were "informal and not recorded, as is permitted by Lebanese law." (See Answer to Interrogatory No. 8, annexed as Exh. I to Roth Affidavit, at 15.) Plaintiffs' legal expert asserts that shareholders of a limited liability company may receive "interim dividends" before an annual shareholder meeting. (Dabbagh Opinion at 3.) While defendant's expert does not address the viability of "interim dividends" under Lebanese law, he stresses that failure to comply with the shareholder meeting requirement before distributing profits based on an accurate balance sheet subjects the managers of the company to personal liability for "swindling." (Saade Opinion at 8-9.) Both Lebanese authorities agree that any improper dividends must be returned to the corporation. (See Saade Opinion at 8; Dabbagh Opinion at 3.)
Moreover, any loans from the company to its shareholders must be repaid as well. (Dabbagh opinion at 2-3.)
In the present case, it is uncontroverted that money earned as commissions was deposited by Elders in account 75002 for the personal benefit of plaintiffs and Gabriel Manougian. Defendant claims that this money constituted corporate profits of Infovest that were deposited into a personal account of the company's shareholders without proper authorization from the shareholders of the company. Plaintiffs contend, on the other hand, that such deposits constituted the payment of salaries, repayment of advances or the withdrawal of profits. (See Answer to Interr. Nos. 5 and 13, Roth Affidavit Exh. I, at 12 and 20.) Irrespective of the proper interpretation of Lebanese law regarding "interim dividends," there remains a material factual question as to whether the amounts deposited into account 75002 were properly authorized salary payments or dividends, as opposed to payments of profits directly to the personal account of plaintiffs in contravention of Lebanese law. As noted, to the extent that any portions of these payments were improper dividends, the Abu-Nassars would be personally liable for the repayment of those funds to Infovest.
The foregoing adequately demonstrates the existence of genuine disputes with respect to material facts concerning Infovest's alleged non-compliance with the Lebanese Code. The record is somewhat less clear concerning the consequence of such noncompliance.
Article 12 provides for a declaration of nullity for a limited liability company based on non-compliance with the cited Code sections, but it expressly limits its effect to relations between partners. Article 13 seems more pertinent. It provides:
When nullity of the company is pronounced in pursuance of the provisions of the preceding article, the partners who have been the cause of nullity, the initial Managers and Founders are jointly responsible to Third Parties as they are to the other partners for the damages resulting from such nullity.
(Lebanese Code, Art. 13. See also Saade Opinion at 7.) Although this wording leaves unclear who has standing to seek such nullification, defendant's expert states it may be obtained by "those who have an interest to do so and whose damage has resulted from or is connected to the infringement causing the nullity." (Saade Opinion at 7.)
Plaintiffs' expert does not address this issue.
The complication in this matter is introduced by the apparent requirement that the party seeking the nullification must have been injured by the company's violation of the Code, a requirement implicit in the language of Article 13 and reflected in the comments of Mr. Saade. Moreover, other substantive Code provisions also incorporate such a causation requirement. Thus, Article 6, which requires a notation of the company's limited liability status and the extent of its capitalization, goes on to provide, in Mr. Saade's translation:
Any infringement of the preceding dispositions is punished with a penalty of one thousand to three thousand pounds. If this infringement has deceived third parties as to the nature of the company, then the dispositions ruling the partnership may apply in order to determine the liability of the partners.
(Saade Opinion at 2) (emphasis added). In other words, the company would lose its limited liability status if its failure to include the required notations actually deceived a third-party into believing that it was dealing with a partnership, and hence could hold the individual partners liable. (See id. at 3-4; see also Dabbagh Opinion at 2.)
The translation of Article 6 of the Lebanese Code provided by defendant' counsel is somewhat more cryptic:
Violation of the preceding provisions is punishable by a fine of between one thousand and three thousand pounds. If such violation has induced Third Parties into errors, the provisions concerning sleeping partnerships may become applicable to determine the partners' obligations.
It is not at all clear on the current record whether defendants were injured by any of the alleged violations of the Code. For example, since Infovest used the term "Ltd.," it is doubtful that Elders could claim to have been deceived into believing that Infovest was not purporting to be a limited liability company. (See Dabbagh Opinion at 2; Saade Opinion at 2.) It is also not at all obvious that defendant was injured by the asserted failure of Infovest to hold required shareholder meetings, and in any event, it appears that such a failure would not provide a basis for holding the shareholders directly liable to third parties for obligations of the company. (See Dabbagh Opinion at 3) (if "paper" profits were distributed without shareholder meetings, they can be ordered returned to company); (Saade Opinion at 8-9) (same).
