| Oxbow Calcining USA Inc. v American Indus. Partners |
| 2012 NY Slip Op 05114 [96 AD3d 646] |
| June 26, 2012 |
| Appellate Division, First Department |
| Oxbow Calcining USA Inc. et al.,Respondents-Appellants, v American Industrial Partners et al.,Appellants-Respondents. |
—[*1] Troutman Sanders LLP, New York (Charles Greenman and Kevin Wallace of counsel), forrespondents-appellants.
Order, Supreme Court, New York County (Eileen Bransten, J.), entered February 3, 2011,which denied defendants' motion to the extent that it sought to compel arbitration and dismiss thefraud and fraudulent concealment causes of action or, in the alternative, to stay the actionpending a simultaneously commenced Texas arbitration, and which granted the motion todismiss with respect to the breach of fiduciary duty causes of action, unanimously modified, onthe law, to the extent of reinstating plaintiffs' causes of action for breach of fiduciary duty,dismissing the fraud and fraudulent concealment causes of action, and granting the motion to staythe action, and otherwise affirmed, without costs.
The facts gleaned from the first amended complaint (the complaint) are as follows. PlaintiffOxbow Carbon LLC (Oxbow Carbon) is the immediate parent and sole owner of plaintiff OxbowCalcining USA Inc. (Oxbow USA), formerly known as Great Lakes Carbon USA Inc. (GLCUSA). Oxbow USA, through its subsidiary, nonparty Oxbow Calcining LLC (Oxbow LLC), thearbitration claimant, formerly known as Great Lakes Carbon LLC (GLC LLC), owns andoperates a calcining plant in Port Arthur, Texas.
Defendants Rogers and Bingham are former directors of GLC USA and principals ofdefendant American Industrial Partners (AIP). Defendants American Industrial Partners CapitalFund II, L.P. (AIP Fund II) and American Industrial Partners Capital Fund III, L.P. (AIP Fund III)are affiliates of AIP. In or about 1998, AIP, through AIP Fund II, acquired all of the stock ofGLC USA and its subsidiaries, which the complaint refers to collectively as GLC.
The calcining process emits large amounts of waste heat, which can be converted to steam.Adjacent to the calcining plant is a steam plant that Dynergy Power Corp. (Dynergy) owned andoperated until sometime in 2000. Pursuant to an agreement between GLC and Dynergy, wasteheat was transferred from the calcining plant's kilns to the steam plant and used to heatgenerators that produced steam and electricity for sale to end users. The release of flue gas fromboth the calcining plant's kiln stacks and the steam plant's boiler stack was conducted [*2]pursuant to regulatory permits issued to GLC.
In 2000, GLC purchased the steam plant from Dynergy. Before operations could resume, theplant required refurbishment, including the installation of a new pollution control system, whichGLC could not fund.
In 2003, AIP sold a portion of its interest in GLC to the Great Lakes Carbon Income Fund(GLC Income Fund), but continued to hold a controlling interest. In 2004, two competing offersfor the purchase of the steam plant and the transfer of waste heat from the calcining plant weresubmitted to GLC. One was from Cinergy and the other from AIP, which, along with anotherentity, formed nonparty Port Arthur Steam Energy LP (PASE), the arbitration respondent, for thatpurpose. Because GLC's AIP directors were conflicted, GLC appointed an independentcommittee of non-AIP directors to review the competing proposals.
In November 2004, to obtain the committee's approval, AIP, with the knowledge of theindividual defendants, represented, as had Cinergy, that it would install electrostatic precipitatorsin its new pollution control system. Based on defendants' knowledge of GLC, and defendants'representations that AIP would fully protect the interests of GLC and its shareholders, thecommittee agreed to accept AIP's proposal. However, AIP soon advised GLC that it wouldprobably be worth installing a magnesium hydroxide injection and multicone pollution controlsystem, which was less expensive and would enable operations to commence sooner. To induceGLC to agree, AIP represented that it would install an effective system at AIP's expense if theinjection system failed, and that GLC would never have any monetary liability for therequirement to supply waste heat to PASE. Relying on these representations, GLC sold the steamplant to PASE for $1 and, effective February 25, 2005, entered into a Heat Exchange Agreement(HEA) with PASE whereby PASE agreed to process all waste heat and flue gas from thecalcining plant.
