Second Circuit Establishes New Test for Determining Law to be Applied in Rule B Alter Ego Matters

On July 16, 2013, the Second Circuit Court of Appeals issued an Opinion holding that a maritime choice-of-law analysis must be conducted to determine what law applies in evaluating whether a Rule B alter ego claim is prima facie valid. Blue Whale Corporation v. Grand China Shipping Development Co. Ltd., et al., Case No. 13-192 (July 16, 2013).  This Opinion is particularly significant because it clarifies a facet of Rule B veil-piercing law that remained unresolved.  By issuing its July 16, 2013 Opinion, the Second Circuit is now the first Circuit Court to provide clear guidance to District Courts within its Circuit assessing Rule B veil-piercing claims.

Plaintiff’s claims in Blue Whale arose from a breach of a charter party by Defendant Grand China Shipping Development Co. Ltd. (“GCS Development”).  The Plaintiff ultimately attached assets belonging to defendant HNA Group Co. Ltd (“HNA”), in the Southern District of New York, on the basis of alter ego allegations.  HNA challenged the attachment, arguing in relevant part, that English law should govern the alter ego analysis (as this was the law agreed by the parties in the charter party agreement), and that Plaintiff’s alter ego allegations were not sufficient under English law to sustain the attachment.  The Plaintiff opposed HNA’s motion, on the basis that courts evaluating alter ego claims under Rule B consistently applied federal common law in conducting the analysis. The District Court ultimately applied English law to the alter ego analysis, and vacated the Order of attachment.  The Plaintiff appealed the District Court’s vacatur Order.

After considering the parties’ briefing and hearing oral argument, the Second Circuit rejected the District Court holding and HNA's argument that the law of the charter party (English law) should apply automatically to assess the alter ego claims.  The Second Circuit reasoned that HNA was not a party to the charter party, and that the alter ego issues raised in the attachment action were collateral to the charter party.  When analyzing whether a Rule B plaintiff has satisfied its threshold burden of pleading a valid prima facie admiralty claim (including alter ego allegations) against a defendant, the Second Circuit asserted that the following two (2) issues must be considered: (i) whether the Rule B plaintiff’s claim sounds in admiralty; and (ii) whether the claim is prima facie valid.  As to the first element, the Second Circuit concluded that this is a procedural question which must be governed by U.S. federal maritime law.   The second element is a substantive issue, requiring that a federal maritime choice of law analysis be performed in order to determine which law applies.  The Second Circuit relied on the maritime choice-of-law test set forth in the U.S. Supreme Court decision, Lauritzen v. Larsen, 345 U.S. 571 (1953).  Courts applying the Lauritzen test consider numerous factors (including the place of the wrongful act, the law of the forum, the inaccessibility of the foreign forum, the domicile of the injured party, etc.), in order to ascertain which jurisdiction has the strongest points of contact with the claim.  

Notably, after considering the Lauritzen factors, the Second Circuit concluded that U.S. law “has the strongest ‘points of contact’ with [Blue Whale’s] claim.”  Specifically, the Second Circuit looked to the location of defendant HNA’s property, the Plaintiff’s choice of forum, and the unavailability of an alternate forum, in reaching its determination.  While recognizing that the claim involves “multi-national foreign parties” and the transport of cargo between foreign countries, the Second Circuit reasoned that no other source of law “ha[s] a particularly strong connection to the transaction.”  Accordingly, the Second Circuit vacated the District Court’s vacatur Order, and remanded the matter, instructing the District Court Judge to re-evaluate the alter ego claims under U.S. federal maritime law.

In short, the Second Circuit’s Opinion: (i) confirms that U.S. federal maritime law cannot automatically apply to assess alter ego claims under Rule B, and (ii) establishes a clear rule that District Courts within the Circuit must always conduct a choice-of-law analysis in determining what law applies to evaluate Rule B alter ego claims. As a practical consideration, Rule B matters often involve disputes between foreign entities, with no strong connection to any specific jurisdiction, and where a defendant’s property is found within the district.  Based on the Blue Whale Opinion, U.S. federal maritime law will govern the veil-piercing analysis under Rule B in such matters.  

To read a copy of the Second Circuit’s decision, click here.

For more information about veil-piercing claims under Rule B, please do not hesitate to contact [email protected].