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March 5, 1991


The opinion of the court was delivered by: Leisure, District Judge.


Simply stated, the plaintiff in this action is seeking to satisfy a judgment against an assetless corporation by reaching its corporate parent. The matter is before this Court on the parties' cross-motions for summary judgment.


The plaintiff, Carte Blanche (Singapore) PTE., Ltd. ("CBS") is a Singapore corporation. On the defendants' side, a series of corporate relationships must be traced. Defendant Carte Blanche International, Ltd. ("CBI") is a Delaware corporation, which in 1980 was a wholly owned subsidiary of Carte Blanche Corporation ("CBC"), which in turn was a wholly owned subsidiary of Citicorp. In June, 1981, Citicorp acquired defendant Diners' Club, Inc. ("Diners"). On or about September 8, 1982, CBC was merged into Diners. The parties do not dispute that, as corporate successor, Diners assumed CBC's obligations. The major dispute is over whether Diners, the corporate parent, is liable for a judgment against CBI, its subsidiary, in favor of CBS.

Although the parties dispute many of the details, it is clear that CBI tried to establish an international franchise network, which was ultimately unsuccessful. As Diners describes it, CBI was in the business of granting and administering Carte Blanche franchises outside the United States, while its parent, CBC, operated a credit card business within the United States. On August 11, 1980, CBS and CBI executed a Franchise Agreement (the "Agreement") under which CBS became a franchisee of CBI to market and service Carte Blanche credit cards in Malaysia, Singapore and Brunei. The negotiations in 1979 and 1980 leading up to the Agreement were conducted primarily between Marcel Diraison ("Diraison"), senior vice president and chief executive officer of CBI, and Tan Kim Wah ("Tan"), of Global Insurance Company Sdn Bhd, a company wholly owned by Tan and his family. At that time, CBI had approximately seven international franchises.

In the spring of 1981, Rene Gareau, a vice president of CBI began approaching CBI's franchisees to arrange termination agreements. The other franchisees agreed, but in September 1981, CBS refused to be bought out. In November 1981, Seymour Flug ("Flug"), chairman of both Diners and CBI and president of CBI, wrote CBS that "Carte Blanche International operations, which have never achieved world coverage, are in the process of being terminated." PX 21. Some terms of the Agreement were modified to reflect the fact that CBS was now offering its customers an essentially local card. Since 1982, CBI has had no business other than that with CBS.

When CBS became the lone franchisee, CBI continued to provide services to it, but used Diners employees, offices, bookkeeping and bank accounts, rather than maintain separate facilities for a single franchisee that, even in CBS's estimate, paid less than $80,000 per year in royalties.

On or about September 11, 1983, the shareholders of CBS sold 100% of its shares to a newly created company controlled by them called Global Equities PTE, Ltd. ("Global"). In December 1984, 50% of Global's shares were transferred to the MBf Holdings Berhad Group of Companies ("MBf"). CBI claimed that the transfer violated certain provisions of the Agreement and placed CBS under formal notice of default.

Both parties filed demands for arbitration, with CBS claiming that CBI had breached the Agreement by reducing essential services. The dispute was admitted to arbitration in October 5, 1985. An Interim Award dated February 18, 1987, found that CBI had materially breached the Franchise Agreement since at least the fall of 1984 by withholding required benefits and services, and that the stock transfer by CBS to MBf was not a breach. A Final Award of January 28, 1988, awarded CBS damages of $8,993,638.20, plus interest. The award was confirmed, except for the rate of interest on post-judgment amounts due, by order of this Court dated April 8, 1988.*fn1 The judgment has not been paid.

CBS presents a number of theories under which it claims that Diners is liable for the judgment against CBI, each of which will be discussed in the body of this opinion, along with the facts material to each. Defendants cross-move for summary judgment in their favor on all issues.


Standard for Summary Judgment

Federal Rule of Civil Procedure 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "`Summary judgment is appropriate when, after drawing all reasonable inferences in favor of the party against whom summary judgment is sought, no reasonable trier of fact could find in favor of the non-moving party.'" Horn & Hardart Co. v. Pillsbury Co., 888 F.2d 8, 10 (2d Cir. 1989) (quoting Murray v. National Broadcasting Co., 844 F.2d 988, 992 (2d Cir.), cert. denied, 488 U.S. 955, 109 S.Ct. 391, 102 L.Ed.2d 380 (1988)).

