Opinion
00 CIV. 2198 (DLC), M 19-375
February 27, 2002
James L. Brochin, Nora A. Henke, GAGE PAVLIS, New York, N Y, for Plaintiffs
Richard H. Dolan, Jeffrey M. Eilender, SCHLAM STONE DOLAN, New York, N Y, for Defendant
OPINION ORDER
On July 24, 2000, this Court denied, inter alia, a motion to compel arbitration brought by defendant North American Foreign Trading Corporation ("NAFT") against plaintiffs Smoothline Ltd. ("Smoothline") and Greatsino Electronic Ltd. ("Greatsino") Smoothline Ltd. v. North American Foreign Trading Corp., No. 00 Civ. 2798 (DLC), 2000 WL 1015949 (S.D.N.Y. July 24, 2000). On May 07, 2001, the Second Circuit Court of Appeals reversed and remanded for further proceedings. Smoothline Ltd. v. North American Foreign Trading Corp., 249 F.3d 147 (2d Cir. 2001). Specifically, the Second Circuit concluded that "Smoothline is required to arbitrate its disputes with NAFT regarding Smoothline's obligations to produce high quality phones and to repair or replace [Customer Returned Units]." Id. at 154. The Second Circuit remanded for determination of whether (1) Smoothline is required to arbitrate its dispute with NAFT involving tooling costs, (2) whether Greatsino and its indirect owner Universal Appliances, Ltd. ("UAL") are required to arbitrate disputes involving Customer Returned Units ("CRUs") with NAFT pursuant toThomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773 (2d Cir. 1995), and (3) whether Greatsino is required to arbitrate disputes involving CRUs with NAFT pursuant to Greatsino's alleged guarantees of the terms of letters of credit issued by NAFT for the benefit of Greatsino. Smoothline Ltd., 249 F.3d at 154-55.
For the reasons stated below, NAFT's motion to compel arbitration is granted with respect to Smoothline's dispute involving tooling costs and Greatsino's dispute involving CRUs. NAFT's petition to enjoin Smoothline and Greatsino from proceeding with the Liechtenstein action is also granted. Consideration of NAFT's motion to compel arbitration with respect to UAL's dispute involving CRUs is deferred pending the completion of discovery on the alleged alter-ego status of UAL, Smoothline, and Greatsino.
Background
The facts of this case are fully described in the Second Circuit's and this Court's prior opinions, Smoothline Ltd., 249 F.3d at 148-53;Smoothline Ltd., 2000 WL 1015949, at *1-*3, familiarity with which is presumed. The facts relevant to the issues remanded are summarized here.
NAFT is a New York corporation that is the principal supplier of BellSouth-brand telephones and other consumer telecommunications devices to BellSouth Corporation. Smoothline is a Hong Kong corporation that began to manufacture telephones for NAFT in about 1989. Greatsino is a British Virgin Islands corporation and an entity related to Smoothline that also manufactured telephones for NAFT beginning in 1997. UAL is the indirect owner of Smoothline, which UAL acquired in 1994, and Greatsino, which UAL acquired in 1996.
In March 1993, in connection with certain sub-contracting arrangements Smoothline entered into with Welback Holdings Ltd. and its subsidiaries P.T. Welback Indonesia and P.N. Electronics (collectively, the "Welback Companies"), Smoothline and NAFT entered into an Agreement and Guaranty (the "March 1993 Agreement") pursuant to which NAFT agreed to open letters of credit directly to the Welback Companies. NAFT's obligations under the March 1993 Agreement are made subject to the performance of Smoothline's existing obligations to NAFT. The agreement provides in relevant part:
If Manufacturer [Smoothline] and Supplier [Welback Holdings Ltd.] fully and completely perform their obligations to NAFT under the terms of NAFT's agreements with Manufacturer, including particularly but without limitation, (a) Manufacturer's obligation to produce and deliver the highest quality electronic and telecommunications equipment; (b) Manufacturer's obligation to meet all production and delivery schedules; and (c) Manufacturer's obligation to repair or replace, at no cost to NAFT, any defective goods returned by NAFT to Manufacturer, then NAFT agrees to open additional letters of credit to the order of Supplier, or a subsidiary of Supplier, in such amounts as the parties shall hereinafter fix by sebsequent [sic] agreement.