In 2005, AIP sold another portion of its interest in GLC to the GLC Income Fund. In 2006, itsold its remaining interest to Rain Commodities (USA) Inc., an unaffiliated third party. In orabout May 2007, Oxbow Carbon, LLC purchased the stock of GLC.
Plaintiffs allege that AIP's inadequate injection system, and installation of unlined carbonsteel boiler stacks, resulted in excessive and rapid corrosion, causing the stacks to fail. AfterAIP/PASE refused to fix the problems, Oxbow USA had to fix them, at a cost estimated to bebetween $6 million and $9 million. Towards this end, Oxbow USA installed a "cooler baghouse"(an added pollution control system), replaced corroded boiler stacks, and retained experts toconduct testing.
On July 16, 2010, Oxbow LLC demanded arbitration in Texas of claims against PASE forbreach of the HEA and related duties. Simultaneously, plaintiffs commenced this action allegingthat defendants, as former directors and controlling shareholders of GLC, engaged in fraud beforeand during the sale of the steam plant to PASE and breached their fiduciary duty to GLC and itsshareholders. Plaintiffs also alleged that defendants concealed the material risks created by theinferior pollution control system, causing Oxbow Carbon to overpay for GLC. Shortly after thecomplaint was filed, defendants moved, inter alia, to compel arbitration.
The Federal Arbitration Act reflects a strong public policy favoring arbitration, a policy NewYork courts have also promoted (see Matter of Smith Barney Shearson v Sacharow, 91NY2d 39, 48 [1997]; Matter ofMiller, 40 AD3d 861, 861 [2007]). Nevertheless, "the obligation to arbitrate. . . remains a creature of contract" (Louis Dreyfus Negoce S.A. v BlystadShipping & Trading Inc., 252 F3d 218, 224 [2d Cir 2001], cert denied 534 US 1020[2001]), and parties may [*3]structure arbitration agreements tolimit both the issues they choose to arbitrate and "with whom they choose to arbitratetheir disputes" (Stolt-Nielsen S.A. v AnimalFeeds Intl. Corp., 559 US —, 130 S Ct1758, 1774 [2010]). Where, as here, "the parties dispute not the scope of an arbitration clause butwhether an obligation to arbitrate exists," the general presumption in favor of arbitration does notapply (Applied Energetics, Inc. v NewOak Capital Mkts., LLC, 645 F3d 522, 526 [2d Cir2011]; see also Matter of Miller, 40 AD3d at 862).
Guided by these principles, we find that Supreme Court correctly denied defendants' motionto compel arbitration. Neither plaintiffs nor defendants are signatories to the agreement toarbitrate. While the arbitration provision in the HEA is broad, covering "[e]very dispute of anykind or nature between the Parties arising out of or in connection with this Agreement," the HEAdefines the term "Parties" as GLC LLC, now Oxbow Calcining USA Inc, and PASE, thearbitration claimant and respondent.
Nor are plaintiffs subsidiaries of or the successors in interest to GLC LLC. Although they arethe grandparent and parent companies to Oxbow LLC, which is the successor to GLC LLC,"[i]nterrelatedness, standing alone, is not enough to subject a nonsignatory to arbitration"(World Bus. Ctr. v Euro-American Lodging Corp., 309 AD2d 166, 171 [2003], citingTNS Holdings v MKI Sec. Corp., 92 NY2d 335, 340 [1998]). A parent corporation'scomplete ownership of a subsidiary's stock is also insufficient, by itself, to pierce the corporateveil (see De Jesus v Sears, Roebuck & Co., Inc., 87 F3d 65, 69 [2d Cir 1996], certdenied 519 US 1007 [1996]; Thomson-CSF, S.A. v American Arbitration Assn., 64F3d 773, 780 [2d Cir 1995] ["Anything short of requiring a full showing of someaccepted theory under agency or contract law imperils a vast number of parent corporations"]).