Notwithstanding these doubts, summary judgment cannot be entered in favor of plaintiffs insofar as Lebanese law may be applicable. First, Elders may well have standing to press for nullification based on Infovest's alleged undercapitalization, since this condition may have prevented Elders from obtaining compensation from Infovest to which it is allegedly entitled under the guarantee provisions of the Agency Agreement. Second, although not entirely clear, Infovest may have been acting as an investment manager for its clients in possible violation of the Code, and that violation by itself could be viewed as contributing to the injury allegedly suffered by Elders. Third, the manager may be liable for corporate debts if he authorized dividend payments to shareholders without an accurate balance sheet. (See Lebanese Code, Art. 35; Saade Opinion at 9.) Fourth, in any event Infovest has not, by its summary judgment motion, put into issue the question of whether Infovest's alleged violations of the Lebanese Code caused injury to Elders. Accordingly, Elders has not been called upon on this motion to establish causation, and cannot be denied the opportunity to do so at an appropriate time. See, e.g., Celotex Corp. v. Catrett, 477 U.S. at 323 (addressing initial burden of movant to identify uncontroverted material facts).
C. New York Law
Even if Infovest's corporate form were preserved under the laws governing Lebanese limited liability companies, the Abu-Nassars could be held personally liable if the corporate veil were pierced under New York law. As a general rule, "courts are reluctant to disregard the corporate entity," William Wrigley, Jr. Co. v. Waters, 890 F.2d 594, 600 (2d Cir. 1989) (citing cases), in large part because "there is a presumption of separateness between a corporation and its owners, which is entitled to substantial weight." American Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir.), cert. denied, 488 U.S. 852 (1988) (citing Crown Cent. Petroleum Corp. v. Cosmopolitan Shipping Co., 602 F.2d 474, 476 (2d Cir. 1979)). See, e.g., Oriental Commercial Shipping Co. v. Rosseel, 702 F. Supp. 1005, 1018 (S.D.N.Y. 1988); Establissement Tomis v. Shearson Hayden Stone, Inc., 459 F. Supp. 1355, 1365 (S.D.N.Y. 1978).
Nonetheless, the corporate form may be pierced "when it can be demonstrated that the `[corporate] form has been used to achieve fraud, or when the corporation has been so dominated by an individual . . . and its separate identity so disregarded, that it primarily transacted the dominator's business rather than its own and can be called the other's alter ego.'" William Wrigley, Jr. Co. v. Waters, 890 F.2d at 600 (citing Gartner v. Snyder, 607 F.2d 582, 586 (2d Cir. 1979). See also Itel Containers Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 703 (2d Cir. 1990); Dow Chemical Pacific Ltd. v. Rascator Maritime S.A., 782 F.2d 329, 342 (2d Cir. 1986); Walkovsky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 587 (1966); Total Care Health Indust., Inc. v. Dep't of Social Serv., 144 A.D.2d 678, 679, 535 N.Y.S.2d 15, 17 (2d Dep't 1988).
The courts have identified a number of factors that must be considered in deciding whether to pierce the corporate veil, including (1) intermingling of personal and corporate funds and siphoning of corporate funds by a principal; (2) failure to observe corporate formalities and keep proper books and records; (3) failure to pay dividends; (4) inadequate capitalization; (5) insolvency; and (6) perpetuation of fraud by shareholders in maintaining the corporate form. See e.g., William Wrigley, Jr. Co. v. Waters, 890 F.2d at 600-01; American Protein Corp. v. AB Volvo, 844 F.2d at 60; Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 53 (2d Cir. 1984); Oriental Commercial Shipping Co. v. Rosseel, N.V., 702 F. Supp. at 1019; Establissement Tomis v. Shearson Hayden Stone, Inc., 450 F. Supp. at 1365.
In Wrigley, the court noted that this list of factors is not exhaustive, and that as a general rule alter ego liability would be imposed "when doing so would achieve an equitable result." William Wrigley, Jr. Co. v. Waters, 890 F.2d at 601. While noting the "literally infinite variety of situations which might warrant a court to pierce the corporate veil," the Wrigley panel cautioned that "preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history would inevitably beckon the end of limited liability for small business owners, many, if not most, of whom have chosen the corporate form to shield themselves from unlimited liability and potential financial ruin." Id. However, the court in Wrigley also commented that piercing the corporate veil had been justified upon proof of an abuse of the corporate form "either through on-going fraudulent activities of a principal, or a pronounced and intimate commingling of the corporation and its principal or principals, which prompted the reviewing courts, driven by equity, to disregard the corporate form." Id. For example, in Dow Chemical Pacific Ltd. v. Rascator Maritime S.A., 782 F.2d at 343, the corporate veil was pierced where the corporation had no employees or records of meetings, stock, or elected directors and had only one individual with authority to sign checks, and where funds were shuffled between personal and corporate accounts.
