United States District Court, Southern District of New York
December 23, 1991
M. PRUSMAN, LTD. AND SAHAR INSURANCE CO., LTD., PLAINTIFFS,
ARIEL MARITIME GROUP, INC., CHARLES KLAUS & CO., LTD. (D/B/A JAVELIN LINE), MARTYN C. MERRITT AND MARY ANNE MERRITT (A/K/A MARY ANNE PAWLOWSKI), JOSHUA DEAN & CO., LTD., FLORENCE WLEZEN (A/K/A FLORENCE PAWLOWSKI), AND FLORENCE PAWLOWSKI (A/K/A FLORENCE WLEZEN), DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
This action, brought by M. Prusman, Ltd. and Sahar Insurance
Company, Ltd. (collectively "Prusman" or the "Plaintiffs")
against Ariel Maritime Group, Inc. ("Ariel"), Charles Klaus &
Co., Ltd. ("Klaus"), d/b/a Javelin Lines, Martyn C. Merritt
("Merritt"), Mary Anne Merritt, a/k/a Mary Ann Pawlowski ("Mrs.
Merritt"), Joshua Dean & Co. Ltd. ("Dean"), Florence Wlezen,
a/k/a Florence Pawlowski, and Florence Pawlowski (collectively
"the Defendants"), was tried before the Court on October 22,
1991. Upon the findings and conclusions set forth below,
judgment will be enforced against the Defendants jointly and
On April 25, 1988, judgment was entered for $28,682.08 with
interest and costs arising out of the loss of goods shipped on
board the M/V NATHANEL (85 Civ. 9485 (RWS)).
The instant action was filed on November 18, 1988, to enforce
that judgment. Discovery was had, and the Defendants' motion to
dismiss for lack of jurisdiction and failure of service was
denied on August 10, 1988. Prusman's motion for summary
judgment was granted in part and denied in part on July 11,
The principal issue remaining to be tried was the personal
liability of the Merritts and whether or not the Defendants
other than Ariel were the alter ego of Ariel or the Merritts.
The Plaintiffs are Israeli corporations with offices in
Merritt was a resident of New Rochelle, New York, and was the
president and a shareholder of Ariel. Mrs. Merritt is Merritt's
wife. She lived with him in New Rochelle and was an officer and
director of Ariel. The Merritts maintained offices in the same
space as Ariel on West Street and/or West 39th Street in New
Ariel was organized as an Illinois corporation, with its
principal place of business at 90 West Street and/or 323 West
39th Street, New York, New York, and was doing business under
the name of Javelin Lines ("Javelin"). On June 1, 1988, Ariel
changed its name to AMG Services, Inc. ("AMG"), but did not
change its corporate form.
Klaus was organized as a Hong Kong corporation and was
likewise doing business under the name of Javelin. It was
incorporated in 1978 upon the written instructions of Merritt.
Klaus's name derives from an amalgam of Merritt's middle name,
"Charles," and the middle name of his former partner, Peter
Schauer. Merritt and Schauer formed Klaus as 50/50 partners,
but their business association ended in about 1980. Javelin was
a division of Klaus and a trade name of Ariel.
Dean was organized as an English corporation. The sole
shareholders of Dean are Broadview Developments, Ltd., with one
share, and Klaus, with 999 shares.
The sole shareholders of Klaus are Dean, with 999 shares, and
Merritt, with one share. The Merritts consider Klaus the
ultimate holding company of Dean. The Merritts also controlled
Broadview and were officers of and controlled Ariel.
In October and November 1984, Javelin issued two negotiable
bills of lading for the carriage of Prusman's cargo on board
the M/V NATHANEL from Germany to Israel. Javelin issued its
bills of lading as a division of Klaus. The bills of lading
were negotiated and transferred to plaintiff M. Prusman Ltd.
During the voyage, the shipment suffered damage. The present
action seeks to enforce the prior judgment arising out of this
On May 31, 1991, Merritt agreed to plead guilty to a
conspiracy to commit fraud that involved the submission of
false bills of lading. Merritt reaped $936,000 from the
conspiracy. "The payment was made pursuant to an Agency for
International Development program to supply needed foodstuffs
to the country of Sudan. In return for the $936,000, the
defendant [Merritt] and his associates were supposed to ship
and deliver high-quality powdered non-fat milk." Trial Exhibit
5 at 1.
