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Ipayment, Inc. v. 1st Americard, Inc.

United States District Court, S.D. New York

February 23, 2017

IPAYMENT, INC., Petitioner,
1st AMERICARD, INC., et al., Respondents.


          JESSE M. FURMAN, United States District Judge

         Petitioner iPayment, Inc. filed this suit to confirm an arbitration award. In a prior opinion, District Judge Analisa Torres, to whom the case was previously assigned, confirmed the award against Respondent 1st Americard, Inc. See iPayment, Inc. v. 1stAmericard, Inc., No. 15-CV-1904 (AT), 2016 WL 1544736, at *5 (S.D.N.Y. Mar. 25, 2016). (Docket No. 26). With the benefit of supplemental briefing, iPayment now seeks to confirm the award against two additional Respondents: Kelly Grainger, the former President and sole shareholder of 1st Americard; and Kelly Grainger, as Administrator of the Estate of Greg Grainger, the former Chief Executive Officer of 1st Americard. Whether the award should be confirmed against the Graingers turns on whether the corporate veil should be pierced, as neither Grainger was a signatory to the agreements at issue. For the reasons stated below, the Court concludes that this is a textbook case for application of veil piercing and thus confirms the award in its entirety and denies Respondents' motion to vacate the award as to the Graingers. Additionally, the Court grants iPayment's unopposed application for attorney's fees.

         THE RECORD

         As a threshold matter, the parties dispute what materials the Court can look to in deciding whether to confirm the award against the Graingers. In its prior Opinion, the Court noted that it “must consider the issue of the Graingers' alter ego liability de novo, and approach the question as if it were raised on a motion for summary judgment.” iPayment, 2016 WL 1544736, at *5; see also Kaplan v. First Options of Chi., Inc., 19 F.3d 1503, 1520 (3d Cir. 1994) (holding that a court is not bound by an arbitrator's determination of alter ego liability and should review the question de novo), aff'd, 514 U.S. 938 (1994). Seizing on Judge Torres's reference to de novo review, Respondents contend that the Court's review should be limited to the record before the arbitrator. (Docket No. 39 (“Resp't Opp'n”) 4). By contrast, emphasizing the reference to summary judgment, iPayment contends that the Court can and should consider additional evidence, namely written discovery and deposition testimony obtained through post-arbitration litigation currently pending in North Carolina. (Docket No. 36 (“Pet'r Mem.”) 55-59).

         iPayment has the better of the argument. For one thing, Respondents' position is ironic - and hard to credit - as they themselves submit and rely on supplemental evidence. (See Docket No. 42 (“Heater Decl.”)). For another, the only case cited by Respondents that is even marginally on point, Kaplan v. First Options of Chicago, Inc., cuts the other way, as the district court in that case provided the parties with an opportunity to submit additional post-arbitration evidence in connection with its veil-piercing analysis. 19 F.3d at 1520 n.26. And on top of that, most of the disputed evidence concerns the time period before the arbitration. (See, e.g., Docket No. 37 (“Second Dahill Decl.”) Ex. 5 (“Grainger NC Hearing Tr.”) 114 (Kelly Grainger testifying for the first time, post-arbitration, that Greg Grainger had begun “withdrawing” from his responsibilities at 1st Americard six months before the transaction with iPayment)). Respondents almost certainly withheld such evidence during the arbitration proceedings, and should not be rewarded now by disregarding any such evidence that is admissible. Cf. Connors v. Connecticut Gen. Life Ins. Co., 272 F.3d 127, 134-35 (2d Cir. 2001) (noting that a district court reviewing an ERISA eligibility determination de novo has discretion to consider additional evidence outside the administrative record if there is “good cause” to do so).

         Perhaps recognizing the dearth of authority supporting their argument, Respondents seize upon Judge Torres's use of the term “de novo” to argue that this proceeding is akin to an appeal and thus should be limited to the original record. (Resp't Opp'n 5-6). The question of whether the Graingers are bound by the arbitration award, however, turns on a question of arbitrability - namely, whether they were bound by the arbitration agreements between the two companies even though they themselves were not signatories to those agreements. See, e.g., Trina Solar US, Inc. v. JRC-Servs. LLC, No. 16-CV-2869 (VEC), 2017 WL 187476, at *4 (S.D.N.Y. Jan. 17, 2017) (“Given that there has been no clear and unmistakable showing that the parties agreed to arbitrate arbitrability, the Court reviews de novo the Tribunal's decision that [the respondent] was bound by the arbitration agreement although not a signatory to it.” (internal quotation marks omitted)); iPayment, 2016 WL 1544736, at *5 (citing Nat'l Ass'n of Broad. Emps. & Technicians v. Am. Broad. Co., 140 F.3d 459, 462 (2d Cir. 1998). And the law is clear that such questions are to be decided using the summary judgment standard, with trial - and thus the possibility of new evidence - if there is a dispute of material fact. See, e.g., Wachovia Bank, Nat. Ass'n v. VCG Special Opportunities Master Fund, Ltd., 661 F.3d 164, 172 (2d Cir. 2011); Bensadoun v. Jobe-Riat, 316 F.3d 171, 175 (2d Cir. 2003). It follows that the Court can and should consider any admissible evidence presented by the parties and that “de novo review” in this context means simply review without the deference traditionally given to the decision of an arbitrator on the merits. See Kaplan, 19 F.3d at 1520; iPayment, 2016 WL 1544736, at *5; cf. Zervos v. Verizon N.Y., Inc., 252 F.3d 163, 168 (2d Cir. 2001) (“De novo review is review without deference. . . . [O]ur review is independent and plenary; as the Latin term suggests, we look at the matter anew, as though it had come to the courts for the first time.” (footnote and citation omitted)).