In the present case, the Abu-Nassars are the sole shareholders and principal officers of Infovest. Clearly, the simple fact that they "oversaw and controlled the . . . business does not mean that the corporate entities were mere alter egos. It merely demonstrates that [they were] personally involved in every aspect of the firm's work, not that the [company was] conducting [their] personal business." William Wrigley, Jr. Co. v. Waters, 890 F.2d at 601 n. 2. See also Kirno Hill Corp. v. Holt, 618 F.2d 982, 985 (2d Cir. 1980) (sole ownership alone does not justify piercing the veil); Total Care Health Indus., Inc. v. Dep't of Social Serv., 144 A.D.2d at 679, 535 N.Y.S.2d at 17 ("mere fact that [one] was a shareholder, officer, and director . . . does not, by itself, warrant disregarding the separate corporate entities"). An examination of the various veil-piercing factors, however, indicates that summary judgment on Elders' counterclaims for alter ego liability is inappropriate, as there are a number of genuine disputes of material fact, the resolution of which may ultimately justify piercing Infovest's corporate veil. See, e.g., Goodman Piping Products, Inc. v. N.L.R.B., 741 F.2d 10, 11 (2d Cir. 1984) (question of alter ego liability is one of fact); Shearson Hayden Stone, Inc. v. Lumber Merchants, Inc., 500 F. Supp. 491 (S.D.Fla. 1980) (veil pierced in suit against corporation and its president, where the president bought out other shareholders to gain sole ownership, transferred money between personal and corporate accounts invested with plaintiff brokerage house, failed to maintain corporate records, and pledged personal property to secure corporate obligations); Establissement Tomis v. Shearson Hayden Stone, Inc., 459 F. Supp. at 1365-66 (motion for summary judgement on piercing corporate veil claim denied where corporation's investment account was undermargined and corporate funds had been used for personal expenses, no formal corporate books or records were kept, and no dividends were declared).
Defendant's attempt to demonstrate that plaintiffs dominated Infovest and abused its corporate form rests largely on allegations that the Abu-Nassars intermingled personal and corporate funds and siphoned corporate funds for their personal use, "without regard to formality and to suit their individual convenience." C.A.B. v. Scottish-American Ass'n, Inc., 411 F. Supp. 883, 887 (E.D.N.Y. 1976). This claim receives at least some support from the undisputed fact that profits and commissions earned by Infovest were deposited directly into account 75002, a joint personal account of plaintiffs and Gabriel Manougian, an employee of Infovest. (See, e.g., Answer to Interrog. No. 13, Roth Affidavit Exh. I, at 20; deposition of George Abu-Nassar, Roth Affidavit, Exh. J. at 156.)
Elders also argues that George Abu-Nassar's use of personal funds to replace the $250,000 Infovest letter of credit, and his deposit of additional personal funds in the same account, to be invested with the existing funds in the account, also demonstrates an intermingling of personal and corporate funds. Additionally, Elders alleges that there was an oral agreement between the Abu-Nassars and Elders in May or June of 1987, in which the Abu-Nassars agreed to forego their monthly commissions in order to pay off the deficits in the customer accounts. (See Answer at ¶¶ 58, 51, 71, 100.) Finally, Elders points to the fact that the Abu-Nassars admitted that George Abu-Nassar paid about $100,000 out of his own funds to satisfy Infovest debts to other Lebanese brokers, in order to protect his business reputation, and that loans were made by the Abu-Nassars to Infovest to allow it to pay its expenses. (See, e.g., deposition of George Abu-Nassar, Roth Affidavit, Exh. J. at 234-35; Answer to Interrog. No. 4, Roth Affidavit, Exh. I at 11.)
Elders points to George Abu-Nassar's statements that these funds were "my personal money" and that he could "transfer it the way I want it" (see deposition of George Abu-Nassar, Roth Affidavit, Exh. J. at 157) as proof that he used a corporate account for personal purposes. This argument is undercut, however, by the fact that the account was held in the name of George Abu-Nassar, rather than Infovest.
Not surprisingly, the Abu-Nassars contest each of these arguments. They assert that as a result of the unstable political conditions existing in Lebanon at the time, they undertook to deposit corporate funds in their personal accounts to allow Infovest to channel payments to them for salary, commissions, expense reimbursements and profits without exposing the funds to possible seizure in Beirut. (See Answer to Interr. No. 5, Roth Affidavit, Exh. I, at 12; deposition of George Abu-Nassar, Spindel Supp. Declaration, Exh. 1, at 89-90, 155-56, 215.)
This factual dispute cannot be resolved by summary judgment. Although most, if not all, of the transfers to plaintiffs' personal accounts and the personal payments and loans of George Abu-Nassar to satisfy Infovest's corporate obligations may have been properly authorized and entirely legitimate, defendant has come forward with sufficient evidence to raise a material factual issue as to whether there was intermingling or siphoning of funds by the Abu-Nassars, and whether this constituted sufficient domination of the corporate form by plaintiffs to justify piercing the corporate veil.
Other factors in this case also lead to the conclusion that summary judgment is not appropriate at this time with respect to Elder's alter ego claim. First, there are a number of unresolved issues with respect to the observance of corporate formalities. For example, it is not clear whether Infovest maintained proper books and records. Although the Abu-Nassars claim that such records exist and are in the custody of Waleed Abu-Nassar, and that they include both customer account records and financial and accounting records (see Answer to Interrog. No. 14, Roth Affidavit, Exh. I at 21-22), those books and records have not been turned over to defendant as a result of plaintiffs' objection to the interrogatory and document production requests seeking such information. Accordingly, there is no way to determine the sufficiency of the purported corporate records. Moreover, even if Infovest's corporate records have in fact been properly maintained, this factor must be balanced with the other relevant considerations in resolving the basic factual dispute as to whether Infovest's corporate veil may be pierced.
