New York Appeals Court Issues Important Rule B And Maritime Corporate Veil-Piercing Decision; Lenient U.S. Maritime Law Veil-Piercing Standard Should Continue To Apply In Most Instances

by Holland & Knight LLP
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For the past sixty years, and until January 11, 2013, U.S. federal courts routinely have applied the comparatively expansive (and potentially creditor-friendly) "maritime law of veil piercing" when examining veil-piercing and/or alter ego claims in Rule B maritime attachment (i.e., security) proceedings and maritime judgment enforcement cases. Courts applied the U.S. maritime veil-piercing standard regardless of whether the claim or dispute arose from a charter party or other agreement specifying a particular law would apply to disputes, such as, as often is the case, English law. 

As a result of a significant ruling by the U.S. Court of Appeals for the Second Circuit yesterday, it is likely that U.S. maritime veil-piercing/alter ego law will continue to apply in most maritime veil-piercing/alter ego cases. The Second Circuit held that where a multinational shipping dispute implicates several potential sources of law, none of which have a "particularly strong connection" to the dispute, the United States has the strongest "'points of contact' with this claim by virtue of the location of [the defendant]'s property [in the United States]."

An Unprecedented Approach

In the matter of Blue Whale Corp. v. Grand China Shipping Development Co. et al.,1Doc. No. 13-0192-cv (2d Cir. July 16, 2013), the plaintiff brought a Rule B action in New York seeking to attach property of a Chinese entity located in New York on the theory that the entity was the "alter ego" of another Chinese entity, as well as to "pierce the corporate veil."

After its property had been attached by the plaintiff, the alleged alter ego moved to vacate the attachment. It argued that the English law of veil-piercing should apply because the dispute arose out of a charter party that contained an arbitration clause that specified English law and that, under the more stringent English veil-piercing law, the plaintiff's allegations were insufficient to state a claim under English law. The district court accepted the alleged alter ego's argument in the absence of authority presented to the contrary and ruled that English law governing veil-piercing applied to the Rule B dispute. The plaintiff appealed.

Appeal Confirms the Irrelevancy of Choice of Law Clauses in Veil-Piercing Analysis

The Second Circuit heard the appeal on an expedited basis. On July 16, 2013, after briefing and argument were completed, the appeals court issued a 28-page decision reversing the lower court's order and, in the process, announced a new maritime veil-piercing test.

As an initial matter, the Second Circuit adopted the argument made in the amicus curiae brief* filed in the case that the charter party's English choice of law provision could not govern the veil-piercing analysis. U.S. courts, including the Second Circuit, long have held that that corporate veil-piercing actions are "collateral" to the underlying contract and are not impacted by any underlying choice of law clause.

However, the Second Circuit did not "automatically" apply federal common law on the issue of veil-piercing, which frequently had been the case in prior decisions. Instead, the court conducted a maritime choice of law test under the U.S. Supreme Court decision in Lauritzen v. Larsen, 345 U.S. 571 (1953). The Lauritzen multi-factor test examines a variety of contacts that the parties have with interested jurisdictions in order to determine which forum has the greatest interest in having its law applied.

Despite its use of a choice of law analysis, however, the Second Circuit's decision strongly suggests that U.S. maritime veil-piercing/alter ego law will continue to apply in most maritime veil-piercing/alter ego cases. In particular, the Second Circuit held that where a multinational shipping dispute implicates several potential sources of law, none of which have a "particularly strong connection" to the dispute, the United States has the strongest "'points of contact' with this claim by virtue of the location of [the defendant]'s property [in the United States]."

The Second Circuit thereby used the presence of the defendant's property in the United States, as well as the inability of the claimant to choose an alternative forum (because the property was in the United States rather than elsewhere), to determine that the United States had the greatest interest in having its law applied. It also reaffirmed the importance of the Rule B attachment process, a uniquely American tool for obtaining security or advancing the enforcement of judgments. The court noted, "part of the reason we authorize maritime attachments is the 'peripatetic' nature of maritime parties, the 'transitory' status of their assets ... and the need for parties to obtain security 'in a world of shifting assets, numerous thinly-capitalized subsidiaries, flags of convenience, and flows of currencies.'"

The Path Forward: Rule B and Judgment Enforcement Actions Alleging Veil-Piercing

As every U.S. maritime attachment or judgment enforcement action2 in which property is sought to be seized implicates these same strong "points of contact," situations where interests that are stronger than the United States' would arise appear to be quite limited. As a result, as a general rule, Blue Whale stands for the proposition that when a maritime defendant has property in the United States that can be attached via Rule B or executed against as part of the creditor's judgment enforcement efforts, the more lenient U.S. maritime veil-piercing test will continue to apply in most cases. This result is consistent with the Second Circuit's "final note" in the opinion, in which they explicitly "recognize the value of simplifying the judicial process required for Rule B attachments."  

* Note: In the case before the U.S. Court of Appeals for the Second Circuit, Holland & Knight, on behalf of a party having similar claims pending against some of the defendants in Blue Whale, filed a motion seeking to appear as amicus curiae on the basis of the authority and arguments presented. The motion was granted and the appeals court took the unusual step of granting the firm permission to fully participate in the oral argument.

Notes

1  A copy of the decision can be found here.

2  Notably, while the issue was not directly before it in Blue Whale, the Second Circuit suggested in footnote 7 of its decision that in the judgment enforcement context (i.e., when a maritime claimant waited until after it had obtained a foreign judgment or arbitration award to commence its property seizure efforts), no Lauritzen choice of law analysis would be required and U.S. maritime veil-piercing law would apply.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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