In sentencing Merritt, the Honorable John S. Martin found
that Merritt "engaged in obstruction of justice when he
submitted a false document to the government," to wit, a
fabricated fax allegedly confirming a payment and "official
looking stationery with the title 'Maritime Bureau of
Investigations' . . . — which 'obviously was designed to
mislead the recipient of the letter into believing that they
were responding to some official government inquiry" — with "a
false statement that the payment had been made." Judge Martin
further found that "Merritt continues to have control over
$670,000 of the proceeds, which he is attempting to hide so
that it may not be used to pay restitution," and that $660,000
of such funds ended up in an account controlled by "Mrs.
Merritt, the defendant's business associate."
Judge Martin also found that the evidence "indicated that all
decisions relating to the disposition of [the home owned by
Broadview Development Corporation in which Mr. and Mrs. Merritt
resided until the property was sold in 1990,] were made by Mr.
or Mrs. Merritt." Moreover, he found that "the corporate
documentation of Broadview from the island of Jersey, although
showing Jersey residents as shareholders, clearly indicate that
the people in control of Broadview were Mr. and Mrs. Merritt.
Some of the corporate documentation is signed by Mrs.
Pawlowski, Mrs. Merritt's mother. Her stipulated testimony,
however, was that she had no knowledge of the corporation
although she did from time to time sign documents for Mr. and
Finally, Judge Martin stated that:
[i]n view of the overwhelming evidence presented
by the Government that Broadview was in fact a
corporation controlled by the Merritts, the Court
finds that Mr. Merritt deliberately attempted to
mislead the Probation Department concerning
Broadview and provided false and fraudulent
information to the Probation Department concerning
his financial condition not reflecting the
proceeds that Broadview received from the sale of
This Court also previously ordered that judgment be entered
enforcing the order of the Federal Maritime Commission ("FMC")
against Merritt, Ariel and various corporations in Commission
Docket Number 84-38 dated September 27, 1987, assessing civil
penalties of $335,000 for violations of the Shipping Act of
1916, 46 U.S.C.App. §§ 815 et seq. The FMC pierced the
corporate veils of Ariel, Klaus, Javelin, Dean and other
entities and found Merritt jointly and severally liable for all
of the penalties by virtue of his control and direction of
these corporate shells. In the words of the FMC: "The corporate
records for these entities contain numerous conflicting and
erroneous statements as to their ownership and
control and some of these records have been falsified." FMC
Order at 42.
Specifically, the FMC found:
This record is replete with evidence that Martyn
Merritt directed and controlled the corporate
respondents [including Klaus and Dean] in
conducting and attempting to conceal unlawful
activities. . . .*fn1
We find, further, that Martyn Merritt was the
author of and principal beneficiary of the schemes
involved in this proceeding. We agree with the
Presiding Officer that Merritt was the dominant
and controlling figure in the operation of the
Merritt not only created, but changed the
corporate entities and form of their ownership at
will, not only when he caused Klaus stock to be
issued . . ., but in changing the ownership of
Joshua Dean from its "incorporators" to his and
his wife's names simultaneously with its creation.
[T]he corporations lacked individual personalties,
separate and apart from Merritt or each other. We
believe that the record in this case repeatedly
reflects use of the corporate device by Martyn
Merritt to violate the Shipping Act, essentially
by defrauding the ocean carriers of freight
revenues, and to hide the illegal activities
carried out through these interwoven corporate
Whether we pierce the corporate veil based upon
the line of cases holding that a corporation which
is merely the "alter ego" of its major owner or
operator may not be used to shield the individual
from liability, or on [another basis], it is
clearly appropriate to do so here.
A letter submitted by Defendants, dated January 2, 1987, from
W.W. Chu to Ariel (attention "Martyn Merritt") on Klaus
letterhead stated: "Your wife being a notary public was kind
enough to be listed as a director of our firm with her nice
mother." Dean's corporate records show the Merritts as
directors and as corporate secretary.
