Post-Arbitral Award Proceeding to Pierce Corporate Veil Correct Procedure but Fails on the Merits

Post-Arbitral Award Proceeding to Pierce Corporate Veil Correct Procedure but Fails on the Merits

By Louis M. Solomon

Ahcom, Ltd. v. Hendrik Smelding, et al., Case No. 07-1139 SC (N.D. Cal. Aug. 2011) [enhanced version available to lexis.com subscribers], presents two interesting issues for international litigation and dispute resolution.   Nuttery Farms, Inc., a U.S. corporation, defaulted in connection with a series of contracts for the sale of almonds to Ahcom, Ltd., a U.K. limited liability corporation in the business of buying and selling dried fruit and nuts.  The Smeldings are the sole shareholders of Nuttery.  The noteworthy rulings affecting international practice are:

First, a clause in the faxed confirmations provided as follows:

AS PER THE EXPORT CONTRACT FOR DRIED FRUIT, TREE NUTS AND KINDRED PRODUCTS, ADOPTED BY THE CALIFORNIA DRIED FRUIT EXPORT ASSOCIATION EFFECTIVE MARCH 1989. - ARBITRATION IN ACCORDANCE WITH THE RULES OF WAREN VEREIN - INTERNATIONAL PARTICIPATION PERMITTED - SHALL BE COMPETENT FOR FINAL SETTLEMENT OF ALL AND ANY DISPUTE ARISING THEREFROM.

The one-way confirms were sufficient to entail arbitration; Nuttery never objected to the arbitration "provision" in the confirms.  The Waren-Verein, says the Court, is a trade association located in Hamburg, Germany that provides arbitration services.  Ahcom was awarded $1,428,000 in damages plus interest.

Second, Ahcom then sought to confirm the award and enforce it against the Smeldings.  The Smeldings were not joined in the arbitration; the effort to enforce the award against them arose from a supplemental judicial proceeding attempting to pierce the corporate veil.  In assessing that question, the Court applied California law (where the Smeldings resided) and ruled that there is no litmus test to determine when the corporate veil will be pierced; "rather the result will depend on the circumstances of each particular case" (finding the doctrine "essentially an equitable one and for that reason is particularly within the province of the trial court" and calling for an examination of whether "there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist", and  "if the acts are treated as those of the corporation alone, an inequitable result will follow."  The evidence the Court considered included a variety of factors, including:

commingling of assets; diversion of corporate assets to personal use; whether the individual defendants held themselves out as personally liable for the debts of the corporation; whether the individual defendants acted in bad faith; whether the individual defendants entered into contracts with the intent to avoid performance by using the corporate entity as a shield against personal liability; whether the individuals and corporation used the same office; whether they employed the same attorney; whether the individuals used the corporation to procure labor, services and merchandise for another person or entity; whether the individuals failed to adequately capitalize the corporation; and whether the individuals failed to maintain minutes or adequate corporate records.

On the facts shown the Court found that piercing was inappropriate.

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