By Keith B. Letourneau August 24, 2021
Plaintiffs seeking to recover from ship managers or the vessels they operate but lacking a direct claim against a particular vessel have developed a clever strategy under U.S. maritime law. They seize a managed vessel under Supplemental Admiralty Rule B and claim the vessel-owning company is an alter ego of the defendant with whom the dispute really exists. In this way, plaintiffs can take advantage of the relatively low evidentiary bar to delve into protracted discovery to develop the alter-ego connection they need to prove up their case.
Rule B requires showing that the defendant is not present within the district to satisfy the existence of general-personal jurisdiction. The Supreme Court’s general jurisdiction ruling in Daimler AG v. Bauman, 134 S.Ct. 746 (2014), has made it much easier to meet Rule B’s requirement because it essentially requires the defendant’s principal place of business to lie within the district, which is never the case for foreign flag vessels or their owning companies, thus enabling plaintiffs to almost automatically meet Rule B’s “not present within the district” requirement.
The defendant shipowner can challenge the attachment at a post-seizure hearing where the federal courts typically apply a probable cause test, which equates to reasonable grounds for supposing the allegations are true. Invariably, Plaintiffs allege that the ship manager or ship-owning group are dominated and controlled by a single individual or entity and that the target defendant is but a corporate extension of the company with whom the plaintiffs’ real dispute exists. Federal courts examine a laundry list of factors for purposes of assessing whether the ostensibly controlling corporation exercised complete domination and control over the purported subservient corporation, though more is required to pierce the corporate veil as discussed below. These factors often include:
- Whether the corporations maintain proper corporate formalities (holding annual board of director and shareholder meetings, holding proper elections, maintaining proper corporate records, etc.);
- Whether the subservient corporation is adequately capitalized to meet its financial obligations;
- Whether corporate funds are used for personal purposes;
- Whether overlap exists in ownership, directors, officers, and personnel;
- Whether the corporation share office space, address, or contact information;
- Whether the alleged subservient entity lacks discretion in operating its business;
- Whether business dealings between the companies are at arms-length;
- Whether one entity holds that it is responsible for the debts of another;
- Whether the dominating corporation uses the subservient entity’s property as its own.
See Pacific Gulf Shipping v. Vigorous Shipping & Trading S.A., et al, 992 F.3d 893, 898 (9th Cir. 2021).
The crux of the issue is that often international corporate special purpose vehicle (“SPV”) structures do not meet the rigors of corporate separateness required in the United States, which makes them more susceptible to the veil-piercing argument at the outset of the case. U.S. federal courts apply the corporate-formality requirements of their respective circuits, and not those employed by the country of incorporation.
The use of common officers, directors, offices, contact details, and common financial and operational management, while certainly more economical and efficient, makes it easier to argue that the group structure is dominated and controlled by one or two key individuals or parent company. Also bear in mind that U.S. federal judges are not familiar with the role of ship managers and how they operate and manage their vessel fleets, nor are they familiar with how vessel-owning groups are constructed as investment vehicles for institutional investors. Plaintiffs can obfuscate corporate relationships by showing how daily financial management and operational decisions are made by relatively few individuals to create the appearance of domination and control.
By satisfying the probable-cause standard at the Rule E(4)(f) hearing stage, plaintiffs open the door to the discovery of documents and witness testimony that often entail considerable time (years), expense, and inconvenience by vessels’ interests to respond. Once discovery is unleashed, the focus shifts to the nitty-gritty details of inter-corporate relationships and delving into the factors and conduct above. The process is daunting and entails enormous effort compiling the group’s relevant corporate documents and vetting witnesses in preparation for invariably long depositions. Additionally, either the vessel remains under seizure during the intervening period or substitute security is posted for its release. The Supplemental Admiralty Rules permit security of up to 200 percent of the amount of the plaintiffs’ claim and security from the vessel’s protection and indemnity (“P&I”) club may not be available for breach of contract claims, which often lie at the heart of these alter-ego cases.
Yet, overlap in corporate activities and operations and activities is not enough. There must be some evidence of wrongdoing. The gist of corporate fraud invariably involves the misuse of monies. The challenge for vessel interests at the Rule E(4)(f) stage is to contest the fundamental premise of the alter-ego claim, which is that the target defendant engaged in fraudulent activity or intended to circumvent statutory or contractual obligations. Under federal practice, fraud must be alleged with particularity—who did it, what was done, when was it committed, where was it committed, and how was it carried out. Are such allegations set forth in the plaintiffs’ original verified complaint? Ultimately, it is this issue of fraud or wrongful conduct and misuse of the subservient corporation’s assets that will decide whether plaintiffs’ alter-ego claims will succeed. Using a forensic accounting expert to examine the defendant’s financial books may yield the best defense.
To avert the misuse of the alter-ego doctrine, international vessel owning and operating groups whose vessels regularly transit to the United States should evaluate whether the corporate structures of the single-shipowning companies that comprise their groups are sufficiently robust to withstand the scrutiny they would surely undergo in a U.S. federal proceeding.
About the Author: Keith B. Letourneau served as lead counsel for Vigorous Shipping & Trading in the Pacific Gulf Shipping case.
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