When determining whether a foreign corporation has observed the proper corporate formalities, courts apply the law of the country of incorporation. See, e.g., Oriental Commercial Shipping Co. v. Rosseel, N.V., 702 F. Supp. at 1019-20.
With respect to dividends, Infovest has never held an official annual meeting and has therefore had no opportunity to declare dividends. (See Answer to Interrog. No. 8, Roth Affidavit, Exh. I at 15.) Although it could perhaps be argued that the money in account 75002 constituted interim dividends, plaintiffs have not differentiated between monies paid as salaries and company earnings paid to the individual shareholders of Infovest. (See, e.g., Answer to Interrog. No. 5, Roth Affidavit, Exh. I at 12; deposition of George Abu-Nassar, Roth Affidavit, Exh. J at 156-57.) Moreover, to the extent that any such "interim dividends" were not directly supported by earnings, Lebanese law requires that such payments be returned to the company. (See Dabbagh Opinion at 3; Saade Opinion at 8.) The failure of Infovest ever to declare a dividend to its shareholders lends additional credence to Elders' theory of alter ego liability and further supports denial of the motion for partial summary judgment.
Infovest's alleged undercapitalization and insolvency further support denial of plaintiffs' motion for partial summary judgment. "[A]lthough undercapitalization alone is not a sufficient ground for disregarding the corporate veil, it nevertheless is an additional factor to be weighed in the balance. However, the mere fact that an entity may or may not have the capital to respond to a potential large award against it does not justify piercing the corporate veil." Oriental Commercial Shipping Co. v. Rosseel, N.V., 702 F. Supp. at 1021 (citing Gartner v. Snyder, 607 F.2d 582 (2d Cir. 1979); Walkovsky v. Carlton, 18 N.Y.2d at 426, 276 N.Y.S.2d at 395)). This court measures undercapitalization in terms of the size of the corporate undertaking, and will deem a corporation undercapitalized if it is "wholly reliant on [an individual] for the operating funds necessary for its continuing existence. . . ." Id. at 1020-21. The Abu-Nassars admit that since at least July 1987, Infovest's liabilities have exceeded its assets (see Answer to Interrog. No. 25, Roth Affidavit, Exh. I at 28), and plaintiffs have loaned personal assets to Infovest to meet its operating expenses. (See Answer to Interrog. No. 4, Roth Affidavit, Exh. I at 11; deposition of George Abu-Nassar, Roth Affidavit, Exh. J at 235.)
These circumstances indicate that, notwithstanding the balances in the disputed frozen accounts at Elders, Infovest is currently undercapitalized and essentially insolvent, in that its liabilities exceed its assets, it is no longer in business and it can no longer meet its obligations without financial assistance from plaintiffs. See 11 U.S.C. § 101 (31); N.Y.U.C.C. § 1-201 (23) (definitions of "insolvent"). Infovest's de facto insolvency is further demonstrated by the fact that it sought permission from the Lebanese government to avoid certain obligations to its employees under a provision covering businesses closing up because of bankruptcy. (Deposition of George Abu-Nassar, Roth Affidavit, Exh. J at 254; deposition of Waleed Abu-Nassar, Spindel Supp. Declaration, Exh. 2 at 28.)
Finally, there is at least a potentially colorable claim that plaintiffs' conduct vis-a-vis Infovest may have involved an element of fraud. This claim is premised on the Abu-Nassars' alleged failure to state the extent of Infovest's capitalization on all its documents, as purportedly required by Lebanese law; Infovest's undercapitalization and plaintiffs' payment of certain corporate obligations; the admitted perpetuation of Infovest's corporate existence merely to litigate against Elders; and the alleged fraudulent transfer of Infovest's assets to a similar corporate entity controlled by plaintiffs in an effort to render Infovest an empty shell and thereby defraud Infovest's creditors. (See, e.g., Answer at ¶¶ 90-96; deposition of George Abu-Nassar, Roth Affidavit, Exh. J. at 170-71.) Plaintiffs counter that the allegations of fraud by Elders were not pleaded with the particularity required under Fed.R.Civ.P. 9(b) and that Elders failed to make the prima facie showing of fraud necessary for the alter ego liability claims to stand. Plaintiffs also assert that Elders' second counterclaim, alleging a fraudulent conveyance of Infovest's assets to a related entity controlled by plaintiffs, is legally insufficient because of a failure to allege that any such conveyances "were made without fair consideration; or that the conveyances rendered Infovest insolvent; or that they left Infovest with an unreasonably small amount of capital; or that they left Infovest in a position of not being able to pay its debts." (Plaintiffs' Memorandum at 28.)
The court finds that Elders' allegations that Infovest failed to state its capitalization adequately, that it has shut down except for purposes of this litigation, that its liabilities have exceeded its assets for at least three and one-half years, and that it has had to borrow funds from plaintiffs to meet its obligations — when viewed in conjunction with the facts underlying Elders' claim of domination and abuse of the corporate form by plaintiffs — are sufficient to raise a triable issue of fact as to whether plaintiffs fraudulently perpetuated Infovest's corporate form.