(Emphasis supplied). Section 6 of the agreement contains an arbitration clause:
The resolution of any dispute between the parties with respect to the subject matter of this Agreement and Guarantee shall be settled by arbitration before the American Arbitration Association in New York, New York, applying the law of New York without regard to conflicts of law principles.
Following the March 1993 Agreement, the Welback companies began to manufacture telephones for NAFT.
In December 1993, Smoothline and NAFT entered into another agreement (the "December 1993 Agreement") concerning Smoothline's obligation to repair or replace CRUs and NAFT's obligation to pay Smoothline's tooling costs. This agreement took the form of a letter from NAFT to Smoothline. NAFT wrote:
This will serve to confirm our understanding with respect to (1) Smoothline's obligation to repair or replace, at no cost to us, the telephones which have been, and in the future will be, returned by us to Smoothline; and (2) our obligation to pay Smoothline for the tooling which you made at our request and are using in the manufacture of goods for us.
Despite our existing agreements, Smoothline has not been able to repair or replace the telephones which we have returned for rehauling on a timely basis. Normally, we would insist that you reimburse us for the cost of those goods, either by an immediate payment or by letter of credit. Smoothline has told us, however, that it cannot afford to do so, and we are willing to cooperate with you.
Accordingly, so long as you have not returned or replaced the telephones which have been, and in the future will be, returned to Smoothline for rehauling, we will not be obligated to pay you on a current basis for the tooling. When and if you have fully performed your obligations to repair or replace, at no cost to us, the telephones for rehauling, then we will be obligated to perform our obligation to you to pay for the said tooling.
(Emphasis supplied). Smoothline agreed to these terms by signing the bottom of the letter.
In 1996, NAFT brought a demand for arbitration against the Welback companies for their alleged failure to repair or replace CRUs in a timely manner. In August 1997, NAFT demanded arbitration against Smoothline as well. These arbitrations have not been completed.
Smoothline consented to this arbitration. The parties do not agree, however, on whether the subject matter of this arbitration includes CRUs manufactured by both Smoothline arid the Welback Companies or only by the Welback Companies.
In 1997, notwithstanding the above disputes, NAFT began placing orders with Smoothline for the manufacture of 900 megaherz cordless telephones. Smoothline requested that its affiliate Greatsino produce the telephones, and NAFT agreed. NAFT paid Greatsino, as it had paid Smoothline and the Welback companies, through letters of credit issued by Barclays Bank AG, based in Zurich, Switzerland. In the letters of credit, under the heading "Special Conditions," Barclays stated the following regarding arbitration: "We are informed that any dispute arising out of any transaction of this letter of credit will be settled through the American Arbitration Association in New York City or the Supreme Court of New York, at NAFT's option." When Greatsino surrendered documents to obtain payment under the letters of credit, the documents included a "Sworn Certificate" in which Greatsino agreed to all of the terms of the letters of credit. The certificate states in pertinent part:
This is to guarantee the followings [sic], required on [the letter of credit] issued by Barclays Bank (Schweiz) AG . . . in favor of Greatsino Limited . . . that:
. . .
4) Smoothline Ltd [sic] also guarantees all the above points, and everything which is written of [sic] this lc, the content of which is being attached separately to this guarantee.
(Emphasis supplied). All parties agree that the reference to Smoothline is a typographical error and should instead read "Greatsino Limited also guarantees. . . ."
NAFT alleges that by 1998, Smoothline and Greatsino were delivering a large percentage of defective telephones and failing to meet their obligations to repair or replace CRUs in a timely manner. In December 1999, Smoothline and Greatsino began proceedings against NAFT in the Princely Court of Liechtenstein seeking damages for NAFT's alleged failure to pay its share of Smoothline's tooling costs and a declaration that, inter alia, Smoothline and Greatsino had no obligation to repair or replace CRUs. Having already demanded arbitration against Smoothline in August 1997, NAFT responded by demanding arbitration against Greatsino and against UAL, as the guarantor of Greatsino's performance.
