Summary
noting that the Second Circuit recognized, in American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 133 (2d Cir. 1997), that a non-signatory party may be bound by an arbitration agreement signed by its alter ego
Summary of this case from American Equities Group v. Ahava Dairy Prods. Corp.Opinion
No. 02 Civ. 2820 (RWS)
September 20, 2002
Attorney for Petitioner: KRAMER LEVIN NAFTALIS FRANKEL from New York, NY. By: JONATHAN M. WAGNER, ESQ. and MICHELLE ROSSETTIE, ESQ., Of Counsel.
Attorneys for Respondents: KALKINES, ARKY, ZALL BERNSTEIN from New York, NY. By: RONALD G. BLUM, ESQ., Of Counsel. Also JOSEPH C. MARKOWITZ, ESQ. from Los Angeles, CA.
OPINION
Petitioner Mobius Management Systems, Inc. ("Mobius") has moved to confirm an arbitration award against respondents Technologic Software Concepts, Inc. ("Technologic") and Thomas Politowski ("Politowski") who in turn cross-moved to vacate the arbitration award against him. The motion of Mobius is granted and the cross-motion of Politowski is denied.
The Parties
Mobius is a Delaware corporation with offices in Rye, New York, dealing in software products.
Technologic is a California corporation which had offices in Irvine, California, and is now alleged to be insolvent. Politowski is the president of Technologic.
Prior Proceedings
Mobius and Technologic entered into a Software Assets Purchase Agreement (the "Agreement") as of December 31, 1998, under which Technologic purchased a software product, the TapeSaver, and undertook to make payments to Mobius. The Agreement contained a provision for arbitration and for a consent to submit to the jurisdiction of the courts of New York.
Technologic failed to make payments in accordance with the Agreement and arbitration against Technologic and Politowski was initiated.
Politowski appeared specially to contest the arbitrator's jurisdiction over him since he was not a party to the agreement, although a signatory as president of Technologic.
Mobius submitted evidence to the arbitrator that Politowski was the president, majority shareholder of Technologic, holding 87% of its shares, that Technologic had made 18 of 48 payments before defaulting, that it sold its assets including TapeSaver to a third party in June 2000 and invested the proceeds in an unidentified software company. Mobius alleges in this proceeding that Politowski received a portion of the sums received by Technologic after the sale of its assets.
An award annexed hereto as Appendix A rendered by the arbitrator, Glenn S. Gray, was issued on March 24, 2002 (the "Award").
The petition to confirm the arbitration award was filed April 12, 2002, and the cross-motion to vacate was marked submitted on June 12, 2002.
The Award
The Award granted an award to Mobius of $381,750 in overdue payments and directed monthly payments of $37,500 through December 2003 and AAA fees and expenses and held Technologic and Politowski jointly liable without further comment.
Technologic does not challenge the Award. The only issue presented by these dueling motions is the propriety of the determination that Politowski is jointly liable. Both sides submitted materials to the arbitrator on the question of whether Technologic was the alter ego of Politowski under New York law.
Politowski Was A Proper Party To The Arbitration
Politowski was served with two documents: a short demand for arbitration form used by the AAA with room to list only one respondent, and a more detailed statement of claim and demand for arbitration hearing in which Mobius particularized its demand and claims. Paragraph 1 states, "respondent Thomas Politowski, the President and CEO of Technologic, is also personally liable for [Technologic's] breach." Likewise, paragraph 7 details the alter ego allegations against Politowski. Mobius's second claim is expressly directed to Politowski, and the demand for judgment describes the relief sought from him.
Politowski made a timely evidentiary submission contending that he should not be a party to the proceedings and should not be held liable for Technologic's debt to Mobius because he was not Technologic's alter ego.
