On November 10, 2021, a Commercial Division Court issued a decision on a motion to dismiss the claims brought by Wilmington Trust Company (“WTC”) against a wide range of parties that WTC alleged to be alter egos of an insolvent entity. This decision, in Cortlandt St. Recovery Corp. v. Bonderman, No. 653357/2011, Doc. No. 757 (Sup. Ct. N.Y. Cty. Nov. 10, 2021), provides a good introduction into the variety of issues that can arise when a party brings claims against alleged foreign alter egos.

Background

Cortlandt involves efforts by WTC to recover on defaulted notes issued and guaranteed by entities that owned a Greek telecommunications company, TIM Hellas.  In 2005, two global private equity groups, TPG Capital, L.P. (“TGP”) and Apax Partners LLP (“Apax”), acquired TIM Hellas Telecommunications through a group of Luxembourg shell companies (the “Hellas Group”).[1]  During a round of recapitalization in 2006, one Hellas Group entity issued €200 million in payment-in-kind notes—at issue in this litigation—guaranteed by another Hellas Group entity. As part of the recapitalization, there was also a redemption of certificates that WTC alleged to have enriched the private equity groups—and those related to them—by €1.185 billion, while further encumbering the Hellas Group.[2] Two months later, the private equity groups sold the Hellas Group to an investor.

In 2009, the Hellas Group entities associated with the notes at issue defaulted. WTC, as successor to the original indenture trustee to the note, brought multiple actions—including this one against the Hellas Entities associated with the notes (known as the “Judgement Debtors” for reasons discussed below),[3] Apax, Apax related entities and individuals involved with Hellas (the “Apax Defendants”)[4] TPG, and TPG related entities and individuals involved with Hellas (the TPG defendants).[5] Critically, in another matter between WTC and the Judgment Debtors, Justice Friedman granted WTC’s motion for summary judgment in lieu of a complaint and the Clerk “entered judgment against the Judgment Debtors in the amount of $565,363,952.80, plus post-judgment interest, fees, and costs.”[6]

In this matter, Justice Friedman granted a motion to dismiss by the defendants and held, inter alia, that “the indenture failed to authorize the trustee to prosecute the causes of action pleaded in the complaint, and dismissed [] cause of action, asserting liability on an alter ego theory to pierce the corporate veil, as insufficiently pleaded.”[7] The First Department reversed the dismissal, holding that “WTC had standing under the indenture and that WTC adequately alleged alter ego liability”; the Court of Appeals affirmed.[8] Subsequently, WTC moved successfully to amend its complaint.[9]

In the amended complaint, WTC asserted 10 causes of action against the Apax Defendants and TPG Defendants for the following: “(1) breach of contract; (2) violation of prohibitions on distributions pursuant to Business Corporation Law (BCL) §§ 510, 513, 629, 719 and 720 and Penal Law § 190.35; (3) satisfaction of the notes and judgments as alter egos of Judgment Debtors; (4), (5), (6), (7), and (8) fraudulent conveyances pursuant to Debtor and Creditor Law (DCL) §§ 273 through 277; (9) unjust enrichment and imposition of a constructive trust; and (10) conversion.”[10]  The defendants moved to dismiss WTC’s claims on multiple grounds, including lack of personal jurisdiction, failure to state a claim, prior dissolution and forum non conveniens.

Lack of Personal Jurisdiction

The Court began its analysis by tackling the issues related to personal jurisdiction. These personal jurisdiction arguments were brought by a group of Apax and TPG defendants termed the European entities—organized under U.K. and Guernsey law—as well as six individual defendants that were responsible for the investments in TIM Hellas.[11]

First, the Court addressed the defendants’ collateral estoppel argument, which stemmed from a related federal litigation, Wilmington Trust Co. v Hellas Telecomm., S.a.r.l., 2016 WL 7339112,*4-*5, *7-*9, 2016 US Dist. LEXIS 102879, *10-*12 (S.D.N.Y. 2016) where the District Court dismissed claims against three of the Apax Defendants; one for personal jurisdiction, and two for subject matter jurisdiction.  The “doctrine of collateral estoppel requires that: (1) the identical issue was necessarily decided in the prior proceeding and is decisive in the present action; and (2) the party to be precluded had a full and fair opportunity to contest the prior determination.”[12] The Court found this doctrine resolved the issue of personal jurisdiction for one of the Apax Defendants.[13] Justice Reed further rejected WTC’s argument that the prior Court of Appeals ruling determined the issue of personal jurisdiction under the “law of the case” doctrine—noting that although the earlier decision had addressed alter ego liability it “did not specifically address alter ego jurisdiction,”[14]  The Court also rejected an argument from the defendants that collateral estoppel should apply to the other two Apax defendants—noting that “the District Court dismissed those entities for lack of subject matter jurisdiction, not personal jurisdiction.”[15]