On March 23, 2000, Smoothline and Greatsino petitioned this Court pursuant to 28 U.S.C. § 1782 to compel discovery in connection with the Liechtenstein action. On March 27, 2000, NAFT responded by cross-petitioning to compel arbitration of the Liechtenstein dispute in New York and enjoin Smoothline and Greatsino from continuing the Liechtenstein action. On the same date, Greatsino and UAL petitioned the Supreme Court, New York County, to stay an arbitration brought against them by NAFT. NAFT responded by removing the action to this Court, where it was consolidated with the above Section 1782 petition and motion to compel arbitration and enjoin the Liechtenstein proceedings.
Plaintiffs' petition to the Supreme Court, New York County, was filed under the caption In the Matter of the Application of Universal Appliances Ltd. and Greatsino Electronic Ltd. For a Judgment Staying the Arbitration Commenced by North American Foreign Trading Corp. Defendant removed the action to this Court under the caption In the Matter of the Application of Smoothline Ltd. and Greatsino Electronic Ltd. for a Judgment Staying the Arbitration Commenced by North American Foreign Trading Corp. Although the caption in this action lists only Smoothline and Greatsino as plaintiffs, plaintiffs and defendant have briefed the issues in the case on the clear understanding that UAL is a party to the action.
Plaintiffs argue that this Court lacks subject matter jurisdiction over UAL under 28 U.S.C. § 1332(a)(2). Section 1332(a)(2) provides federal courts with original jurisdiction over civil actions between "citizens of a State and citizens or subjects of a foreign state." 28 U.S.C. § 1332(a)(2). UAL is a Hong Kong corporation and therefore a citizen of a "foreign state," namely the People's Republic of China.Matimak Trading Co. v. Khalily, 118 F.3d 76 (2d Cir. 1997), is not to the contrary. The Matimak Court explicitly stated: "We express no view as to Hong Kong's current status, following Great Britain's transfer of sovereignty on July 1, 1997. As noted above, diversity of citizenship is determined as of the commencement of the action. Accordingly, we do not determine the status of Hong Kong, its residents, or its corporations under Chinese rule for the purposes of alienage jurisdiction." Id. at 80 n. 1. As UAL commenced its action against defendant after July 1, 1997, this Court has alienage jurisdiction over UAL. See Favour Mind Ltd. v. Pacific Shores, Inc., No. 98 Civ. 7038 (SAS), 1999 WL 1115217, at *7 (S.D.N.Y. 1999) (finding alienage jurisdiction over a Hong Kong corporation pursuant to 28 U.S.C. § 1332(a)(2) in an action commenced after July 1, 1997).
In July 2000, this Court denied NAFT's cross-petition and denied, without prejudice, Smoothline and Greatsino's Section 1782 petition.Smoothline Ltd., 2000 WL 1015949, at *1-*6. In May 2001, the Second Circuit reversed this Court's denial of the cross-petition. Smoothline Ltd., 249 F.3d at 147. The Second Circuit held that the arbitration clause of the March 1993 Agreement, applicable by its terms to the "subject matter" of the agreement, governed Smoothline's obligations to repair or replace CRUs.
Discussion
NAFT's Dispute with Smoothline Regarding Tooling Costs
It is well established that "any doubts about the scope of arbitrable issues should be resolved in favor of arbitration." Chelsea Sguare Textiles, Inc. v. Bombay Dyeing and Manufacturing Company, Ltd., 189 F.3d 289, 294 (2d Cir. 1999) (quoting Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983)). This presumption "applies with special force in the field of international commerce." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985).
The March 1993 Agreement requires arbitration of "any dispute between the parties with respect to the subject matter of this Agreement and Guarantee." In its May 2001 opinion, the Second Circuit defined the "subject matter" of the agreement as including disputes over Smoothline's obligation to repair or replace CRUs. Smoothline Ltd., 249 F.3d at 153-54. It did so because Smoothline's replacement of CRUs is a condition precedent to NAFT's performance under the agreement. Id. at 154.