Politowski did not seek a stay within the 20-day time limit set by CPLR 7503(c) ("An application to stay arbitration must be made by the party served within twenty days after service upon him of the notice or demand, or he shall be so precluded from objecting that a valid agreement [to arbitrate] was not made.") and is therefore bound by the arbitration. Favara, Skahan, Tabaczyk, Ltd. v. Ewing, 1992 WL 80659 at *2 (S.D.N.Y. Apr. 9, 1992) (under CPLR 7503(c), "[b]ecause [alter ego] failed to move for a stay of the arbitration, she is precluded from asserting that the arbitration was invalid"); In re Carbone/Orrino Agency, 210 A.D.2d 221, 222, 619 N.Y.S.2d 348, 348 (2d Dep't 1994) ("[w]here a party does not move for a stay until after the statutory time period of 20 days after service of the demand for arbitration and where the party has participated in or acquiesced in the arbitration proceeding, the party waives its right to raise any objection to service of the demand") (citations omitted) Politowski was therefore served and a proper party.
The Alter Ego Issue Was Properly Before The Arbitrator
Our Court of Appeals has recognized that "piercing the corporate veil between a signatory and nonsignatory party may bind the nonsignatory party to an arbitration agreement of its alter ego." American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 133 (2d Cir. 1997), citing Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir. 1995). The parties' arbitration agreement covered "any controversy or dispute respecting this Agreement" and consequently the arbitrator was empowered to resolve the issue of Politowski's participation. United Merchants Mfrs., Inc. v. American Textile Co., 512 F. Supp. 757, 758 (S.D.N.Y. 1981) (where agreement included a "broad provision for arbitration of all disputes arising thereunder or related thereto," court found that "deciding which issues pertaining to the relationship of the parties are arbitrable should be left to the arbitrators").
Politowski sought to distinguish Favara, 1992 WL 80659 (S.D.N.Y. Apr. 9, 1992) on the ground that the alter ego was properly served in that case but here Politowski was properly served as described above.Levin-Townsend Computer Corp. v. Holland, 29 A.D.2d 925, 925, 289 N.Y.S.2d 12, 14 (1st Dep't 1968), cited by Politowski, merely addresses whether a parent can be bound by a subsidiary's agreement to arbitrate but does not discuss the context where corporate forms are ignored. The other two cases, Livingston v. Gindoff Textile Corp., 191 F. Supp. 135, 137 (S.D.N.Y. 1961) and International Brotherhood of Teamsters Local 815 v. Castwell Foundry Corp., 37 Misc.2d 31, 234 N.Y.S.2d 261, 262-63 (Sup.Ct. N.Y. Co. 1961), both arose in the specialized area of labor law and addressed so-called "runaway shops." While alter ego issues are implicated, neither of these cases stands for the proposition that an alter ego cannot be bound by an arbitration agreement which it did not sign. As set forth above, the Court of Appeals has ruled otherwise.
Because Politowski put to the arbitrator the issue of arbitrability of the claims against him, he is wrong in claiming that the standard of review on that issue is de novo. See Freight Drivers v. Kingsway Transports, Inc., 1992 WL 281379, at *1 (W.D.N.Y. Aug. 31, 1992) (when parties "submit the issue of arbitrability vel non to the arbitrator rather than reserving such for initial determination by a court, the review of the arbitrator's decision on such issue will be undertaken pursuant to the same deferential standard generally applied to an arbitrator's decision").
Manifest Disregard By The Arbitrator Has Not Been Established
The Award set forth the conclusion of the arbitrator without any amplification with respect to the alter ego issue. The parties submitted authorities to him with respect to the New York law on the issue, and it can be presumed in the absence of any other submissions that New York law was applied. To do so was not a manifest disregard of the controlling law.
Although the law of the state of incorporation typically governs alter ego claims, "where the parties have agreed to the application of the forum law, their consent concludes the choice of law inquiry." American Fuel Corp., 122 F.3d at 134. Here, the parties' Agreement contains a New York choice of law provision. Here, both parties submitted briefs to the arbitrator arguing the alter ego issue under New York law. See Darby v. Societe Des Hotels Meridien, 1999 WL 459816, at *4 (S.D.N.Y. June 29, 1999) (applying New York law to alter ego issues; "[a]lthough SHM is a French corporation, the parties rely entirely on New York law for the veil-piercing analysis").
