Opinion
11502904.
Decided March 18, 2005.
Petitioners move by order to show cause for an order, pursuant to CPLR 7503(b), staying arbitration that respondent Selee Corporation (Selee) commenced against petitioners Corporacion Selee de Venezuela (SDV) and Miguel Marquez Barry (Marquez Barry) as well as another Venezuela corporation, Representaciones Selee S.A. (RSS), on the grounds that a valid arbitration agreement was not executed between petitioners and respondents. Selee opposes the motion to stay and counterclaims to compel SDV and Marquez Barry to participate in the arbitration.
Background
Selee is a North Carolina corporation that manufactures and sells industrial ceramic products that are distributed within the United States and around the world. SDV is a Venezuela corporation which, as relevant here, manufactured and sold Selee products in Venezuela and Columbia. Selee owned a 49 percent interest in SDV; Grupo Marquez Barry, another Venezuelan corporation, held the remaining 51 percent ownership interest in SDV. Petitioner Marquez Barry, who concedes that he is "affiliated" with Grupo Marquez Barry, served as president of SDV. The president of Selee, Mark J. Morse (Morse), served as a member of the board of directors of SDV.
In 1988, Selee entered into an agreement with SDV, by which SDV manufactured and sold Selee products in Venezuela and Columbia. The relationship was primarily governed by a "Know-How, Patent Trademark, and Technical Assistance Agreement" (Know-How Agreement), dated December 19, 1988. The Know-How Agreement was continuously renewed until on or about June 7, 2000, when Selee formally sold its interest in SDV to an entity owned by Marquez Barry.
During the middle to early part of 2000, Marquez Barry and Morse negotiated the formation of a new entity to serve as Selee's Venezuelan distributor. This new entity was to be called "Representaciones Selee S.A." (RSS). Marquez Barry and Morse ultimately signed an agreement addressing the representation of Selee products in Venezuela, the "Representation Agreement," on August 21 and September 24, 2001, respectively. The Representation Agreement contained an arbitration clause and designated that the construction and execution of the contract would be controlled by New York law. The requisite documents for the registration of RSS were ultimately filed with the Venezuelan authorities in June 2002.
Although the parties' signatures are dated August and September 2001, the Representation Agreement indicates that it became effective January 1, 2001.
According to Selee, after the first shipment of products under the Representation Agreement, RSS requested Selee to process the order under SDV instead of RSS for tax purposes. An affidavit of Timothy P. Kriegel, CFO of Selee, sets forth that on numerous other occasions Selee invoiced and shipped products to SDV, and received purchase orders and payments from SDV. SDV's payments under the Representation Agreement totaled more than $448,000.00.
Payments due from RSS fell substantially behind and Morse became suspicious that Marquez Barry was "playing games" with the two corporate entities when Marquez Barry explained that the reason for nonpayment was due to Selee transacting business with SDV instead of RSS. Morse claims that thereafter he investigated the corporate status of RSS and learned that it was not formed as a Venezuela corporation until 2002. Thus, according to Selee, Marquez Barry signed the Representation Agreement on behalf of a nonexistent corporation. Selee terminated the Representation Agreement by letter dated February 5, 2003, due to nonpayment and based on RSS' lack of corporate status upon entering the Representation Agreement in 2001.
Selee alleges that it attempted to negotiate with SDV, RSS and Marquez Barry to collect payments totaling approximately $352,864.49 that were allegedly due pursuant to the Representation Agreement. On October 5, 2004, pursuant to the arbitration clause contained in the Representation Agreement, Selee made demand on RSS, SDV and Marquez Barry for submission of this controversy to arbitration before the International Center for Dispute Resolution, which is part of the American Arbitration Association (AAA).
Petitioners Marquez Barry and SDV now bring the instant application to stay the arbitration that respondent Selee has commenced against them on the grounds that there is no valid agreement to arbitrate between said parties. Petitioners do not contest the validity of the arbitration clause that is contained in the Representation Agreement, nor do they challenge the obligation of RSS to arbitrate this dispute. Rather, petitioners argue that SDV and Marquez Barry are not signatories to the Representation Agreement and therefore cannot be compelled to arbitrate pursuant thereto.
In opposition and in support of its counter claim to compel arbitration, Selee contends that SDV and Marquez Barry are bound to arbitrate the underlying dispute due to the blurred distinction among the entities of Marquez Barry, SDV and RSS. Specifically, Selee contends that Marquez Barry is a proper party to the arbitration on the grounds that he signed the Representation Agreement on behalf of RSS when RSS was not yet in existence. Consequently, according to Selee, Marquez Barry entered the Representation Agreement in his individual capacity. Selee contends that arbitration against SDV is likewise proper because at the direction of RSS, SDV was substituted in place of RSS with respect to shipments and payments made pursuant to the Representation Agreement. Thus, according to Selee, SDV benefitted from the agreement. Selee also contends that RSS may be a shell corporation for Marquez Barry and/or SDV.
Petitioners counter that Selee knew that RSS was being formed for the sole purpose of effectuating the new Representation Agreement. Petitioners contend that it is therefore disingenuous for Selee to claim now that it was unaware that RSS was not formally a corporation at the time of the signing of the Representation Agreement. Moreover, petitioners argue that notwithstanding the delay in filing the registration papers for RSS with the Venezuelan Government, which constitutes a mere formality, RSS should still be deemed a corporation under Venezuelan law because it existed privately among its shareholders. Petitioners further contend that the established course of dealings during the 17 year business relationship between SDV and Selee underscores that the parties never considered the signatories of the Representation Agreement to be signing in their personal capacity. Thus it was not the intent of the parties for Marquez Barry to have contracted with Selee in his personal capacity but rather it was the intent and understanding of the parties that Marquez Barry signed the Representation Agreement and transacted business on the corporate level for RSS.
Analysis
The parties do not dispute that the Inter-American Convention on International Commercial Arbitration applies here, where the issue of arbitration arises from a commercial relationship between citizens of signatory nations, in this case, the United States and Venezuela ( see 9 USC § 301; Productos Mercantiles E Industriales, SA v. Faberge USA, Inc, 23 F3d 41, 44 [2d Cir 1994]; Banco de Seguros del Estado v. Mut. Marine Offices, Inc., 257 F Supp 2d 681 [SDNY 2003]). The Inter-American Convention incorporates the terms of the Federal Arbitration Act (FAA) to the extent that the FAA terms do not conflict ( see Productos Mercantiles, 23 F3d at 45 [citing 9 USC § 307]).
The court notes, and the parties do not dispute, that as applied here, there is no substantive distinction between the FAA as codified in 9 USC § 1, et seq., and the Inter-American Convention, as codified in 9 USC § 301, et seq.
The FAA requires courts to "enforce arbitration agreements, reflecting Congress' recognition that arbitration is to be encouraged as a means of reducing the costs and delays associated with litigation ( Genesco, Inc. v. T. Kakiuchi Co., 815 F2d 840, 844 [2d Cir 1987]). The parties agree that "[t]he federal policy favoring arbitration is even stronger in the context of international transactions" ( Deloitte Noraudit A/S v. Deloitte Haskins Sells, US, 9 F3d 1060, 1063 [2d Cir 1993] [citing Mitsubishi Motors Corp v. Soler Chrysler-Plymouth, Inc., 473 US 614, 629-631]). Notwithstanding the strong public policy favoring arbitration as an alternative means of dispute resolution ( Oldroyd v. Elmira, Savings Bank, FSB, 134 F3d 72, 76 [2d Cir 1998]; see also Matter of Smith Barney Shearson. Inc. v. Sacharow, 91 NY2d 39, 49), "the Federal Arbitration Act carefully limits the role of the courts in considering motions to compel arbitration" on the grounds that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit" ( Deloitte Noraudit A/S, 9 F3d at 1063-64, citing Conticommodity Servs. Inc. v. Phillipp Lion, 613 F2d 1222, 1224 [2d Cir 1980]; United Steelworkers of America v. Warrior Gulf Navigation Co., 363 US 574).
With these principles in mind, the court turns to the narrow issue before it: whether Marquez Barry and SDV, as nonsignatories to the Representation Agreement, are obligated to arbitrate under the terms of the Representation Agreement vis-a-vis principles of agency and/or contract law. It is well settled and the parties do not dispute that there are various situations in which a non-signatory may be compelled to participate in an arbitral proceeding under the FAA. The following are the theories for "binding nonsignatories to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil piercing/alter ego; and 5) estoppel" ( MAG Portfolio Consultant, GMBH and Merlin Biomed Group LLC, 268 F3d 58 [2d Cir 2001]). The two theories implicated here are agency and estoppel.
Agency
It is established law in New York that a person entering into a contract on behalf of a nonexistent corporation may be held personally liable on the contract ( see Bay Ridge Lumber Co. v. Groenendaal, 175 AD2d 94 [2d Dept 1991]; Brandes Meat Corp. v. Cromer, 146 AD2d 666 [2d Dept 1989]; 14A NY Jur2d 8760). Selee alleges that petitioner Marquez Barry knowingly signed the Representation Agreement on behalf of a nonexisting company, RSS, thereby incurring individual liability under the agreement as the signatory ( see Bay Ridge Lumber Company v. Groenendaal, 175 AD2d 94 [2d Dept 1991]; Imero Fiorentino Asso. Inc. v. Green, 85 AD2d 419 [1st Dept 1982]; Brandes Meat Corp. v. Cromer, 146 AD2d 666 [2d Dept 1989]; Grutman v. Katz, 202 AD2d 293 [1st Dept 1994]).
While New York law governs the substantive issues of formation and execution of the Representation Agreement, the validity of RSS' corporate status when Morse and Marquez Barry executed the Representation is governed by Venezuelan law, the corporate domicile for RSS ( see Saxe, Bacon Bolan, PC v. Martindale-Hubbell, 710 F2d 87, 89 [2d Cir 1983]). The parties submit conflicting expert affidavits addressing whether RSS was sufficiently constituted as a Venezuelan corporation when Marquez Barry signed the Representation Agreement. The affidavit of petitioners expert, Dr. Rafael Marquez Castro, states, inter alia, that a "Venezuelan corporation can clearly exist before the recording of the corporate documents. A corporation's existence arises from the agreement of its shareholders to constitute the corporation and carry-out business as a corporation, in the name of the corporation, to pursue its corporate goals."
Respondents submit two affidavits of Vitor Sousa, a practicing attorney in Venezuela, who cites to Article 219 of the Commerce Code, which states:
If in the incorporation of a company the formalities established by (the preceding articles) were not met at the opportune time, as the case may be, and while they are not met, the company will not be considered as validly constituted. The incorporating partners, the administrators or any other persons who may have acted in their name, will be personally and jointly responsible for their operations."
The court finds the Sousa Affidavit more persuasive. Accordingly, a corporation is not validly constituted with respect to third-parties if public filings requirements are not met, and the persons who have been acting in the name of the corporation are "personally and jointly" liable for the debts that have been incurred.
Accordingly, Marquez Barry is a proper party to the arbitration. It is undisputed that, when Marquez Barry executed the Representation Agreement on behalf of RSS, RSS was a nonexistent principal because it had not filed the requisite corporate documents necessary to consummate its corporate status. Petitioners, who claim that Selee was aware of this fact, fail to offer any proof to substantiate this alleged knowledge. An individual who enters into a contract on behalf of a corporation that does not exist is individually obligated under that contract ( see Bay Ridge Lumber Co. v. Groenendaal, 175 AD2d 94, 96 [2d Dept 1991]; Parker v. Cox, 306 AD2d 55 [1st Dept 2003]). Even with the alleged adoption of the contract by RSS, "corporate adoption of a contract 'gives rise to corporate liability in addition to any individual liability'" the promoter remains obligated unless there has been a novation between the corporation and the plaintiff, which Marquez Barry fails to sufficiently allege ( see Clinton Investors Co. v. Watkins, 146 AD2d 861, 863 [3d Dept 1989] [granting summary judgment against defendant officer for breach of lease since officer signed pre-incorporation lease in the name of the proposed corporation]).
Estoppel
Selee contends that its claims against SDV are arbitrable because SDV accepted the benefits of the Representation Agreement. Selee contends that "[u]nder the estoppel theory, a company knowingly exploiting an agreement with an arbitration clause can be estopped from avoiding arbitration despite having never signed the agreement" ( MAG Portfolio Consult, GMBH v. Merlin Biomed Group LLC, 268 F3d 58, 61 [2d Cir 2001]). Selee's reliance, however, upon MAG Portfolio ( 268 F3d 58), is misplaced. Although the record supports that the corporate identities of RSS and SDV are closely interrelated — which may be due in part to the fact that Marquez Barry serves as the president for both companies and also due in part to the fact the corporate aims or objectives of the companies was to service Selee — Selee has failed to establish that SDV exploited the benefits of the Representation Agreement. While there is evidence that SDV exploited the "contractual relation" of the parties, the record is silent as to whether SDV exploited the Representation Agreement and thereby received a direct benefit from doing so ( see MAG Portfolio, 268 F3d at 61). It also is unclear if SDV derived a direct benefit from the Representation Agreement or whether it was acting as an agent of a disclosed principal, RSS. Thus, SDV is not obligated to arbitrate pursuant to the Representation Agreement, as Selee failed to establish that SDV exploited the Representation Agreement as a nonsignatory to the contract and directly benefitted therefrom ( see Deloitte Noraudit, 9 F3d at 1064; see also Thomson-CSF, S.A. v. Am. Arbitration Assn., 64 F3d 773, 776 [2d Cir 1995]).
Accordingly, it is ordered that
ORDERED that petitioners' application to stay arbitration is denied as to Miguel Marquez Barry and is granted with respect to Corporacion Selee de Venezuela, and it is further
ORDERED that petitioners are to serve a copy of this order with notice of entry, forthwith, upon all parties herein, including the American Arbitration Association.
This constitutes the decision and order of the court.