Plaintiffs also argue that defendant failed to plead the alleged fraudulent conveyance with the necessary particularity. This assertion is meritless. Defendant's second counterclaim, while pleaded "on information and belief," was sufficient when first filed since defendants did not have access to the documentation held by plaintiffs and Infovest.
Plaintiffs alternatively seek summary judgment on the fraudulent conveyance counterclaim. In support of this application plaintiffs contend that, although Waleed Abu-Nassar was hired to be the officer manager of a firm called Investment Opportunities, which operated out of Infovest's former offices and leased its equipment, neither the Abu-Nassars nor Infovest had any ownership or other interest in the company. (See deposition of Waleed Abu-Nassar, Spindel Supp. Dec., Exh. 2, at 21-22, 25-26.) In addition, plaintiffs assert that no assets of Infovest have been transferred to a Shatkin Trading Company in New York. (See id. at 156.) Such assertions, however, are an insufficient basis to grant summary judgment, especially in light of Elders' inability to obtain discovery that might substantiate its claim. See, e.g., Schering Corp. v. Home Ins. Co., 712 F.2d at 10 ("summary judgment should not be granted while the party opposing judgment timely seeks discovery of potentially favorable information"). Moreover, the evidence proffered by Elders to the effect that Infovest has shut down except for litigating this action, that it has needed to borrow funds from plaintiffs to meet its obligations and that its liabilities exceed its assets are sufficient to establish a genuine material issue of fact as to the nature and propriety of any conveyance of Infovest's assets to another entity. Cf. Federal Ins. Co. v. Mallardi, 690 F. Supp. 875, 881 (S.D.N.Y. 1988).
D. Requirement of a Judgment
Plaintiffs also contend that Elders is precluded under New York law from pursuing any claims against the Abu-Nassars in their personal capacity, since Elders has not first exhausted its legal remedies against Infovest, "by recovery of a judgment against [the corporate entity], and return of an execution wholly or partially unsatisfied, unless [Elders] show[s] that this was impossible or would have been useless." Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 266 F. Supp. 79, 82 (S.D.N.Y. 1967); accord Tennisland, Inc. v. Precision Tennis Systems, Inc., 437 F. Supp. 339, 344 (W.D. Pa. 1977) (applying New York law); Noto v. Cia Secula di Armanento, 310 F. Supp. at 647 n. 22. Plaintiffs' argument is meritless.
The cases cited by plaintiffs in support of this proposition also describe the recognized exceptions to the exhaustion requirement — in particular, when it would be futile to proceed first against the corporation, as when the corporation is bankrupt or insolvent, or when a strong public policy dictates that exhaustion should not be required. See, e.g., Aries Ventures Ltd. v. Axa Finance S.A., 729 F. Supp. 289, 298 n. 15 (S.D.N.Y. 1990); Flute v. Rubel, 682 F. Supp. 184, 187 (S.D.N.Y. 1988); Tennisland, Inc. v. Precision Tennis Systems, Inc., 437 F. Supp. at 344; Eskimo Pie Corp v. Whitelawn Dairies, Inc., 266 F. Supp. 79, 82 (S.D.N.Y. 1967). The present case falls squarely within the recognized exceptions to the exhaustion rule.
While Infovest has not declared bankruptcy under Lebanese law, it is clear that Infovest is in essence insolvent, since its liabilities exceed its assets and its income is insufficient to meet its expenses. Moreover, plaintiffs admit that Infovest has essentially shut down, that it has sought government permission to avoid certain obligations to its employees on account of its financial status, and that the sole purpose of Infovest's continued existence is to litigate this and the related state court action. (See deposition of George Abu-Nassar, Roth Affidavit, Exh. J, at 254; deposition of Waleed Abu-Nassar, Roth Affidavit, Exh. N, at 28.) Under the circumstances, it would be futile for defendant to seek a judgment against Infovest before raising its alter-ego claims directly against plaintiffs. In addition, allowing plaintiffs to hide from colorable accusations of domination and abuse of the corporate form, as well as fraud, by raising a defense of failure to exhaust when the company is arguably no longer a viable entity would disserve the policy of judicial economy.
The fact that Elders commenced a separate suit in New York state court against Infovest to recover for Infovest's alleged breach of a guarantee to cover customer deficits and Infovest's denial of such liability is not dispositive of the exhaustion issue. Notwithstanding the state-court suit, Elders has demonstrated sufficient grounds in the federal action to waive the exhaustion requirement and allow it to bring various counterclaims directly against the individual plaintiffs.
Accordingly, plaintiffs' motion for partial summary judgment on defendant's first, second and fifth counterclaims is denied.