The substantive law governing the case*fn2 will identify the facts that are material, and "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. . . . While the materiality determination rests on the substantive law, it is the substantive law's identification of which facts are crucial and which facts are irrelevant that governs." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986). "[T]he judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there does indeed exist a genuine issue for trial." Id. at 249, 106 S.Ct. at 2511; see also R.C. Bigelow, Inc. v. Unilever N.V., 867 F.2d 102, 107 (2d Cir.), cert. denied, ___ U.S. ___, 110 S.Ct. 64, 107 L.Ed.2d 31 (1989). Only admissible evidence is properly considered on a motion for summary judgment. See, e.g., United States v. Bosurgi, 530 F.2d 1105, 1111 (2d Cir. 1976).

The party seeking summary judgment "always bears the initial responsibility of informing the district court of the basis for its motion" and identifying which materials it believes "demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); see also Trebor Sportswear Co. v. Limited Stores, Inc., 865 F.2d 506, 511 (2d Cir. 1989). "[T]he burden on the moving party may be discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex, supra, 477 U.S. at 325, 106 S.Ct. at 2554.

Indeed, once a motion for summary judgment is properly made, the burden then shifts to the nonmoving party, which "`must set forth facts showing that there is a genuine issue for trial.'" Anderson, supra, 477 U.S. at 250, 106 S.Ct. at 2511 (quoting Fed.R.Civ.P. 56(e)). "Conclusory allegations will not suffice to create a genuine issue. There must be more than a `scintilla of evidence,' and more than `some metaphysical doubt as to the material facts.'" Delaware & H. Ry. v. Consolidated Rail Corp., 902 F.2d 174, 178 (2d Cir. 1990) (quoting Anderson, supra, 477 U.S. at 252, 106 S.Ct. at 2512, and Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986)); see also Carey v. Crescenzi & Herenzy Realty Corp., 923 F.2d 18, 21 (2d Cir. 1991). "The nonmovant cannot `escape summary judgment merely by vaguely asserting the existence of some unspecified disputed material facts,' or defeat the motion through `mere speculation or conjecture.'" Western World Insurance Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (quoting Borthwick v. First Georgetown Securities, Inc., 892 F.2d 178, 181 (2d Cir. 1989), and Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 12 (2d Cir. 1986)). In this case, in which both sides have moved for summary judgment, each must sustain the burdens of both movant and nonmovant to avoid summary judgment against it.

Collateral Estoppel

Plaintiff argues that a considerable number of "findings" by the arbitrators must be given preclusive effect in this litigation, and also that the judgment is binding on Diners by principles of res judicata or claim preclusion. As to the latter argument, it is settled law that the arbitrators' ruling against the subsidiary does not establish the personal liability of the parent corporation unless and until a court with jurisdiction over the parent has pierced the corporate veil. See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 108-11, 89 S.Ct. 1562, 1568-70, 23 L.Ed.2d 129 (1969); Eagle Transport Ltd. v. O'Connor, 470 F. Supp. 731, 733-34 (S.D.N.Y. 1979). Because, as discussed infra, this Court cannot pierce the veil on the record currently before it, there can be no claim preclusion against Diners at this stage of the litigation.

As to collateral estoppel, or issue preclusion, such preclusive effect is given only when "(1) the issue as to which preclusion is sought is identical to the issue decided in the prior proceeding; (2) the issue was necessarily decided in the prior proceeding; and (3) the litigant now opposing preclusion had a full and fair opportunity to litigate the issue in the prior proceeding." Owens v. Treder, 873 F.2d 604, 607 (2d Cir. 1989) (construing New York law). Defendants assert that in a prior ruling in this case, United States Magistrate Bernikow found that the preclusive effect of the arbitration was limited to the facts necessary to the finding that CBI breached the Agreement, and that this ruling controls as the law of the case. See Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 1391, 75 L.Ed.2d 318 (1983).

Plaintiff disputes the weight of the Magistrate's ruling, which was made in the context of a discovery dispute. However, the question can be resolved without applying the doctrine of law of the case, for it is clear to this Court that the preclusive effect of the arbitration goes no farther than what the panel necessarily found, that CBI breached the Agreement, that CBS did not, and the amount of damages resulting from CBI's breach. The facts essential to these findings include that CBI denied cooperation, assistance and certain benefits of the Carte Blanche system to CBS. Most of the other statements to which plaintiff urges the Court to give preclusive effect, such as the panel's comment that the Tans were "misled,"*fn3 or that the Carte Blanche entities were a single integrated operation, were either clearly identified as "background" information or were just as clearly not essential to the issues decided by the panel.