         In light of the foregoing, the following relevant facts are drawn from materials submitted by the parties, and are either undisputed or described in the light most favorable to Respondents. See Costello v. City of Burlington, 632 F.3d 41, 45 (2d Cir. 2011).[1] iPayment is an Independent Sales Organization (“ISO”) that enables small and medium-sized merchants across the United States to accept credit card payments. (Docket No. 33 (“Jt. Stmt.”) ¶ 1). 1st Americard was an ISO engaged in the same business in the Charlotte, North Carolina area. (Id. ¶ 3). Greg Grainger was 1st Americard's CEO and was responsible for the company's day-to-day operations. (See Docket No. 10 Ex. 4 (“Award”) at 1; Second Dahill Decl.Ex. 1 (“Hearing Tr.”) 148-49). Kelly Grainger was the sole shareholder and President of 1st Americard. (Award 1).

         In May 2013, the two companies entered into an asset purchase agreement pursuant to which iPayment paid nearly $5 million to 1st Americard in exchange for its merchant portfolio. (Jt. Stmt. ¶¶ 125-27). The parties also signed a “Sub-ISO agreement” that required 1st Americard to use its “best efforts” to recruit new merchants for iPayment for three years following the transaction. (Award 2).[2] The asset purchase agreement and the Sub-ISO agreement each contained an arbitration provision. (See Second Dahill Decl. Exs. 5-6). Neither Greg nor Kelly Grainger, however, was party to the agreements in his or her individual capacity.

         Shortly after 1st Americard wired payment to iPayment, things began to fall apart. On July 14, 2013, Greg Grainger (apparently - unbeknownst to iPayment - having been involuntarily committed) sent iPayment's general counsel a text message accusing Kelly Grainger of “kill[ing] all will to go forward with this deal.” (Docket No. 7 (“First Dahill Decl.”) Ex. 7; id. Ex. 9 ¶ 6). The text also stated that 1st Americard's portfolio had lost “at least 20%” of its value in the prior ninety days, that Kelly had “embezzled over 3 million dollars of the money, ” and that Kelly had tried to wire an additional “4 million dollars to an unknown” personal account. (Id.). iPayment immediately asked the Graingers to place the $4.87 million it had paid in escrow pending further discussion. (First Dahill Decl. Ex. 8). In response, the Graingers transferred the money into their personal bank accounts, leaving only $20, 000 in 1st Americard's account. (Award 6).

         Shortly thereafter, iPayment discovered that in the months leading up to execution of the asset purchase agreement, 1st Americard's portfolio had lost over 36% of its value and was generating only about $86, 000 per month in revenue - approximately $50, 000 per month less than what Greg Grainger had represented during the parties' negotiations. (Compare First Dahill Decl. Ex. 3, with Id. Ex. 17, at 15-16). Additionally, by January 2014, 1st Americard's workforce had contracted from ten employees to three, leaving only the Graingers and a third employee who left in May 2014. (First Dahill Decl. Ex. 12 at 105; id. Ex. 16 at 18, 106). Between the closing of the sale to iPayment and the filing of this suit, 1st Americard had recruited only one new merchant for iPayment's portfolio. (First Dahill Decl. Ex 13, at 23-24).

         In November 2013, iPayment initiated arbitration against 1st Americard and the Graingers, alleging breach of contract and other claims. (First Dahill Decl. Ex. 9). iPayment contended that the Graingers, although not signatories to the companies' agreements, were liable as 1st Americard's alter egos. (Id.). On March 31, 2015, after a four-day arbitration hearing, the arbitrator issued a Final Award (the “Award”) finding that Respondents had breached the parties' agreements and that the Graingers were “proper parties” to the action because iPayment had sustained its burden of proof to pierce 1st Americard's corporate veil. (Award 2-6). The arbitrator found Respondents jointly and severally liable for $1, 930, 073.35 in damages, plus 9% per annum interest, and $420, 191.39 in fees and costs. (Id. at 8). On February 13, 2015, iPayment filed a petition to confirm the Award in New York state court. (First Dahill Decl. Ex. 22). Thereafter, Respondents removed the matter to this Court and moved to vacate the Award as to the Graingers individually. (Docket Nos. 1, 3). On March 25, 2016, Judge Torres confirmed the Award as to 1st Americard, but deferred determination of whether to confirm it as to the Graingers pending further briefing on whether the evidence supported piercing the veil and holding the Graingers accountable for 1st Americard's breaches. See 2016 WL 1544736, at *5.


         Under New York law - which the parties agree applies here (Pet'r Mem. 30; Resp't Opp'n 10) - a plaintiff may “pierce the corporate veil” and sue a non-signatory for breach of contract when the non-signatory is an alter ego of a signatory. Kaliner v. Mt. Vernon Monetary Mgmt. Corp., No. 07-CV-4643 (LMM), 2008 WL 4127767, at *2 (S.D.N.Y. Sept. 3, 2008). In order to pierce the corporate veil, a party must establish that “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff's injury.” JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade Servs., Inc.,306 F.Supp.2d 482, 485 (S.D.N.Y. 2004); see also Freeman v. Complex ...

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