The Court then moved to remaining personal jurisdiction arguments in this matter.  The Court stated that “in opposing a motion to dismiss, the plaintiff need only make a “sufficient start” in demonstrating its position to be not frivolous.”[16] It then recounted WTC’s argument “that: (1) the court has personal jurisdiction over the Judgment Debtors, having assumed jurisdiction over them through a forum selection clause [in the note indenture]; and (2) the Judgment Debtors are alter egos of the movants.”[17]

As a preliminary point, the Court rejected the defendants’ argument that the New York forum selection clause did not apply to actions to enforce a judgment, holding that the phrase “in any actions arising out of, based on, or related to the Notes, this Indenture or the transactions contemplated hereby” was broad enough to cover this action.[18]

After addressing this threshold issue, the Court considered the alter ego arguments for the European entities. The Court first evaluated whether these entities were “mere departments” of the Judgment Debtors (and were thus subject to personal jurisdiction in New York) by applying the  four factor test from Volkswagenwerk Aktiengesellschaft v. Beech Aircraft: “(1) ‘common ownership’; (2) ‘financial dependency of the subsidiary on the parent’; (3) the ‘degree to which the parent interferes in the selection and assignment of the subsidiary's executive personnel and fails to observe corporate formalities’; and (4) ‘the degree of the parent's control of the subsidiary's marketing and operational policies.’”[19] The first factor of common ownership is considered essential under First Department law.[20]  The Court, considering that factor, found dispositive the fact that WTC “fails to allege, and has not submitted any evidence indicating, that the European entities own a majority interest in the Judgment Debtors.”[21]

Next up were the arguments about personal jurisdiction related to the individuals at Apax and TPG who were responsible for the investments in TIM Hellas. The Court noted that a corporation’s consent to personal jurisdiction under a forum selection clause could be applied to an individual under a veil-piercing theory, and then recited the fact-dependent multi-factor test under New York law, which includes the amount of discretion that the alleged dominated corporation possessed and whether that corporation had property that was used by another as if it were the other’s own.[22] Applying the test to the specific facts of this case, the Court noted that “WTC did not request additional jurisdictional discovery, and has failed to make a sufficient start indicating that alter ego jurisdiction may exist against” a subset of four individual defendants that were either out of state or European residents. [23] The Court found, among many things, that the conduct of these individuals did not constrain the discretion of the Judgment Debtors to the point of complete domination and that they did not misuse the corporate form.

However, the Court did hold that WTC met its burden for proving personal jurisdiction for two the individual defendants—who served as Hellas board members and signed the indenture of behalf of the Hellas entities—under the Closely-Related doctrine.[24] This doctrine holds that “signatory to a contract may invoke a forum selection clause against a non-signatory if the non-signatory is ‘closely related’ to one of the signatories such that ‘enforcement of the forum selection clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound’.”[25] As a result, the Court dismissed the claims against all of the European entities and four of the six individual Apax and TPG defendants.

Failure To State a Claim

 Having concluded that the Court could exercise personal jurisdiction over at least some of the defendants in the case, Justice Reed next turned to the argument, by all of the defendants, that plaintiffs had failed to state a claim with respect to several of their alleged causes of action.[26]

Justice Reed first considered the argument that the plaintiff’s claims were barred by the merger doctrine in light of an earlier breach of contract judgment against the Judgment Debtors, The merger doctrine dictates that when “a judgment is in favor of the plaintiff the claim underlying the action is merged in the judgment and cannot thereafter be used as a basis for an independent action.”[27] Ultimately, the Court concluded that the doctrine did not apply, noting that “WTC d[id] not seek to relitigate its breach of contract claim against the Judgment Debtors,” but instead sought “to collect amounts due under the notes from defendants based upon an alter ego theory and based upon their alleged receipt of fraudulent conveyances.”[28]