In the past, the Merritts have used names of non-existent and
fictitious individuals to further their business dealings and
to obstruct and cloud legal inquiry into their corporate
schemes. They were the dominant and controlling figures in the
operation of the corporate Defendants. The Merritts created and
changed the corporate entities within their ownership at will.
They caused the Klaus shares to be issued, and changed the
ownership of Dean from its "incorporators" to the Merritts'
names simultaneously with its creation. The corporate
Defendants lacked individual personalties, separate and apart
from the Merritts or each other.
The Merritts have sole signature control over the Ariel and
Javelin accounts, and Ariel and the Merritts represented that
Javelin deposits could be made into Ariel accounts. In January
1989, Javelin funds were deposited into Ariel's bank account
and intermingled with Ariel funds. The Merritts' manipulation
of the corporate devices and names of the corporate Defendants,
and the absence of any meaningful assets or capitalization of
such corporate shells, has prevented enforcement of the
judgment against Klaus and Javelin. Since entry of the
judgment, the Merritts have changed Ariel's name, and in
discovery have misrepresented, misstated, and attempted to
conceal their participation in the corporate Defendants and
their receipt of funds on behalf of such Defendants. The
Defendants have fraudulently deposited Javelin funds into Ariel
accounts to avoid execution on the judgment, to the prejudice
of the Plaintiffs' rights as judgment creditors.
As of the date of trial, Plaintiffs have sustained a loss in
the sum of $38,815.60 (the principal amount of judgment, plus
interest at 9%), plus costs and attorneys fees.
This court has admiralty and maritime jurisdiction over this
action to enforce a judgment in admiralty for cargo damage, and
has inherent power to safeguard and protect the integrity of
its judgments. Swift & Co. Packers v. Compania Colombiana Del
Caribe, S.A., 339 U.S. 684, 691-92, 70 S.Ct. 861, 866-67, 94
L.Ed. 1206 (1950); Olar Ringdals Tankrederi, A/S v. Ocean
Carriers Corp., 1964 A.M.C. 1581 (S.D.N.Y. 1964).
The doctrine of collateral estoppel, or issue preclusion,
prevents Merritt from denying his domination and control of
Javelin, Klaus, Dean, and Broadview. Collateral estoppel
applies where there is a final judgment, an identity of
parties, and an identity of issues that were necessarily
decided in the prior proceeding. The party against whom
estoppel is asserted must have had a full and fair opportunity
to litigate the pertinent issues. Gelb v. Royal Globe Insurance
Co., 798 F.2d 38, 44 (2d Cir. 1986), cert. denied,
480 U.S. 948, 107 S.Ct. 1608, 94 L.Ed.2d 794 (1987). Moreover, an
administrative agency's resolution of disputed issues of fact
or law which the parties have had an adequate opportunity to
litigate precludes relitigation of such issues. United States
v. Utah Construction & Mining Co., 384 U.S. 394, 421-22, 86
S.Ct. 1545, 1559-60, 16 L.Ed.2d 642 (1966); Wickham Contracting
Co. v. Board of Education, 715 F.2d 21, 26 (2d Cir. 1983).
On May 23, 1990, the Honorable Thomas P. Griesa ordered that
judgment be entered enforcing the FMC order. Judge Griesa's
opinion and the FMC's order establish that the Gelb standard is
satisfied. The corporate Defendants and Merritt had a full and
fair opportunity in that case to litigate the same issues of
corporate dominance and control and of piercing the corporate
veils presented in the instant case. The wrongful creation and
use of the corporate Defendants under false pretenses misled
the Plaintiffs, as it did the shippers and the government in
the other proceeding. The wrongful activity of Defendants in
the instant case is not limited to post-judgment conduct.
Judge Martin's finding that the Merritts controlled Broadview
for their own unlawful purposes similarly binds Merritt here
under the Gelb test.
