Opinion
00 Civ. 6458 (RCC)
March 12, 2002
OPINION AND ORDER
Plaintiff Horizon Plastics, Inc. ("Horizon") seeks to enjoin as against it an arbitration proceeding commenced by defendant Douglas Constance ("Constance"), arising out of Constance's employment with a Horizon subsidiary company, Clear Pak, LLC ("Clear Pak"). Horizon contends that it cannot be bound by the arbitration provision contained in Constance's employment contract because it was not a signatory to that agreement. Constance argues, however, that Horizon is subject to arbitration as Clear Pak's alter ego or, alternatively, pursuant to a "single employer" theory.
Horizon initially filed this action in New Jersey state court and Constance removed the case to the United States District Court for the District of New Jersey. Horizon then submitted a motion for remand or, alternatively, for summary judgment. Constance in response asked the Court to dismiss the complaint or to transfer the action to the Southern District of New York. Constance also requested a default judgment against Horizon for failing to answer its counterclaim. The New Jersey District Court (Wolin, J.) denied the motion to remand and the motion for a default judgment, but granted the motion to transfer. Horizon Plastics v. Constance, No. Civ. A 99-6132, 2000 WL 1176543 (D.N.J. Aug. 11, 2000).
Although Horizon styled its motion as one for summary judgment, and appended a statement of undisputed facts pursuant to Local Rule 56.1, the parties had not yet undertaken any discovery.
Upon reassignment to this Court, Horizon, by order to show cause, sought a preliminary injunction staying the arbitration until its pending summary judgment motion was resolved. Constance, in opposition, moved for an order dismissing the complaint and compelling arbitration. This Court postponed its decision during the parties' attempts at mediation. Mediation having proved unsuccessful, the parties now renew their motions. For the reasons set forth below, the motions of both Horizon and Constance are denied without prejudice, with leave to renew after the completion of discovery. The arbitration proceeding is hereby stayed pending this Court's final determination as to whether Horizon properly can be bound by its subsidiary's arbitration agreement.
I. BACKGROUND
Clear Pak was a New Jersey corporation that distributed a shrink wrap product in the United States for Polifllms, SRL ("Polifilms"), an Italian company. Pl. Rule 56.1 Stmt. ¶ 3; Certification of Peter Feniello dated September 9, 2000 ("Feniello Cert."), at ¶ 17. Clear Pak is no longer in existence as a corporate entity. According to Horizon, Clear Pak was owned 50% by Horizon and 50% by Polifilms. Pl. Rule 56.1 Stmt. ¶ 2. In August 1998, Clear Pak hired Constance to develop sales and to hire a sales force for the shrink wrap product. Pl. Rule 56.1 Stmt. ¶ 4. In connection therewith, Constance entered into an employment agreement with Clear Pak (the "Agreement"). Id. ¶ 1. The Agreement provides, in pertinent part, that:
Constance argues that discovery is necessary on this point. Def. Rule 56.1 Stmt. ¶ 1. Constance states that he was informed by Peter Feniello ("Feniello"), the President of Clear Pak and the Vice President of Horizon, that Polifilms had no financial or ownership interest in Clear Pak. See Supplemental Declaration of Douglas Constance dated May 8, 2000 ("Constance Supp. Decl."), at ¶ 8.
In the event that any dispute shall arise under this agreement that cannot be settled by the parties, either party may submit same to an arbitrator selected in accordance with the rules of the American Arbitration Association (Commercial Panel).
Feniello Cert., Ex. A.
The Agreement was signed by Constance and by Feniello on behalf of Clear Pak. Id. At the time Constance came to work for Clear Pak, he was engaged in an on-going dispute with his former employer, Intertape Polymer ("Intertape"), over the scope of a non-compete clause. Pl. Rule 56.1. Stmt. ¶ 5. Intertape apparently believed that Constance now worked for Tafco, Inc. ("Tafco"), a company wholly owned by Feniello. To clarify the situation, Constance wrote to Intertape and advised that "I do not work for Tafco. I work for Clear Pak, LLC." Id. ¶ 6; Feniello Cert., Ex. C. Constance also informed his own attorney that "there is concern on Peter Feniello and myself about the misunderstanding who I really work for [sic] . . . Clear Pak is a separate corporation which [Feniello] is a minority stockholder [sic]." Pl. Rule 56.1 Stmt. ¶ 7. Constance's attorney likewise referred to Clear Pak as Constance's employer in subsequent correspondence with Intertape. Id. ¶ 8.