Even if California law were to govern, New York and California law essentially apply the same veil-piercing criteria, including whether the corporation was inadequately capitalized, funds were commingled, or corporate forms otherwise ignored. Compare Austin Powder Co. v. McCullough, 216 A.D.2d 825, 827, 628 N.Y.S.2d 855, 857 (3d Dep't 1995)and Matter of Morris v. New York State Dept. of Taxation Fin., 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 N.E.2d 1157, with Associated Vendors, Inc. v. Oakland Meat Co., Inc., 26 Cal.Rptr. 806, 813-14 (Cal. Appl. 1962).
Politowski suggests that under California law a plaintiff must additionally show that an alter ego acted with "bad faith" or that the failure to find alter ego liability would lead to "inequitable results." Even if required, evidence was presented that both elements are present here.
Politowski acted in bad faith by breaching his fiduciary duty, as a director of an insolvent company, to run Technologic for the benefit of its creditors, the largest of which is Mobius. Under California law, as under New York law, directors of an insolvent company owe fiduciary duties to their creditors. See New York Credit Men's Adjustment Bureau, Inc. v. Weiss, 305 N.Y.1, 7, 110 N.E.2d 397 (1953); Mediators Inc. v. Manney, 1996 WL 554576, at 4 (S.D.N.Y. Sept. 30, 1996; Nahman v. Jacks, 266 B.R. 728, 736 (9th Cir. 2001) ("California courts have recognized that `all of the assets of a corporation, immediately on its becoming insolvent, become a trust fund for the benefit of all of its creditors'") (citation omitted); Commons v. Schine, 110 Cal.Rptr. 606, 609 (Ct.App. 1973) (when the defendant dominant shareholder of an insolvent corporation paid himself instead of his creditors, that is "a species of fraud"; "[a]s a fiduciary he has violated his duty to the beneficiaries of his trust," the creditors). Politowski's decision "to sell most of the company's assets to Unicom," even if in Technologic's best interest, permitted the satisfaction of at least a portion of the outstanding obligation to Mobius.
In this proceeding, Politowski has offered new evidence and exhibits concerning his relationship with Technologic. The Federal Arbitration Act, however, does not allow the district court to vacate an award on the basis of new evidence. 9 U.S.C. § 10; Shearson Hayden Stone, Inc. v. Liang, 653 F.2d 310, 313 (7th Cir. 1981). See also Levine v. Klein, 70 A.D.2d 531, 533, 416 N.Y.S.2d 28, 29 (1st Dep't 1979).
Further, the new evidence weighs in Mobius's favor. Technologic apparently received $9 million for the sale of its software lines, including TapeSaver, to Unicom, $6 million of which was used to pay off most of Technologic's other debts. While Unicom paid $250,000 to Politowski, it made no payments to Mobius. The balance sheets submitted establish that Technologic was rendered insolvent, and that by January 2002 the company's assets exceeded its liabilities by $1 million. Given the obligation to Mobius, the evidence submitted to the arbitrator could support a conclusion of bad faith.
Arbitration awards "are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation."Possehl, Inc. v. Shanghai Hai Xing Shipping, 2001 WL 214234, at *3 (S.D.N.Y. Mar. 1, 2001) (citing Dirussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997)). Here, the burden lies upon Politowski to establish the grounds for vacating the Award under the "manifest disregard of the law" rubic. "The Second Circuit adhere[s] firmly to the proposition . . . that an arbitration award should be enforced, despite a court's disagreement with it on the merits, if there is a barely colorable justification for the outcome reached." Griffin Indus., Inc. v. Petrojam, Ltd., 72 F. Supp.2d 365, 369 (S.D.N.Y. 1999). Politowski has not met this burden.
Conclusion
The Award is confirmed, and the motion of Mobius is granted, and the cross-motion of Politowski denied.
It is so ordered.