Opinion
99 Civ. 2246 (RWS)
October 21, 2002
LACHER LOVELL-TAYLOR, By MICHAEL A. LACHER, ESQ., ADAM J. RADER, ESQ., New York, NY, of Counsel, Attorney for Plaintiff.
EDWARDS ANGELL, By ANDREW P. FISHKIN, ESQ., THOMAS J. CURRAN, ESQ., of Counsel, New York, NY, Attorney for Defendants.
OPINION
Pursuant to Fed.R.Civ.P. 56, defendant Western Union Financial Services, Inc. ("WU-FSI") has moved for partial summary judgment to dismiss 1) the fraud claim of plaintiff Stahlex-Interhandel Trustee, Reg. ("Stahlex") and 2) the claims for breach of contract arising out of the Consulting Agreement between Western Union Financial Services USSR Limited ("WU-USSR") and Stahlex, to which WU-FSI was not a party.
Defendant Western Union Financial Services Eastern Europe Limited ("WU-FSEU"), formerly known as WU-USSR, has moved for partial summary judgment to dismiss 1) the fraud claim and 2) Stahlex's accounting claim under the Consulting Agreement for the period before March 1993 (due to statute of limitations) and after December 1999 (due to termination of the Consulting Agreement)
Stahlex has cross-moved for partial summary judgment to extend the liability of WU-FSI, as the parent of WU-USSR, on the basis of piercing the corporate veil, and for a declaratory judgment against WU-USSR that the Consulting Agreement remains in full force and effect.
For the reasons set forth below, 1) defendants' motions with respect to fraud are granted; 2) WU-FSI's motion to dismiss claims based upon the Consulting Agreement is granted; 3) WU-USSR's motion with respect to pre-1993 claims is granted; 4) WU-USSR's motion regarding the termination date of the Consulting Agreement is denied; 5) Stahlex's motion to pierce the corporate veil is denied, and its other motions are denied.
Prior Proceedings
In March 1999, Stahlex brought the instant action against WU-USSR and WU-FSI. Discovery has been largely completed. The instant motions were heard on April 17, 2002, and were marked fully submitted on that date.
Undisputed Facts
On July 26, 1991, Stahlex and WU-USSR entered into a Consulting Agreement providing that in consideration for identifying a partner in the Soviet Union, and in consideration for the promise to perform consulting services, WU-USSR agreed to pay Stahlex $100,000 and 10% of WU-USSR's annual net income from the money transfer business in the USSR, subject to certain conditions and maximum limits. The term of the Consulting Agreement was coterminous with the Joint Venture which was entered into by WU-USSR on the same day (the "Joint Venture")
By signing the Consulting Agreement, Stahlex acknowledged that it accurately "set forth the entire and final agreement and understanding of the parties" and that any prior agreement or understanding, whether written or oral, was "terminated." Consulting Agreement, 6.2. The Consulting Agreement provided for unrestricted assignment, without consent, to any WU-USSR affiliates. The Consulting Agreement, by its terms, is governed by New York law.
On the day that it entered into the Consulting Agreement, WU-USSR entered into the Joint Venture Agreement with Sberbank, the Soviet bank that Stahlex had identified as a partner for WU-USSR (the "Joint Venture Agreement"). The Joint Venture was to act as WU-FSI's money transfer agent within the USSR and was known as "Western Union-Sberbank MT." It was owned 60% by WU-USSR and 40% by Sberbank.
Many months later, on February 20, 1992, WU-FSI also signed an Agency Agreement with WU-USSR. Under that agreement, WU-FSI agreed to pay the Joint Venture a fee from each money transfer. WU-FSI expressly reserved the right to reduce the fees due the Joint Venture in the event WU-FSI determined that its foreign exchange gains under the Agency Agreement were inadequate. The Agency Agreement obligated WU-FSI to provide the Joint Venture with the "opportunity to use Western Union's [WU-FSI's] agency network in any part of the world." ¶ 2.
The percentage of fees payable to the Joint Venture under the Agency Agreement were higher than the percentages that other WU-FSI money transfer agents around the world were receiving at that time. WU-FSI amended the Agency Agreement on several occasions to reduce the fees going to the Joint Venture, and thus, the net income to WU-USSR and Stahlex. WU-FSI provided the Joint Venture substantial support in the form of loans, higher than customary fees, and paid directly for certain travel and advertising expenses.
In 1992, Mezheconomsberbank succeeded Sberbank in the Joint Venture when Sberbank became insolvent. In October 1993, the Joint Venture was amended to include a third entity, KOIN, with a 5% interest in the Joint Venture and to bring the organizational and legal form of the Joint Venture into accordance with current Russian Federation legislation. The name of the new entity was Western Union MT East which continues to operate.