Indeed, had the arbitrators attempted to determine the liability of Diners, a nonparty to the contract, such a finding undoubtedly would have exceeded the scope of the panel's authority under the agreement to arbitrate. See, e.g., Kerr-McGee Refining Corp. v. M/T Triumph, 924 F.2d 467, 469-70 (2d Cir. 1991) (citing Orion Shipping & Trading Co. v. Eastern States Petroleum Corp. of Panama, S.A., 312 F.2d 299 (2d Cir.), cert. denied, 373 U.S. 949, 83 S.Ct. 1679, 10 L.Ed.2d 705 (1963)). Thus, any findings by the arbitrators concerning the status of Diners can have no preclusive effect in this case.

Piercing the Corporate Veil

The New York Court of Appeals has frequently stated that "[a] principal attribute of, and in many cases the major reason for, the corporate form of business is the elimination of personal shareholder liability," and that "[t]he general rule . . . is that shareholders are not personally liable for corporate debts." We're Assocs. Co. v. Cohen, Stracher & Bloom, P.C., 65 N Y2d 148, 151, 490 N.Y.S.2d 743, 745, 480 N.E.2d 357, 359 (1985) (citing cases); see also Itel Containers Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 703-04 (2d Cir. 1990). In contrast to tort actions, this presumption is particularly strong in contract cases, in which plaintiff has chosen the party with which it has contracted, and may negotiate guarantees or other security arrangements. See, e.g., Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir.), cert. denied, ___ U.S. ___, 111 S.Ct. 138, 112 L.Ed.2d 105 (1990); Secon Serv. Sys., Inc. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 413-14 (7th Cir. 1988); P. Blumberg, The Law of Corporate Groups: Substantive 488 (1987). Under appropriate circumstances, however, the corporate veil may be pierced and a parent corporation may be held liable for the debts of its subsidiary.

The Second Circuit has noted that the question of piercing the corporate veil is a fact-intensive issue that generally must be submitted to the jury. See, e.g., American Protein Corp. v. AB Volvo, 844 F.2d 56 (2d Cir.), cert. denied, 488 U.S. 852, 109 S.Ct. 136, 102 L.Ed.2d 109 (1988). In this case, after reviewing the voluminous papers submitted by the parties, the Court concludes that the issues of control and domination must be submitted to the jury, but that summary judgment may be rendered on a number of other issues.

I. Piercing the Veil

  Under the familiar test of Lowendahl v. Baltimore & Ohio
R.R., 247 A.D. 144, 287 N.Y.S. 62 (1st Dep't), aff'd 272 N.Y. 360,
 6 N.E.2d 56 (1936), the corporate veil will be pierced and
a parent held liable for the debts of its subsidiary if the
following elements are established: (1) control amounting to
complete domination with respect to the transaction attacked;
(2) use of such control to perpetrate a fraud or wrong,
including a violation of a positive legal duty; and (3) the
control and breach of duty must proximately cause the injury
complained of. See Gorrill v. Icelandair/Flugleidir,
761 F.2d 847, 853 (2d Cir. 1985) (construing New York law).

A. First Prong: Domination

"Factors indicating that a parent corporation controls its subsidiary include lack of normal corporate formality in the subsidiary's existence, under-capitalization, and personal use of the subsidiary's funds by the parent. . . ." See American Protein, supra, 844 F.2d at 60. The mere presence of interlocking directorates is a "commonplace circumstance of modern business [that] does not furnish such proof of control as will permit a court to pierce the corporate veil." Id.

Plaintiff presents a number of undisputed facts, all relating to the years 1984 through 1985, the time of breach, that it alleges mandate a finding of control and domination as a matter of law. These include that at the time of breach, CBI had no employees or officers, other than its chairman and president, Flug, who was also chairman of Diners; that CBI was then serviced by two Diners employees; that CBI then had no assets or bank accounts, and all payments to CBI went into Diners accounts, with all expenses paid out of Diners accounts; that after 1983, CBI had no separate offices and conducted all business related to CBS out of various Diners offices; that CBI had no letterhead of its own between 1983 and 1986; that Flug was identified in certain letters and the telex notice of default to CBS as chairman of Diners; and that CBI ...

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