Constance does not dispute that he referred to Clear Pak as his employer but argues that his understanding was based on representations made by Feniello. Def. Rule 56.1 Stmt. ¶ 2. Constance contends that in reality Clear Pak had no separate existence apart from Horizon and that Feniello controlled the operations of both companies. According to Constance, Clear Pak did not lease its own office and did not hire an office staff. See Declaration of Douglas Constance dated April 13, 2000 ("Constance Decl.") at ¶ 5. Except for Constance, who was Clear Pak's only employee, all work performed for Clear Pak allegedly was performed by employees on the payroll of Horizon, Tafco, or other companies owned or controlled by Feniello. Id. Constance also claims that Clear Pak did not own or lease its own warehouse space, but rather stored its entire inventory in space leased by Horizon. Id. ¶ 6.
Feniello purportedly instructed Constance to sell Horizon products first before selling Clear Pak products. Id. ¶ 7. Horizon employees allegedly placed orders for Clear Pak products to be delivered from the Horizon warehouse and placed orders with Polifilms in Italy for shipment to Clear Pak. Id. ¶ 9. In addition, Constance claims that independent sales representatives who sold Clear Pak products were paid commission checks by either Tafco or Horizon, not Clear Pak. Id. ¶ 8. When Constance began his employment with Clear Pak, it is undisputed that he initially was paid out of a Horizon checking account. Id. ¶ 9. Horizon claims that this was necessary only because Clear Pak's checking account had not yet been set up, and contends that those monies were deemed to be a loan to Clear Pak and were repaid. Pl. Rule 56.1 Stmt. ¶¶ 9-12. Thereafter, Constance was paid by Clear Pak. Id. His checks were signed by Bobbie Garbaccio, the mother of Feniello and the treasurer of both Clear Pak and Horizon. Constance Supp. Decl. at ¶ 3.
On February 1, 1999, Clear Pak terminated Constance, purportedly for failing to hire a sales force and to develop sales as set forth in the terms of the Agreement. Pl. Rule 56.1 Stmt. ¶ 15. Constance then initiated arbitration proceedings pursuant to the Agreement but named Horizon, rather than Clear Pak, as the respondent. Id. ¶ 16.
II. DISCUSSION
Horizon argues that because it is not a signatory to the Agreement between Clear Pak and Constance, it cannot be bound by the arbitration provision contained therein. Constance argues that Horizon properly may be made a party to the arbitration on ground that Horizon and Clear Pak are alter egos, or alternatively, a single employer.
In order to resolve this dispute, the Court first must look to the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the "FAA"). The FAA creates a "body of federal substantive law of arbitrability applicable to any arbitration agreement within the coverage of the [FAA]." Paine Webber, Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir. 1996) (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). The Second Circuit has held that under the FAA a non-signatory may be bound to an arbitration agreement if so dictated by the "ordinary principles of contract and agency." Thomson-CSF. S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995). Accordingly, the Second Circuit recognized that a parent corporation may be bound by its subsidiary's arbitration agreement on the basis of, among other things, a veil-piercing or alter ego theory. Id.
Employment contracts, such as the one at issue here, fall within the scope of the FAA. See Powers v. Fox Television Stations, 923 F. Supp. 21, 23-24 (S.D.N.Y. 1996).
The Thomson opinion did not mention the single employer theory, advanced here by Constance, as a basis for compelling arbitration. The single employer doctrine originally was developed by the National Labor Relations Board as a means of determining whether two entities constituted a single employer in order to protect the collective bargaining rights of employees and to advance industrial stability. Murray v. Miner, 74 F.3d 402, 404 (2d Cir. 1996). It is an open question whether the single employer doctrine can be used to compel a non-signatory to arbitrate a dispute regarding the breach of an employment contract, particularly in a diversity case such as this where the court must look to ordinary principles of contract and agency under state law. See id. at 404 n. 2 (predicting that the New York Court of Appeals would not apply the single employer doctrine to the facts of the case at bar and noting that it was unclear whether the doctrine even applies to the common law claims of employees). In any event, this court need not decide at this time whether the single employer doctrine is applicable. If this Court ultimately compels arbitration under Constance's alter ego theory, a decision on this point would be rendered mere dicta.
Courts in diversity cases generally refer to state law in defining these ordinary principles of contract and agency. See, e.g., American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) (applying state veil-piercing law to an arbitrability dispute based on diversity jurisdiction); cf. Doctors Assocs., Inc. v. Hamilton, 150 F.3d 157, 162-64 (2d Cir. 1998) (noting that state law may be applied only to the extent that it reflects general principles of contract law and does not impose additional limits on arbitration).