II. Motion to Compel
When a party seeks relevant discovery, the party resisting discovery bears the burden of establishing the factual basis for withholding the requested discovery. See, e.g., United States v. Schwimmer, 892 F.2d 237, 244 (2d Cir. 1989); von Bulow by Auersperg v. von Bulow, 811 F.2d 136, 144 (2d Cir.), cert. denied, 481 U.S. 1015 (1987); In re Grand Jury Subpoena Dated Jan. 4, 1984, 750 F.2d 223, 224-25 (2d Cir. 1984). This burden requires an evidentiary showing by competent evidence, see, e.g., von Bulow by Auersperg v. von Bulow, 811 F.2d at 144, and cannot be "`discharged by mere conclusory or ipse dixit assertions.'" In re Grand Jury Subpoena Dated Jan. 4, 1984, 750 F.2d at 225 (quoting In re Bonano, 344 F.2d 830, 833 (2d Cir. 1965)). Accord, von Bulow by Auersperg v. von Bulow, 811 F.2d at 146. If there is no valid reason for withholding the requested discovery, the court may, upon motion of the party seeking discovery, compel the opposing party to respond to the request pursuant to Fed.R.Civ.P. 37(a). In the present case, the discovery sought by defendant is relevant, and the defenses raised by plaintiffs are insufficient to justify their refusal to respond.
A. Relevance
Plaintiffs' first line of defense against the discovery requests is that they do not seek relevant information. This is untrue.
Discovery must be related to a valid cause of action in order to be relevant. Fed.R.Civ.P. 26(b)(1) does not allow a party "to roam in shadow zones of relevancy and to explore matter which does not presently appear germane on the theory that it might conceivably become so." In re Fontaine, 402 F. Supp. 1219, 1221 (S.D.N.Y. 1975). If the moving party is unable to make out a "prima facie showing, through affidavits or other means, to support [its] claim," then the "request for discovery is therefore nothing more than a `fishing expedition' which would needlessly delay the proceeding." Samuels v. Eleonora Beheer, 500 F. Supp. 1357, 1362 (S.D.N.Y. 1980) (quoting Grand Bahama Petroleum Co. v. Asiatic Petroleum Corp., 550 F.2d 1320, 1327 (2d Cir. 1977)). See also Contemporary Mission, Inc. v. United States Postal Service, 648 F.2d at 107 ("Where a plaintiff fails to produce any specific facts whatsoever to support a[n] . . . allegation, a district court may, in its discretion, refuse to permit discovery . . ."
Nonetheless, recognizing that "cases involving an attempt to pierce a corporate veil are complicated," Compagnie Francaise d'Assurance Pour le Commerce Exterieur v. Phillips Petroleum Co., 105 F.R.D. 16, 42 (S.D.N.Y. 1984), the courts have held that when a party seeks discovery about the relationships between individuals and a corporation, "relevance is broadly and liberally construed." Benchmark Design, Inc. v. BDC, Inc., No. 88-10007-FR, slip op., 1989 U.S. Dist. Lexis 8240, *2 (D.Or. 1989). "The issue is not whether [the party] may ultimately prevail on the `piercing the corporate veil' theory, but whether the allegations are sufficient to allow them to conduct discovery in an attempt to prove their allegations." Jackam v. Hospital Corp. of America Mideast, Ltd., 800 F.2d 1577, 1579-80 (11th Cir. 1986). See also Edgar v. Fred Jones Lincoln-Mercury of Oklahoma City, Inc., 524 F.2d 162, 167 (10th Cir. 1975) ("plaintiff is entitled to pursue discovery which would either establish or fail to establish the existence of facts sufficient to justify the piercing of the corporate veil"); Electromatic (Pty) Ltd. v. Rad-O-Lite of Philadelphia, Inc., 90 F.R.D. 182, 184 (E.D.Pa. 1981) (allegation that corporations were not operated as independent entities insufficient to support discovery, but where a party demonstrates interrelated transactions and other connections, this is "enough to support further discovery on the relationships among the various defendants.")
In the present case, in denying plaintiffs' motion for partial summary judgment, we have noted that Elders has proffered sufficient evidence to make out a prima facie case for piercing Infovest's corporate veil and imposing personal liability on plaintiffs. As a result, defendant is entitled to further discovery on the issues of plaintiff's possible alter ego liability and the alleged fraudulent conveyance of Infovest's assets. See, e.g., Melikian v. Corradetti, 791 F.2d at 281-82 (discovery permitted where allegations included commingling of assets, undercapitalization, lack of records, common officers, directors and partners, and fraud); Minelli Constr. Co. v. United Derrickmen Riggers Ass'n, Local 197, 1990 WL 180550, *5 (S.D.N.Y. November 14, 1990) (discovery permitted on alter ego defense claim where much of the relevant information was in control of plaintiff); Electromatic (Pty) Ltd. v. Rad-O-Lite of Philadelphia, Inc., 90 F.R.D. at 184; cf. Fidenas AG v. Honeywell, Inc., 501 F. Supp. 1029, 1037 (S.D.N.Y. 1980) (where "plaintiff's asserted facts, viewed in the most favorable light, are insufficient to justify piercing the corporate veil . . . [there is] no purpose to be served in further exploration of this uncharted territory, either in further discovery or at trial"). In seeking the factual information to which we find it is entitled, Elders' document requests and interrogatories are entirely relevant to its claims of alter ego liability and fraudulent conveyance. See, e.g., Scott v. Arex, Inc., 124 F.R.D. 39, 40-41 (D.Conn. 1989) (personal and corporate information and records are discoverable in attempt to pierce corporate veil); Compagnie Francaise d'Assurance v. Phillips Petroleum Co., 105 F.R.D. at 39-42 (where party seeks to pierce the corporate veil, personal and corporate records discoverable).
The supplemental document requests generally relate to changes in Infovest's corporate form, transfers of assets and information regarding related entities. (See Roth Affidavit, Exh. E.)
The interrogatories relate to the corporate structure, books and records, meetings, financial status and business practices of Infovest, the use of personal funds to cover margin calls and corporate debts, the transferring of corporate funds into personal accounts, payment by Infovest of compensation and distribution of profits, transaction of personal business through the corporate form, and the relationship of Infovest to other entities. (See Roth Affidavit, Exh. D.)
B. Objections to Discovery
Apart from a general relevancy objection, plaintiffs contend that defendant's discovery request is overbroad, burdensome and expensive, and calls for information protected by the attorney-client and attorney work-product privileges. Plaintiffs also claim that the requested discovery is in violation of Local Rule 46 regarding the use of interrogatories, that Elders previously had an opportunity to discover the information sought during the state-court discovery proceedings, and especially during the London depositions of plaintiffs, that the discovery request covers too lengthy a time frame, and that the definition of Infovest incorporated by Elders in its discovery requests is overbroad. Each of these arguments is unpersuasive.
When the relevancy of a discovery request has been demonstrated, the party claiming that a discovery request is overbroad or burdensome "must show specifically . . . how each question is overly broad, burdensome or oppressive, by submitting affidavits or offering evidence revealing the nature of the burden. The court is not required to sift each interrogatory to determine the usefulness of the answer sought." Compagnie Francaise d'Assurance v. Phillips Petroleum Co., 105 F.R.D. at 42 (quoting Roesberg v. Johns-Manville Corp., 85 F.R.D. 292, 296-97 (E.D.Pa. 1980) (citations omitted). See also Advance Labor Service, Inc. v. Hartford Accident Indemnity, 17 Fed.R.Serv.2d at 1401. Moreover, the "sheer numerosity [of interrogatories] is not a valid objection" Compagnie Francaise D'assurance v. Phillips Petroleum Co., 105 F.R.D. at 42, nor is the fact that answering the interrogatories may entail considerable time, effort and expense. See, e.g., Roesburg v. Johns-Manville Corp., 85 F.R.D. at 297; Federal Deposit Ins. Corp. v. Mercantile Nat'l Bank of Chicago, 84 F.R.D. 345, 348 (N.D. Ill. 1979). The burden on plaintiffs must, of course, be balanced against the relevance of and need for the information sought by defendant. See, e.g., Fein v. Numex Corp, 92 F.R.D. 94, 96 (S.D.N.Y. 1981).
In their responses, plaintiffs fail to demonstrate to the court's satisfaction how defendant's proposed discovery is overly broad or burdensome. Plaintiffs mention a number of general objections to the proposed discovery and then focus on their objections to four of the interrogatories and one of the supplemental document requests. (Memorandum of Plaintiffs-Counterdefendants at 41-45.) Nonetheless, general statements by counsel, unsupported by affidavits or other competent evidence, are inadequate to demonstrate the burden of complying with proposed discovery relating to relevant areas of inquiry by defendant in this action. See, e.g., Compagnie Francaise d'Assurance v. Phillips Petroleum Co., 105 F.R.D. at 42.
In their objections, plaintiffs claim that the time frame of the interrogatories, in many cases covering the years 1983 to present, is too broad since the claims involved in this action encompass acts and transactions occurring principally between April and July 1987. Clearly, discovery is to be limited to the relevant time period, see, e.g., Benchmark Design, Inc. v. BDC, Inc., 1989 U.S. Dist. Lexis 8240 at *2, but information for years prior or subsequent to the specific period covered by the dispute may still be relevant to defendant's counterclaims. See, e.g., King v. E.F. Hutton Co., 117 F.R.D. 2, 7 (D.D.C. 1987); Hillside Amusement Co. v. Warner Bros. Pictures, 7 F.R.D. 260, 261-62 (S.D.N.Y. 1944) (relevant time period depends on the nature of the claim and may include period antedating plaintiff's entry into business). As noted, plaintiffs have offered no specific evidence in support of their contention that discovery for the full seven-year period requested by defendant would be burdensome. Therefore, since I also reject any objection to the various questions propounded by defendant on the ground of irrelevancy, there is no valid reason to limit defendant's requested time frame for plaintiffs' responses. In fact, in those questions where the seven-year time frame is applicable, the information requested by defendant regarding the period beginning several years before the events at issue in this action and continuing through the present might be highly probative of defendant's veil-piercing and fraudulent conveyance claims.
Plaintiffs also claim that the definition of "Infovest" provided in the interrogatories and document requests encompasses within its scope persons, events, circumstances and documents having no bearing on the present case. Plaintiffs have failed, however, to demonstrate specifically why application of this definition would be burdensome or would lead to the production of otherwise irrelevant information in answering any of the proposed interrogatories or producing any requested documents. Accordingly, plaintiffs' objection must be rejected.