In federal maritime law, "The prerequisites for piercing a
corporate veil are . . . clear . . .: [the defendant] must have
used [the corporation] to perpetrate a fraud or have so
dominated and disregarded [the] corporate form that [the
corporation] primarily transacted [the defendant's] personal
business rather than its own corporate business." Kirno Hill
Corp. v. Holt, 618 F.2d 982, 985 (2d Cir. 1980); cf. Bergesen
d.y. A/S v. Lindholm, 760 F. Supp. 976, 987 (D.Conn. 1991)
(Smith, Maj. J.) (in federal admiralty case, court has more
flexibility in dealing with state law in deciding whether to
pierce corporate veil).
"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." Itel Containers International, Corp. v.
Atlanttrafik, Express Service Ltd., 909 F.2d 698, 703 (2d Cir.
The following factors are relevant in determining whether to
pierce a corporate veil:
(1) the absence of the formalities and
paraphernalia that are part and parcel of the
corporate existence, i.e., issuance of stock,
election of directors, keeping of corporate records
and the like,
(2) inadequate capitalization,
(3) whether funds are put in and taken out of the
corporation for personal rather than corporate
(4) overlap in ownership, officers, directors, and
(5) common office space, address and telephone
numbers of corporate entities,
(6) the amount of business discretion displayed by
the allegedly dominated corporation,
(7) whether the related corporations deal with the
dominated corporation at arms length,
(8) whether the corporations are treated as
independent profit centers,
(9) the payment or guarantee of debts of the
dominated corporations by other corporations in
the group, and
(10) whether the corporation in question had
property that was used by other of the
corporations as if it were its own.
Wm. Passalacqua Builders, Inc. v. Resnick Developers South,
Inc., 933 F.2d 131
, 139 (2d Cir. 1991).
The facts set forth above establish that the Merritts so
controlled and dominated the corporate Defendants and Broadview
as to justify piercing the corporate veils to reach the assets
of Merritt, Mrs. Merritt, or the controlled corporate entities.
Corporate formalities such as the election of directors and the
keeping of corporate records were not observed. Klaus and Dean
were inadequately capitalized. Funds of Javelin, Klaus and
Ariel were intermingled in bank accounts controlled by the
Merritts as sole authorized signatories. The Merritts shuttled
funds through Broadview, a shareholder of Dean, following the
sale of their personal residence and have secreted them. The
Merritts are listed and otherwise shown as owners, officers,
directors, and/or shareholders of all of the corporate
Defendants. The Merritts and the corporate Defendants share
common office space, the rent for which is paid by Ariel. The
corporate Defendants had no credible discretion or arms length
dealing with each other. The Defendants have presented no
evidence showing that the corporate Defendants are independent
profit centers. The Merritts used the home purportedly owned by
Broadview as if it were their own, and have treated the sales
proceeds the same way.
Neither the testimony of Merritt nor of Mrs. Merritt was
offered by Defendants at trial. Accordingly, their failure to
testify creates an inference that such testimony would have
been adverse. See Georgia Southern and Florida Railway Co. v.
Perry, 326 F.2d 921, 925 (5th Cir. 1964).
In these circumstances, the policy justifying a disregard of
the corporate form — the need to protect those who deal with
the corporation — requires piercing the Defendants' corporate
veils. See Resnick Developers South, Inc., 933 F.2d at 139-40.
The Merritts have used Javelin, Klaus, Dean, Ariel and
Broadview as "alter egos" to perpetrate a fraud. Klaus and
Javelin issued bills of lading that were negotiated to
plaintiffs. Klaus and Javelin were not legitimate corporate
entities; they were formed with fictitious names and were owned
by an entity that, in turn, was owned by them. The Merritts
continued to perpetrate their fraudulent scheme by disavowing
any knowledge of the ownership or assets of these entities
during discovery and during efforts by Plaintiffs to enforce
Therefore, the doctrine of piercing the corporate veil will
be applied here "to prevent fraud or to achieve equity."
International Aircraft Trading Co. v. Manufacturers Trust Co.,
297 N.Y. 285, 292, 79 N.E.2d 249 (1948).
Judgment will be entered on notice.
It is so ordered.