The December 1993 Agreement regarding tooling costs contains no arbitration clause. Nor does it "expressly state that it is related to and is a subsidiary agreement of the March 1993 Agreement," as NAFT alleges. The December 1993 Agreement does, however, expressly and repeatedly state that Smoothline's obligation to repair or replace CRUs is a condition precedent to NAFT's obligation to pay certain of Smoothline's tooling costs. NAFT has alleged that, because Smoothline has failed to fulfill its obligations with respect to CRUs, NAFT need not pay the tooling costs. The linkage between Smoothline's obligation with respect to CRUs and NAFT's obligation with respect to tooling costs is underscored by Smoothline's own request for relief in the Liechtenstein proceedings. There, Smoothline seeks tooling costs and a declaration that it has no obligation to repair or replace CRUs. Smoothline seeks both forms of relief because to receive the first without the second would produce a result in direct contravention of the terms of the December 1993 Agreement. While, as a theoretical matter, the tooling costs dispute could involve issues entirely independent of the CRU dispute, and exist even if the CRU dispute were resolved, that is not the issue that the parties are litigating. Instead, the only dispute described by the parties involving tooling costs is in fact a dispute about Smoothline's duty to replace CRUs, which in turn is a condition precedent to NAFT's payment of the tooling costs. As described by the parties, the dispute over NAFT's obligation to pay Smoothline's tooling costs is thus in essence a dispute over Smoothline's obligation to repair or replace CRUs. It therefore fits within the subject matter of the March 1993 Agreement as defined by the Second Circuit id., and must be arbitrated.
NAFT's Dispute with Greatsino Regarding CRUs
NAFT seeks to compel Greatsino to arbitrate its CRU disputes because,inter alia, Greatsino submitted "Sworn Certificate[s]" accepting all of the terms of the letters of credit opened by NAFT for Greatsino's benefit, including the "special condition" quoted above: "We [Barclays Bank] are informed that any dispute arising out of any transaction of this letter of credit will be settled through the American Arbitration Association in New York city or the Supreme Cour [sic] of New York, at NAFT's option." By these terms, NAFT repeatedly recorded its understanding that any disputes with Greatsino arising out of the letters of credit were potentially arbitrable. Greatsino did nothing to disabuse NAFT of this assumption. On the contrary, it repeatedly submitted certificates stating "[t]his is to guarantee the following required on the [letter of credit] . . . that. [Greatsino] guarantees everything which is written [in] this [letter of credit]." plaintiffs respond that the arbitration condition in the letters of credit is not binding on Greatsino because (1) it is not bilateral and (2) it refers only to the bank's understanding and not to the intent of either NAFT or Greatsino.
Neither of these arguments is persuasive. As to plaintiff's first argument, NAFT need not be bound by an arbitration clause in order for it to be enforced against Greatsino. Under New York law, it is well-settled that "mutuality of remedy is not required in arbitration agreements." Sablosky v. Edward S. Gordon Company, Inc., 73 N.Y.2d 133, 137 (1989). See also Doctor's Associates, Inc. v. Distajo, 66 F.3d 438, 452 (2d Cir. 1995) (citing Sablosky). As to the second argument, Greatsino misconstrues the purpose of the certificates. In submitting the certificates agreeing to the terms of the letters of credit, Greatsino indicated to the bank an intent to be bound by a condition imposed on the letters of credit. Greatsino submitted its certificates not for the bank's benefit, but for its own benefit and that of NAFT. As the Second Circuit has observed, commitments like that signed by Greatsino are normally given effect. Smoothline, 249 F.3d at 155.
Though they do not explicitly agree that New York Law applies, both parties argue New York law in their briefs and make no mention of the law of any other forum on this issue. In this situation, New York law properly applies. Tehran-Berkeley Civil and envtl' Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989) (applying New York law "[u]nder the principle that implied consent to use a forum's law is sufficient to establish choice of law").
NAFT's Dispute with UAL Regarding CRUs
NAFT seeks to compel UAL, who was not a signatory to the March 1993 Agreement, to arbitrate its CRU disputes under the arbitration clause of the agreement pursuant to Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773 (2d Cir. 1995). The Thomson-CSF court recognized five theories for binding non-signatories to arbitration agreements: (1) incorporation by reference, (2) assumption, (3) agency, (4) veil-piercing/alter ego, and (5) estoppel. Id. at 776.