"`Infovest' means Informative Investment Group, Ltd., its divisions, subsidiaries, affiliates and parent companies, and any successors and assigns over which Infovest has control or which it can compel release of documents, and any and all present directors, officers, employees, agents, attorneys and accountants, and any other person known by Infovest to have acted for Infovest from November 1983 to the present." (Roth Affidavit, Exh. D at 2; Exh. E at 2.)
Plaintiffs also contend that the discovery sought by defendant is unnecessarily duplicative and repetitive, because defendant had an earlier opportunity to obtain discovery regarding the alter ego allegations as part of the state court discovery proceedings. Plaintiffs have offered no specific evidence that "the discovery sought is unreasonably cumulative or duplicative . . ." or that defendant "has had ample opportunity in the action to obtain the information sought." Fed.R.Civ.P. 26(b)(1)(i), (ii). The mere fact that a party chooses to conduct discovery in different forms does not prevent the discovery from going forward, see J. Moore, J. Lucas G. Grotheer, Jr., 4 Moore's Federal Practice ¶ 26.50 at 26-81 (1989), even at this relatively late date in the proceedings. Moreover, while defendant had the opportunity to depose plaintiffs in London in connection with the state-court action, plaintiffs have not shown that those depositions were an adequate substitute for the detailed inquiry that is available through a well-tailored document request and set of interrogatories. Indeed, it does not appear that the depositions even covered the issues raised in this lawsuit by defendant's claims of alter ego liability and fraudulent conveyance. The Court will therefore compel plaintiffs to answer the interrogatories submitted by defendant and provide the requested documents, irrespective of any prior or concurrent discovery in the state court action.
See Defendant's Memorandum in Support of Motion to Compel at 6. Plaintiffs claim that defendant had "unfettered opportunity to explore all relevant areas at the deposition examination of Plaintiffs" and that it declined to pursue these areas at any length, relying instead on the proffered interrogatories and document requests. (Memorandum of Plaintiffs-Counterdefendants at 12, 46-47). Based on the limited deposition excerpts provided to me by both parties, and in the absence of any specific evidence to the contrary, I have no basis to assume that the depositions elicited the information now sought by defendant.
Plaintiffs also argue that the proposed interrogatories are in violation of Rule 46 of the Civil Rules of this court. Rule 46(b) provides, in pertinent part, that "[d]uring discovery, interrogatories . . . may only be served if they are a more practical method of obtaining the information sought than a request for production or a deposition." Plaintiffs argue that since defendant served requests for the production of documents and conducted extensive depositions of the plaintiffs prior to propounding the interrogatories at issue, the use of interrogatories at this late stage of discovery would violate the local rule. Although extensive discovery had taken place in this case before defendant propounded the discovery requests at issue, defendant seeks information that is most efficiently obtained in this manner, particularly in light of the cost and impracticality of re-deposing plaintiffs on these issues. Moreover, to the extent that any of the interrogatories may be answered by the production of documents, plaintiffs may avail themselves of that procedure. See Fed.R.Civ.P. 33(c). In sum, the court finds that the proposed interrogatories, which are geared specifically and solely to the counterclaims at issue, are not in violation of Local Rule 46. See Lyons v. Aster, 1990 WL 71473, *4 (S.D.N.Y. May 21, 1990).
Finally, plaintiffs contend that the requested discovery calls for information protected by the attorney-client privilege or work-product rule. The attorney-client privilege protects confidential communications between attorney and client made for the purpose of giving or obtaining legal services. See 8 C. Wigmore, Evidence, § 2292 at 554 (McNaughten rev. 1961); In re Grand Jury Subpoena Duces Tecum dated Sept. 15, 1983, 731 F.2d 1032, 1036 (2d Cir. 1984); United States v. Bein, 728 F.2d 107, 112 (2d Cir.), cert. denied, 469 U.S. 837 (1984). To establish the applicability of the work-product rule, the party resisting discovery must show that the requested discovery seeks information prepared in anticipation of litigation. See e.g., United States v. Gulf Oil Corp., 760 F.2d 292, 296 (T.E.C.A. 1985); Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854, 864 (D.C. Cir. 1980); Hardy v. New York News, Inc., 114 F.R.D. 633, 646 (S.D.N.Y. 1987). Plaintiffs have entirely failed to sustain either claim, however, since they have offered no competent evidence to establish the specific facts that underlie the privilege or the work-product rule. In the absence of any showing that the requested discovery seeks the contents of attorney-client communications or attorney work-product, plaintiffs' arguments for non-disclosure must be rejected.24
The court has reviewed plaintiffs' other objections to defendant's interrogations and document requests and finds them meritless. Accordingly, defendant's motion to compel discovery is granted in its entirety.
CONCLUSION
For the reasons stated, plaintiffs' motion for summary judgment on defendant's first, second and fifth counterclaims is denied and defendant's motion to compel discovery is granted. Plaintiffs are ordered to answer defendant's interrogatories and comply with its document requests by April 15, 1991, and, if necessary, to supplement their existing answers and document production in light of this decision.