WU-FSI has supplied to Stahlex net revenue figures that establish that WU-FSI has derived substantial revenue from the USSR money transfer business from 1994-2000.
Sometime after the breakup of the Soviet Union, WU-FSI appointed additional money transfer agents in several of the countries that were formerly part of the Soviet Union. The Joint Venture continued as WU-FSI's only agent in Russia. Presently, all money transfers in Russia go through Western Union MT East.
WU-FSI and WU-USSR have no witnesses to testify regarding the negotiation of the Consulting Agreement.
Disputed Facts
In May 1998, Mezheconomsberbank filed for bankruptcy protection and sold its interest in the Joint Venture to WU-USSR, leaving WU-USSR with a 95% interest. In December 1999, WU-USSR bought out KOIN, leaving it full ownership of the Joint Venture. Stahlex disputes these facts, subject to translation of documents reflecting the transfer.
WU-FSI and WU-USSR contend that the Joint Venture operated at a net loss, and thus no additional monies were due Stahlex. After the first year, according to Stahlex, the Joint Venture proved successful and included over 150 offices, thus requiring an accounting under the Consulting Agreement. According to Stahlex, WU-FSI's prime motivation for reducing the net income to WU-USSR was to reduce its tax liability to Soviet and later Russian authorities.
Issues
According to Stahlex, WU-FSI has siphoned off substantial income from its subsidiary, WU-USSR, thus reducing the payments due Stahlex under the Consulting Agreement. In addition, according to Stahlex, the Consulting Agreement and Joint Venture Agreement provided that WU-FSI would conduct business only through WU-USSR and that it violates an obligation of good faith to reduce the amounts gained by the subsidiary even if permitted under the Agency Agreement. Stahlex urges that WU-FSI and its affiliates act as one conglomerate, and that it is appropriate to pierce the corporate veil, holding the parent responsible for WU-USSR's breach of good faith. According to Stahlex the Consulting Agreement is therefore with WU-FSI, not WU-USSR, and that the Joint Venture agreement makes the Joint Venture WU-FSI's sole agent in the former Soviet Union.
According to WU-FSI, it is not a party to the Consulting Agreement and Stahlex has failed to plead fraud properly. Moreover, according to WU-USSR, any claim based on the Consulting Agreement prior to 1993 is barred by the statute of limitations, and any claim after WU-USSR bought out the other parties to the Joint Venture is barred as a matter of law because that purchase terminated the Joint Venture as a matter of law.
Discussion Legal Standard for Summary Judgment
Rule 56(c) of the Federal Rules of Civil Procedure provides that a motion for summary judgment may be granted when "there is no genuine issue as to any material fact and that the moving party is entitled to the judgment as a matter of law." The Second Circuit has repeatedly noted that "as a general rule, all ambiguities and inferences to be drawn from the underlying facts should be resolved in favor of the party opposing the motion, and all doubts as to the existence of a genuine issue for trial should be resolved against the moving party." Brady v. Town of Colchester, 863 F.2d 205, 210 (2d. Cir. 1988) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 330 n. 2 (1986) (Brennan, J. dissenting); see Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995); Burrell v. City Univ., 894 F. Supp. 750, 757 (S.D.N.Y. 1995). If, when viewing the evidence produced in the light most favorable to the non-movant, there is no genuine issue of material fact, then the entry of summary judgment is appropriate. See Burrell, 894 F. Supp. at 758 (citing Binder v. Long Island Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991))
Materiality is defined by the governing substantive law. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "[T]he mere existence of factual issues — where those issues are not material to the claims before the court — will not suffice to defeat a motion for summary judgment." Quarles v. General Motors Corp., 758 F.2d 839, 840 (2d Cir. 1985)
The Claim of Stahlex Alleging Fraud is Dismissed
Fraud claims must be pleaded with particularity: "In all averments of fraud," the circumstances constituting fraud "shall be stated with particularity." Fed.R.Civ.p. 9(b). Specifically, the plaintiff must "specify the statements it claims were false or misleading," Suez Eguity Investors L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d. Cir. 2001) (citation omitted), upon which it relied, Isanaka v. Spectrum Tech. USA Inc., 131 F. Supp.2d 353, 360 (N.D.N.Y. 2001) and "give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Suez Equity Investors, L.P., 250 F.3d at 95 (citations omitted)
WU-FSI and WU-USSR have moved for summary judgment to the extent Stahlex intended to state a fraud claim. Even accepting the allegations in the complaint as true and reading them in a most favorable to Stahlex, Stahlex fails to plead fraud with the requisite specificity.