Defendants contend that the nonsignatory plaintiffs must arbitrate under an estoppel theory.However, there is little authority for enforcing an arbitration provision between twononsignatories (see Invista S.A.R.L. v Rhodia, S.A., 625 F3d 75 [3d Cir 2010];American Personality Photos, LLC v Mason, 589 F Supp 2d 1325, 1331 [SD Fla 2008];Amstar Mtge. Corp. v Indian Gold, LLC, 517 F Supp 2d 889, 900 [SD Miss 2007]). Evenif estoppel may be raised in this situation, a nonsignatory may be estopped from avoidingarbitration where it "knowingly accepted the benefits of an agreement with an arbitration clause"(MAG Portfolio Consultant, GMBH v Merlin Biomed Group LLC, 268 F3d 58, 61 [2dCir 2001] [internal quotation marks omitted]). The benefits must be direct, and the party seekingto compel arbitration must demonstrate that the party seeking to avoid arbitration relies on theterms of the agreement containing the arbitration provision in pursuing its claim (see Matter of SSL Intl., PLC v Zook,44 AD3d 429 [2007]; American Bur. of Shipping v Tencara Shipyard S.P.A., 170F3d 349, 353 [2d Cir 1999]). Here, plaintiffs did not assume performance of the HEA and didnot derive a direct benefit therefrom. Rather, plaintiffs are suing defendants in their capacity asformer fiduciaries of GLC who allegedly fraudulently misrepresented facts and engaged inself-dealing. Accordingly, plaintiffs are not equitably estopped from avoiding the agreement'sobligation to arbitrate.
Arbitration of the claims against the individual defendants is not required, since the allegedmisconduct does not relate to their behavior as officers, directors, or agents of PASE, the othersignatory to the agreement, but, rather, to their behavior as former directors of GLC USA (seeHirschfeld Prods. v Mirvish, 88 NY2d 1054 [1996]).[*4]
The fraud claim should have been dismissed since itmerely alleges an intent not to perform future contractual obligations (see New York Univ. vContinental Ins. Co., 87 NY2d 308, 318 [1995]; Pacnet Network Ltd. v KDDI Corp., 78 AD3d 478 [2010]; Fletcher v Boies, Schiller & Flexner,LLP, 75 AD3d 469, 470 [2010]).
The fraudulent concealment claim should also have been dismissed. To state a claim forfraudulent concealment, a plaintiff must allege: (1) that the defendant had a duty to disclosecertain material information but failed to do so; (2) that the defendant then made a materialmisrepresentation of fact; (3) that said misrepresentation was made intentionally in order todefraud or mislead; (4) that the plaintiff reasonably relied on said misrepresentation; and (5) thatthe plaintiff suffered damage as a result (see IDT Corp. v Morgan Stanley Dean Witter & Co., 63 AD3d 583,586 [2009]). Plaintiffs failed to allege that, at the time of the subject transactions, they wereknown parties that could be expected to rely on defendants' representations or omissions (see e.g. Sykes v RFD Third Ave. 1 Assoc.,LLC, 15 NY3d 370 [2010]; Swersky v Dreyer & Traub, 219 AD2d 321, 326[1996]). They alleged conclusorily that defendants intended to cause them harm, based on apossibility that the injection system might fail some day. However, former directors of acompany do not owe a duty to disclose information to future, unknown purchasers.