Next, the Court addressed the defendants’ argument that the “no recourse clause” in the indenture barred WTC’s first cause of action for breach of contract and third cause of action for satisfaction of the notes and judgments as alter egos of Judgment Debtors. Justice Reed readily rejected this argument, noting that, “[u]nder New York law, no recourse provisions bar only contract claims, not equitable claims, and alter ego liability claims [like the plaintiffs’ claims here] are equitable in nature.”[29]

The defendants also argued that WTC’s first and third cause of action were governed by Luxembourg law, which they claimed (through an expert affidavit) does not recognize equitable remedies. However, the Court held that judicial estoppel barred the defendants from making this argument, since, during the long life of this litigation, the defendants had “consistently argued to Justice Friedman, the First Department and the Court of Appeals that New York law governed the alter ego liability claims.”[30]

As to the WTC’s second cause of action, for unlawful distributions under New York Business Corporations Law, Justice Reed noted this claim required, inter alia, that the defendants do business in New York.[31] In light of the Court’s previous findings with respect to personal jurisdiction, he concluded that WTC did not meet this requirement, because “the amended complaint only makes conclusory allegations that the foreign corporation defendants were doing business in New York.”[32]

Moving to WTC’s fourth through eighth causes of action for fraudulent conveyance, the Court held that “WTC’s fraudulent conveyance claims must be dismissed because they impermissibly seek extraterritorial application of New York law.”[33]  It observed that transfers at issue in this case were “from and to Luxembourg entities from a foreign bank account” and that “WTC has not identified any New York investor that bought notes in the recapitalization.”[34] Additionally, for WTC’s fourth, fifth, sixth and eight causes of action, the Court resolved a choice of law dispute between the parties in the defendants’ favor—holding that either U.K. or Luxembourg law applied; neither of which recognizes constructive fraudulent conveyance. Consequently, all of WTC’s fraudulent conveyance claims were dismissed.

As to WTC’s  ninth cause of action for unjust enrichment, the Court rejected the defendants’ argument that WTC failed to plead a sufficiently close relationship with each defendant. The Court noted that privity between the parties was not required for an unjust enrichment claim and that WTC adequately plead a sufficient relationship by alleging that “[d]efendants, who were the owners of, and formed and controlled the Hellas Entities, were enriched by the conveyance of the proceeds of money borrowed by Hellas Finance by issuing the Notes, and using the Note proceeds to improperly and illegally redeem the PECs and CPECs, violating the terms of same.”[35]

With respect to WTC’s tenth and final cause of action for conversion, the Court explained that for money-based claims, like the one at issue here, the law requires that “the funds must be specifically identifiable . . . .”[36]  Because WTC failed to allege such specifically identifiable funds with respect to its claim, and failed to plead that the defendants had exercised  unauthorized dominion over the funds, the Court dismissed this claim as well.

Prior Dissolution

After the Court addressed the arguments associated with specific causes of action, it moved onto arguments associated with the dissolution of three of the defendants—one of which had already been dismissed from the case for lack of personal jurisdiction.[37] The remaining two dissolved defendants were former Delaware limited liability companies that filed certificates of cancellation in December of 2007. The Court noted that under Delaware law, an LLC cannot be sued once a certificate of cancellation has been filed, unless the plaintiff successfully seeks to have the certificate nullified on the grounds that company was not wound up properly.[38] Because “WTC d[id] not allege that it sought to nullify these certificates,” the Court also dismissed the claims against these two defendants.[39]

Forum Non Conveniens

Finally, Justice Reed considered—and rejected—the defendants’ forum non conveniens argument. The Court held that the “defendants have failed to meet their heavy burden of establishing that New York law is an inconvenient forum,”[40] noting that WTC sought enforcement of a New York judgment and that at least two of the corporate defendants allegedly had offices in New York.  Ultimately, the defendants were unable to convince the Court that they would face great hardship in remaining in the jurisdiction where they had been litigating the matter for the past ten years. 

Conclusion

This thorough decision provides a helpful reminder to practitioners that—even with a New York-forum selection clause—it can sometimes be difficult to secure jurisdiction over and maintain claims against transaction participants outside of New York.