Stahlex does not identify a false or fraudulent statement made by WU-FSI or WU-USSR, or a false or fraudulent statement upon which Stahlex relied, the person from WU-FSI who made it, or when it was made. In its reply memorandum, Stahlex offers no opposition on this point but instead asserts and develops other theories of the harm suffered.
The Term of the Consulting Agreement Remains An Issue of Fact
WU-USSR has moved for partial summary judgment to dismiss the claim of Stahlex based on the Consulting Agreement after December 1999. The motion is denied as an issue of material fact exists.
The term of the Consulting Agreement was tied to the continuance of the Joint Venture. Consulting Agreement Para. 2 ("the term of this Agreement shall commence on the date hereof and shall continue while the joint venture shall continue to operate") The parties agree that the Consulting Agreement survived the Amended and Restated Foundation Agreement ("Foundation Agreement") that created Western Union-MT East as the successor to the initial Joint Venture with Sberbank. The Foundation Agreement created Western Union-MT East as a LLC with a perpetual term and further provided that any liquidation of Western Union-MT East shall be in accord with the earlier Sberbank Joint Venture Agreement. The Joint Venture Agreement does not expire until there is a liquidation of Western Union-MT East. Additionally, a buy-out is not listed as an event precipitating termination of the Joint Venture.
The Western Union MT East agreement actually refers to Article 16 of the Sberbank Joint Venture agreement, which appears to be in error. That Article in deals with miscellaneous items where Article 13 deals with termination and liquidation.
According to WU-FSI and WU-USSR, although Western Union-MT East continues to operate, it ceased to exist as a joint venture when WU-USSR bought out the other parties on December 14, 1999. A Joint Venture, according to WU-FSI and WU-USSR, is a "business undertaking by two or more persons," see Blacks Law Dictionary (7th Ed. 1999), and therefore the purchase terminated the Joint Venture as a matter of law and with it the Consulting Agreement. Neither WU-USSR nor WU-FSI have cited any authorities on this issue to counter the continued existence of Western Union-MT East as the successor to the initial joint venture.
Further, Stahlex disputes the fact of the buy-out of the other parties to the Joint Venture as the documents reflecting the transaction have not been translated into English from Russian. With a motion for summary judgment, the Court must construe the facts in the light most favorably to the non-moving party and thus cannot assume that the Joint Venture has been bought out. With this fact in dispute, Stahlex's request for declaratory judgment must also be denied.
Stahlex further objects that as they have not received a termination notice per the terms of the Consulting Agreement, that it is still valid. But failure to provide notice under that agreement does not impede the dissolution of the Joint Venture as it is created under the governing documents discussed above, not the Consulting Agreement.
The Stahlex Claims Pre-March, 1993 Are Barred By The Statute of Limitations
The general rule applicable to contract actions is that a six-year statute of limitations begins to run when a contract is breached or when one party omits the performance of a contractual obligation. Raine v. RKO General, Inc., 138 F.3d 90, 93 (2d Cir. 1998). Accordingly, WU-FSI and WU-USSR urge that claims based upon breaches occurring prior to March 1993, six years before the lawsuit was filed, are barred.
Stahlex contends that there is an exception for contracts entailing continuing performance such that claims may be brought for damages occurring prior to six years before filing of the suit. Stahlex relies onAirco Alloys Division v. Niagra Mohawk Power, 76 A.D.2d 68 (4th Dept. 1980) for this proposition. According to Stahlex, claims may be brought for damages arising prior to March 1993.
The exception for continuing performance contracts does not extend in the manner Stahlex contends. Airco provides that "each breach may begin the running of the statute anew such that accrual occurs continuously and plaintiffs may assert claims for damages occurring up to six years prior to filing of the suit." Id., at 80 (emphasis added). Thus the exception assists plaintiffs who might otherwise be blocked from bringing claims based on present-day breaches if, for example, they had not brought a claim for six years since the first breach. The exception, however, does not allow Stahlex to reach back beyond the six-year period to assert a claim for periods before March 1993.
Material Facts Are in Dispute With Respect to Piercing the Corporate Veil
The Consulting Agreement between Stahlex and WU-USSR provided that the compensation of Stahlex was tied to the net income of WU-USSR. Stahlex has sought to establish the liability of WU-FSI for profits which would have been earned by WU-USSR by piercing the corporate veil between parent and subsidiary.