Specifically, NAFT argues that UAL is estopped from avoiding arbitration under the March 1993 Agreement essentially because it guaranteed Smoothline's performance. Though NAFT has failed to provide the Court with a copy of the alleged guarantee, plaintiffs do not dispute that UAL made such a guarantee. Nonetheless, NAFT has not identified any "accepted theory under agency or contract law," id. at 780, on which a nonsignatory to an agreement is estopped from avoiding arbitration under that agreement because it guaranteed a signatory's performance. Nor has NAFT shown that UAL, who was not an acknowledged beneficiary of any of the above-mentioned letters of credit issued by NAFT, knowingly exploited the agreement or directly benefitted from it. See MAG Portfolio Consult, GMBH v. Merlin Biomed Group, LLC, 268 F.3d 58, 61 (2d Cir. 2001) (non-signatory to agreement containing arbitration clause may be estopped from avoiding arbitration under the agreement if it knowingly exploited the agreement and received a direct benefit from it).
NAFT also urges the Court to pierce the corporate veil and compel UAL to arbitrate its CRU disputes as the alter-ego of Smoothline. In the alternative, NAFT urges the Court to compel discovery on the alleged alter-ego status of UAL and Smoothline. Under New York law, the party seeking to pierce a corporate veil must "make a two-part showing: (i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." American Fuel Corp. v. Utah Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997). See also Freeman v. Complex Computing Co., Inc., 119 F.3d 1044, 1052-53 (2d Cir. 1997).
NAFT has articulated a sufficient theory of domination and "fraud or wrong" to justify discovery. Specifically, NAFT argues that UAL dominated Smoothline by insufficiently capitalizing Smoothline and according it a narrow scope of discretion. NAFT further alleges that UAL and Smoothline shared common officers and office space. See id. at 1053 (factors showing "domination" for veil-piercing purposes) As to fraud or wrong, NAFT argues that UAL's domination of Smoothline has harmed NAFT in that UAL's alleged shifting of assets out of Smoothline has left Smoothline effectively judgment proof. This conduct is sufficient to constitute fraud or wrong for purposes of veil-piercing. See Thrift Drug v. Prescription Plan Service Corp., 1 F. Supp.2d 387, 388 (S.D.N.Y. 1998) (controlling shareholder's manipulation of corporation's accounts to shield assets from creditors constitutes fraud or wrong necessary to pierce corporate veil) Freeman v. Complex Computing Co., Inc., 979 F. Supp. 257, 260 (S.D.N.Y. 1997) (shifting of assets by equitable owner of corporation to make corporation judgment proof constitutes fraud or wrong justifying veil-piercing)
NAFT's Petition Permanently to Enjoin Greatsino and Smoothline from Proceeding in the Liechtenstein Action
NAFT petitions this Court permanently to enjoin Greatsino and Smoothline from proceeding in the Liechtenstein action. "An anti-foreign-suit injunction should be used sparingly, and should be granted only with care and great restraint." China Trade and Development Corp. v. M.V. Choong Yong, 837 F.2d 33, 36 (2d Cir. 1987) (citations omitted). There are two threshold requirements: The parties must be the same in both matters, and resolution of the case before the enjoining court must be dispositive of the action to be enjoined. Id. If both of these requirements are met, then the party seeking the injunction must show either that the "foreign action threatens the jurisdiction of the enjoining forum" or that "strong public policies of the enjoining forum are threatened by the foreign action." Id.
NAFT has met both threshold requirements. The parties that are engaged in the Liechtenstein action are engaged in, inter alia, essentially the same action before this Court. Moreover, resolution by arbitration pursuant to this Court's Order will be dispositive of the Liechtenstein action. NAFT has also shown that the "strong federal policy favoring arbitration," Chelsea Sguare Textiles, 189 F.3d at 294, would be threatened by Greatsino's and Smoothline's continued participation in the Liechtenstein action. Consequently, neither Smoothline nor Greatsino may continue the Liechtenstein action in so far as they seek to challenge in that suit the validity of the obligations encompassed by their respective agreements to arbitrate. See Smoothline, 249 F.3d at 154.
Conclusion
For the reasons stated, NAFT's motion to compel arbitration is granted with respect to Smoothline's dispute involving tooling costs and Greatsino's dispute involving CRUs. NAFT's petition to enjoin Smoothline and Greatsino from proceeding with the Liechtenstein action is granted. Consideration of NAFT's motion to compel arbitration with respect to UAL's dispute involving CRUs is deferred pending the completion of discovery on the alleged alter-ego status of UAL, Smoothline, and Greatsino.
SO ORDERED: