The 3-Million-Dollar Question: Does an Arbitral Award Pierce the Corporate Veil?

How parties to international trade contracts subject to U.S arbitration could face personal liability under the alter ego theory.

[1]

In February 2024, the Tenth Circuit rendered a decision that reaffirmed important considerations pertaining to whether a company’s founder can be held liable as its “alter ego” in a controversy.[2]  An alter ego claim is, “a legal doctrine whereby the court finds that a corporation lacks a separate identity from an individual or corporate shareholder.”[3] In this way, a court can ignore the limited legal liability that boards of directors, CEO’s, shareholders, and others usually enjoy.

In Asphalt Trader Ltd. v. Beall,[4] the Tenth Circuit found that to collect an arbitral award against the president of a company personally, even in the face of fraudulent transfers, there must be no legal recovery available to the plaintiffs seeking relief.[5] The balance between limited liability for corporations and the power of arbitral award settlements against those afforded liability protections under the corporate veil is an important consideration expounded by this case.

Asphalt Trader involved a ship owner, Asphalt Trader Ltd., who attempted to enforce its $2.3 million arbitral award against a ship charterer, Taryn Capital Energy, LLC, and its founder, Robert Beall, through the alter ego theory.[6] Asphalt Trader alleged that Taryn Capital and Robert Beall, by his association as founder and sole member of the company, failed to fulfill their obligations under a petroleum shipping deal they entered with Asphalt Trader and Cinque Terre Financial Group, Ltd. (Cinque Terre), a sub-charterer.[7] Cinque Terre was subcontracted by Taryn Capital to retrieve oil from Venezuela and transport it to Panama using Asphalt Trader’s ship.[8] As a result of interference by the Venezuelan government, Cinque Terre was unable to fulfill its oil obligation while the ship was docked in Venezuela, thereby breaching its contract with Taryn Capital and forcing a similar breach by Taryn Capital of its agreement with Asphalt Trader.[9]

Asphalt Trader claimed that Beall, as Taryn Capital’s sole member, should be held personally liable under the alter ego rule because he allegedly made hundreds of fraudulent transfers to circumvent payment of the arbitral award.[10] The District Court for the District of Utah granted summary judgment against Asphalt Trader’s alter ego claim, which the company hoped to reverse on appeal. In Asphalt Trader’s unsuccessful motion for summary judgment, it sought $2 million (plus interest) for the alter ego claim and only about $450,000 for the fraudulent transfer claim.[11]

The Tenth Circuit affirmed the district court’s summary judgment holding against the use of the alter ego rule.[12] The court stated that Asphalt Trader already had a remedy through their fraudulent transfer claim against Beall.[13] The court then emphasized that Asphalt Trader failed to provide sufficient evidence of an inadequate remedy at law to support its alter ego claim.[14] In this way, the court found that, despite the disparity in damages sought under the alter ego and fraudulent transfer claims, Asphalt Trader could not bring an alter ego claim because its fraudulent transfer claim provided an alternative mechanism for recovery.[15]

While Asphalt Trader failed with its alter ego claim, the court acknowledged that its fraudulent transfer claim was a valid legal remedy, looking to both legal and equitable precedent relating to the given fact pattern to support its conclusion.[16] Asphalt Trader should have pursued the fraudulent transfer claim to ensure recovery of its arbitral award. The court mentioned that Asphalt Trader “fail[ed] to explain how it can limit its maximum fraudulent-transfer recovery to the $450,000 [it] sought” in light of the fact that Asphalt Trader’s motion claimed that “[t]he funds that were fraudulently transferred by Beall from Taryn[ Capital]’s bank accounts . . . amounted to approximately $2,000,000 over the course of approximately four years.”[17] Because this claim was an adequate remedy for Asphalt Trader’s arbitral award, there was no equitable reason to pierce the corporate veil.[18]

This ruling highlights the importance for plaintiffs attempting to collect arbitral awards under an alter ego theory to demonstrate that there is no other legal remedy available apart from an alter ego claim. The decision underscores the importance of thorough evidence presentation and legal strategy in arbitration proceedings, because there are high barriers to be cleared to circumvent the limited liability of some corporate structures. Plaintiffs, like Asphalt Trader, must carefully consider available remedies and provide targeted evidence to support each of their theories and claims. While this case involves the U.S. Tenth Circuit, the significance of its holding relating to arbitral awards and companies engaging in trade will surely have an impact on international economic relations. The holding of this case puts companies around the world on notice that, to the extent their international dealings are subject to arbitration under U.S. law, they may face veil piercing under an alter-ego theory.

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[1] Photograph of oil tanker ship, in Reza Kapo, Oil Tanker Ships; Hazards and Safety Precautions, seably, https://www.seably.com/courses/oil-tanker-ship-hazards-and-safety-precautions (last visited Oct. 16, 2024).

[2] See Asphalt Trader Ltd. v. Beall, 2024 U.S. App. LEXIS 3932 (10th Cir. 2024).

[3] Alter Ego, Cornell L. Sch.: Legal Information Inst. (2022), https://www.law.cornell.edu/wex/alter_ego#:~:text=Alter%20ego%20is%20a%20legal,an%20individual%20or%20corporate%20shareholder.

[4] 2024 U.S. App. LEXIS 3932 (10th Cir. 2024).

[5] Id. at *10 (“Asphalt needed to plead and prove the inadequacy of legal remedies to prevail on the alter-ego claim. Absent that, the alter-ego claim fails.”).

[6] Caroline Simson, 10th Circ. Won’t Enforce $2.3M Award in Shipping Feud, Law360 (Feb. 22, 2024), https://plus.lexis.com/document?pdmfid=1530671&pddocfullpath=%2Fshared%2Fdocument%2Flegalnews%2Furn%3AcontentItem%3A6BD3-VPT3-RVS5-2143-00000-00&pdcontentcomponentid=122080&pdislparesultsdocument=false&prid=d72ef0f8-7ea7-4e66-9ee2-6a36bf10d792&crid=8eab2778-edbe-401e-9376.

[7] Asphalt Trader, 2024 U.S. App. LEXIS 3932, at *1.

[8] Id. at *2.

[9] Id.

[10] Id. at *6

[11] Id. at *22.

[12] Id. at *26.

[13] Id. at *23–24.

[14] Id. at *26.

[15] Id. at *23, *26 (highlighting Asphalt Trader’s fraudulent conveyance claim as permitting recovery of damages sufficient to satisfy its arbitration judgment).

[16] Id. at *14–17(citing to both state and federal court precedent to establish Asphalt Trader’s fraudulent transfer claim as legal, not equitable). In Jones v. Mackey Price Thompson & Ostler, the Utah Supreme Court looked to “the nature of the rights asserted and the remedies sought in light of the facts of the case,” to assess whether the plaintiff’s claim was legal or ethical. Id. at *14 (quoting Jones v. Mackey Price Thompson & Ostler, 355 P.3d 1000, 1012 (Utah 2015)). The Tenth Circuit compared this analysis to that which the U.S. Supreme Court adopted in Granfinanciera v. Nordberg. Asphalt Trader, 2024 U.S. App. LEXIS 3932, at *14–15. In Granfinanciera, the Supreme Court employed a two-step inquiry in determining whether a party’s fraudulent transfer claim was legal or ethical; the Court first considered how the claim compared to those brought in 18th Century English courts and then, more importantly, how the relief sought factored into the equitable or legal nature of the claim. Id. at *15 (citing Granfinanciera v. Nordberg, 492 U.S. 33, 42 (1989)).

[17] Id. at *20–21.

[18] Id. at *26.