The issue of "corporate disregard is generally submitted to the jury."American Protein Corp. v. AB Volvo, 844 F.2d 56, 59 (2d Cir. 1988) (citing Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 53 (2d Cir. 1984) (listing appropriate criteria under New York law for jury to decide whether corporate veil should be pierced), cert. denied 488 U.S. 852)). While all reasonable ambiguities and inferences should be resolved against the moving party, those inferences must be based on relevant, admissible evidence. See Fed.R.Civ.P.56. A party seeking to defeat summary judgment cannot "rely on mere speculation or conjecture as to the true nature of facts to overcome the motion." Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995) (citation omitted).
Under New York's choice of law principles, "[t]he law of the state of incorporation determines when the corporate form will be disregarded and liability will be imposed on shareholders." Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995) (quoting Kalb, Voorhis Co. v. American Fin. Corp., 8 F.3d 130, 132 (2d Cir. 1993)). Because WU-FSI and WU-USSR are Delaware corporations, Delaware law determines whether WU-FSI may be held liable for WU-USSR's conduct. Id.; Gabriel Capital, L.P. v. NatWest Finance, Inc., 122 F. Supp.2d 407, 432 (S.D.N.Y. 2000).
However, defendants cite New York state cases as enumerating the relevant standards for piercing the corporate veil. In 1991, two years before the rule employed in Fletcher was established, Passalacqua applied New York substantive law despite the fact that New York's choice of law rules might otherwise have warranted the application of Florida law. Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131 at 137 (2d Cir. 1991). The Passalacqua Court reasoned that the parties had agreed to employ New York law by relying solely upon New York law in briefing the veil-piercing issue, and that in any case, Florida and New York standards for piercing the corporate veil were "virtually identical." Id.; see also Heller v. Video Innovations Inc., 730 F.2d 50, 52 (2d Cir. 1984) (under New York law, "in the absence of a strong countervailing public policy, the parties to litigation may consent by their conduct to the law to be applied.")
The choice of law provided in the Consulting Agreement is the law of the State of New York. Notwithstanding Fletcher, some courts have followed Passalacqua and adopted the law the parties agree to employ rather than the law of the state of incorporation where there is no substantive difference between the two state law approaches to piercing the corporate veil. See, e.g., Kempf v. Mutsui Plastics, Inc., No. 96 Civ. 1106 (HB), 1996 WL 673812, *3 n. 1 (S.D.N.Y. Nov. 20 1996) (applying law briefed by the parties rather than law of state of incorporation); S.J. Berwin Co. v. Evergreen Entertainment Group, Inc., No. 92 Civ. 6209 (WK), 1995 WL 606094, *2 (Oct. 12, 1995) ("Although it is clear that Delaware law should have applied to the piercing claim from the outset . . . the conduct of the parties, and the fact that Delaware's piercing standard is not all that different from the one used in New York suggest that New York law should continue to apply.").
As the standards for piercing the corporate veil are substantially similar under Delaware and New York law, see, e.g., Harrison v. NBD Inc., 990 F. Supp. 179, 184 (E.D.N.Y. 1998) (noting similarity in standards for piercing corporate veil in New York and Delaware), New York law will be applied.
New York law allows courts to pierce the corporate veil either where a fraud has been committed, or where the corporation has been so dominated by an individual or corporate parent that the subsidiary is relegated to the status of a mere shell, instrumentality, or alter ego. See Passalacqua, 933 F.2d at 138; Carte Blanche v. Diners Club Int'l, 2 F.3d 24, 25 (2d Cir. 1993) (courts may pierce veil in one of two circumstances: "to prevent fraud or other wrong, or where a parent dominates and controls a subsidiary"); Intel Containers Int'l Corp. v. Atlanttrafik Exp. Serv. Ltd., 909 F.2d 698, 703 (2d Cir. 1990) ("New York law allows the corporate veil to be pierced either when there is fraud or when the corporation has been used as an alter ego") (emphasis in original); Gartner v. Snyder, 607 F.2d 582, 586 ("Because New York courts disregard corporate form reluctantly, they do so only when the form has been used to achieve fraud, or when the corporation has been so dominated by an individual or another corporation . . ., and its separate identity so disregarded, that it primarily transacted the dominator's business rather than its own and can be called the other's alter ego.")
