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
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
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.
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.
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 ...