Under New York choice of law principles, "[t]he law of the state of incorporation determines when the corporate form will be disregarded."Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995) (quoting Kalb, Voothis Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993)). Therefore, New Jersey law applies to this dispute. Under New Jersey law, a corporation is considered to be a separate entity from its shareholders, and courts generally will not abrogate limited liability "even in the case of a parent corporation and its wholly-owned subsidiary." State of New Jersey v. Ventron Corp., 94 N.J. 473, 500, 468 A.2d 150, 164 (1983) (citing Lyon v. Barrett, 89 N.J. 294, 300, 445 A.2d 1153, 1156 (1982)). However, when the "subsidiary [is] the mere instrumentality of the parent corporation," veil-piercing may be appropriate. Id. In essence, courts must find "that the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent," and that the corporation used the subsidiary "to perpetrate a fraud or injustice, or otherwise to circumvent the law."Id. at 501, 468 A.2d at 164.
In making such a determination, New Jersey courts apply the traditional common law factors, including the presence in both corporations of the same officers, directors, and shareholders, financial support of the subsidiary's operations by the parent, whether the property of the subsidiary is used by the parent corporation as its own, the failure of a subsidiary to observe the formal requirements attributable to its operation, and the involvement of the parent's corporate officers in the day-to-day business of the subsidiary. Land Ocean Logistics, Inc. v. Aqua Gulf Corp., 68 F. Supp.2d 263, 275 (W.D.N.Y. 1999) (analyzing New Jersey law).
Here, the parties dispute the degree of control exercised by Horizon over Clear Pak. For example, the parties dispute whether there was common management. According to Horizon, Clear Pak was managed by Feniello and Gerald Meulman ("Meulman") of Polifilms, while Horizon was managed by Feniello's son and Ferdinand Lutz ("Lutz"). See Pl. Reply Rule 56.1. Stmt., Response to ¶ 10(a). However, Constance claims that Feniello in reality controlled the operations of both entities. According to Constance, Lutz lived and worked in Europe and acknowledged that Feniello was in charge of Horizon's North American operations. Constance Supp. Decl. ¶ 1. Likewise, Constance claims that Meulman lived and worked in Italy. Id. ¶ 10. Constance contends that he was not informed that Meulman had any role in Clear Pak. Id.
Aside from issues as to common management, the parties dispute whether the property and operations of Clear Pak were integrated with those of Horizon. For example, Constance contends that Horizon employees performed work for Clear Pak, that Clear Pak utilized Horizon's warehouse space, that Horizon sales representatives sold Clear Pak products, and that he himself was instructed to sell Horizon products. Id. ¶ 6; Constance Decl. ¶¶ 5-8. Horizon substantially denies these allegations. In addition, questions exist regarding the intermingling of corporate funds. See Stochastic Decisions, Inc. v. DiDomenico, 236 N.J.Super. 388, 395, 565 A.2d 1133, 1136 (App.Div. 1989) (holding that the commingling of funds can trigger alter ego liability). It is undisputed that Constance initially was paid by Horizon, although the parties dispute whether those payments were a loan to Clear Pak. Moreover, according to Constance, he requested at the outset of his employment that money be placed in an escrow account to cover the amounts due under the employment contract. Feniello allegedly assured Constance that, between all of his companies, money would always be available if the venture was to fail. Constance Supp. Decl. ¶ 4.
There is also a real question as to whether "fraud, injustice or the like" is present here so as to justify piercing the corporate veil.Ventron Corp., 94 N.J. at 500, 468 A.2d at 164. Constance alleges that Clear Pak no longer has any assets and that Horizon has retained the moneys earned from the sale of Clear Pak's inventory. Constance Decl. ¶¶ 11-12. If proved true, such a scenario would support a decision to pierce the corporate veil. See Kuibyshevnefteorgsynthez v. Model, Civ. A. No. 93-49 19, 1995 WL 66371, at *14 (D.N.J. Feb. 6, 1995) (granting motion to pierce the corporate veil under New Jersey law where the corporate funds were diverted to the owner's use with the consequent frustration of the claims of the corporate debtor); see also Karo Marketing Corp. v. Playdrome America, 331 N.J. Super. 430, 443, 752 A.D.2d 341, 347 (App.Div. 2000) (piercing the corporate veil where the corporation was rendered judgment-proof).
A period of discovery is required to adduce evidence to support or disprove Constance's claims. If, after discovery, issues of fact remain, the Court will conduct an evidentiary hearing. See, e.g., A/S Custodia v. Lessin Int'l, Inc., 503 F.2d 318, 320 (2d Cir. 1974) (holding that the district court must conduct an evidentiary hearing where there are disputed issues of fact on the question of whether a non-signatory to an arbitration agreement can be compelled to arbitrate).
III. CONCLUSION
The parties' pending motions are denied in their entirety, with leave to renew after the completion of discovery. Discovery shall be concluded by June 14, 2002. On that date, the parties are directed to appear before this Court for a status conference as to whether they wish to move for summary judgment because no genuine issues of material fact remain, or whether an evidentiary hearing will be necessary. The arbitration proceeding is hereby stayed until a final decision is rendered in this Court.