Whether a subsidiary is an alter ego of its corporate parent is a fact-intensive inquiry that must take into consideration a variety of factors: (1) failure to observe corporate formalities; (2) undercapitalization; (3) intermingling of corporate funds; (4) overlap in corporate officers, directors, and personnel; (5) common office space, address and telephone numbers; (6) the amount of business discretion exercised by the subsidiary corporation; (7) whether the two companies deal with each other at arm's length; (8) whether the corporations exist as independent sources of profit; (9) the guarantee of the subsidiary's debts by the parent; and (10) common use of corporate property.Passalacqua, 933 F.2d at 139; see also, William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600 (2d Cir. 1989) ("failure to pay dividends, insolvency at the time of a transaction, siphoning of corporate funds by the dominant shareholder and nonfunctioning of other officers and directors, either individually or in combination, may evidence a corporation that is a mere shell and therefore susceptible to being bypassed in fashioning an appropriate remedy."); Heller, 730 F.2d at 53 (citing, inter alia, absence of corporate formalities and perpetration of fraud by means of corporate vehicle as relevant factors in piercing corporate veil)
WU-FSI's motion for partial summary judgment to dismiss the breach of contract claims arising out of the Consulting Agreement is denied because Stahlex has established a genuine question of material fact regarding WU-FSI's domination of WU-USSR to the extent that WU-FSI may be held liable for WU-USSR's conduct.
Stahlex has provided supporting affidavits to show that the Consulting Agreement was negotiated by WU-FSI employees and was entered into five days before WU-USSR formally existed. The payments that Stahlex did receive under the Consulting Agreement were from WU-FSI and another entity, not WU-USSR. WU-USSR's capitalization appears to have been about $1 million, supplied by WU-FSI, in the form of a loan that was not fully repaid. No evidence has been submitted regarding the adequacy of this capitalization. WU-FSI paid for some travel and other daily WU-USSR expenses. (Hendrickson Dec. at 3). As Western Union had a centralized cash management" policy, WU-USSR placed the loaned funds into the WU-FSI central bank account. (Radar Dec. Ex. H, WU August 3, 1993, Western Union Memo.) At least during the early days of WU-USSR's existence, it appears that WU-FSI was the sole source of WU-USSR's funding.
The terms of the Agency Agreement permitted WU-FSI to unilaterally reduce the fees payable by it to WU-USSR, and WU-FSI exercised this right. Moreover, evidence submitted by Stahlex indicates that WU-FSI exercised control over hiring of WU-USSR employees.
These facts do constitute evidence pertaining to a lack of observance of corporate formalities, financial control by the parent, and a lack of business discretion allowed the subsidiary. However, "[e]vidence of domination alone does not suffice without an additional showing that it led to inequity, fraud or malfeasance." TNS Holdings, Inc. v. MKI Sec. Corp., 92 N.Y.2d 335 (1988). No single one of the factors enumerated inPassalacqua is dispositive: "liability is imposed to reach an equitable result." Bridgestone/Firestone, Inc. v. Recovery Credit Services, Inc., 98 F.3d 13, 18 (2d Cir. 1996) (citation and internal quotations omitted)
Stahlex alleges that WU-FSI's domination of WU-USSR permitted it to manipulate the fees due the Joint Venture, thus indirectly reducing the amount due WU-USSR and Stahlex. WU-FSI was permitted to do this under the Agency Agreement which was entered into after the Joint Venture Agreement and the Consulting Agreement. The issue is thus presented as WU-FSI's liability for WU-USSR's conduct in permitting the reduction of fees by its parent and any consequent loss of profit.
WU-USSR and WU-FSI contend that if the veil is pierced that the parent is held liable for the subsidiary's breach. Pebble Cove Homeowners' Ass'n., Inc. v. Fidelity New York FSB, 153 A.D.2d 843 (2d Dep't 1989) (piercing the corporate veil "render[s] the parent liable for the subsidiary's acts"). Thus, they contend, WU-FSI is liable only for 10% of WU-USSR's net income during the relevant period.
If, however, as alleged, WU-FSI has dominated WU-USSR and the corporate veil is pierced, Stahlex may be able to establish that it is entitled to 10% of the net profits from WU-USSR, whether garnered by parent or subsidiary, subject to the caps established in the Consulting Agreement.
However, the veil piercing does not extend, as Stahlex argues, to WU-FSI subsidiaries other than WU-USSR or to other countries in the former Soviet Union. It is limited to 10% of the profits of WU-USSR. There is no provision in the Consulting Agreement that WU-USSR was to be the sole agent representing WU-FSI in the Soviet Union. After the fall of the Soviet Union, WU-FSI did engage other agents in the former Soviet Union states, while WU-USSR (now known as WU-FSEU) has apparently continued as the sole agent in Russia.
Conclusion
Thus there is an issue of material fact on the issue of whether to pierce the corporate veil between WU-USSR and WU-FSI. The veil piercing extends to claims arising after March 1993. The status of claims from December 1999 to the present is not decided due to a factual dispute.
For the foregoing reasons, WU-FSI and WU-USSR's motions for partial summary judgment are granted in part and denied in part.
A pretrial conference will be held on November 5, 2002, or on such other date as the parties may agree upon in 2002.
It is so ordered.