Supreme Court erred in dismissing plaintiffs' breach of fiduciary duty claims as time-barredunder CPLR 202 at this procedural stage. Where a nonresident brings a cause of action thataccrued outside of New York, CPLR 202 applies, and the action must be timely in both NewYork and the other jurisdiction (Global Fin. Corp. v Triarc Corp., 93 NY2d 525, 528[1999]). "When an alleged injury is purely economic, the place of injury usually is where theplaintiff resides and sustains the economic impact of the loss" (id. at 529). In the case of acorporate plaintiff, that may be the state of incorporation or its principal place of business (id.at 529-530; see also Kat HouseProds., LLC v Paul, Hastings, Janofsky & Walker, LLP, 71 AD3d 580, 580-581 [2010];Brinckerhoff v JAC Holding Corp., 263 AD2d 352, 353 [1999]). Plaintiffs allege thatOxbow USA is a Delaware corporation formerly known as GLC USA, doing business in NewYork and Texas and "formerly having its principal place of business at 551 Fifth Avenue," withits current principal place of business in Florida; that the causes of action set forth arose in NewYork; and that from August 2003 until 2005, AIP and GLC's [GLC USA and its subsidiaries]offices were located in New York. Read together, these allegations, if proven, would establishthat plaintiffs' principal office was in New York when the cause of action accrued. Defendantsdid not submit documentary evidence that would conclusively disprove these allegations (see e.g. Romanelli v Disilvio, 76 AD3d553, 554 [2010]). Any ruling on whether the borrowing statute applies would require afactual determination as to the principal residency of GLC USA and its subsidiaries, which isinappropriate on motion to dismiss (see e.g. United Bhd. of Carpenters & Joiners of Am. vNyack Waterfront Assoc., 212 AD2d 778 [1995]).
Verizon Directories Corp. vContinuum Health Partners, Inc. (74 AD3d 416 [2010], lv denied 15 NY3d 716[2010]) is inapposite. In Verizon, we rejected the plaintiff's contention that it was aresident of New York, or that its cause of action accrued in this State, by virtue of itsauthorization to do business and asserted extensive presence here. Verizon did not claim that itsprincipal office was in New York.
Accordingly, the motion to dismiss the breach of fiduciary duty cause of action astime-barred under the borrowing statute is premature and is denied without prejudice to renewalafter [*5]further discovery. Should it be determined on renewalthat the borrowing statute does not apply, the claims on behalf of Oxbow USA against theindividual defendants in their capacities as directors of GLC will be governed by the six-yearstatute of limitations of CPLR 213 (7), which applies to actions for breach of fiduciary duty by oron behalf of a corporation against a present or former corporate director or officer (seeSardanis v Sumitomo Corp. 279 AD2d 225, 230 [2001]; see also Matter of Skorr v Skorr Steel Co., Inc., 29 AD3d 594[2006]; Toscano v Toscano, 285 AD2d 590 [2001]). "CPLR 213 (7) applies to all'action[s],' with no differentiation between legal and equitable claims" (Roslyn Union Free School Dist. vBarkan, 16 NY3d 643, 650 [2011]).
As to the AIP defendants, "where an allegation of fraud is essential to a breach of fiduciaryduty claim, courts have applied a six-year statute of limitations under CPLR 213 (8)" (IDT Corp. v Morgan Stanley Dean Witter& Co., 12 NY3d 132, 139 [2009]). Here, the essence of plaintiffs' claim is that AIP, asthe holder of a controlling interest in GLC, breached its fiduciary duty to ensure that anyself-dealing transaction between GLC and PASE would be entirely fair to GLC and itsshareholders, by employing bait-and-switch tactics and making numerous misrepresentations toGLC's independent committee and management in order to fraudulently induce GLC to enter intothe HEA (see Carbon Capital Mgt., LLCv American Express Co., 88 AD3d 933 [2011]; Monaghan v Ford Motor Co., 71 AD3d 848 [2010]).
Defendants' motion to stay this action pending the outcome of the arbitration should begranted. CPLR 2201 provides that "[e]xcept where otherwise prescribed by law, the court inwhich an action is pending may grant a stay of proceedings in a proper case, upon such terms asmay be just." This Court has stayed litigation that included nonsignatories to the subjectarbitration agreement where the non-signing party was closely related to the signatories and wasalleged to have engaged in substantially the same improper conduct (see Pacer/Cats/CCS vMovieFone, Inc., 226 AD2d 127 [1996]). Here, although there is not a complete identity ofparties, the arbitration statement of claims and the complaint contain overlapping factualallegations, and both seek the same damages, including all costs and expenses related to thereplacement, repair, inspection, and maintenance of the boiler stacks, and lost steam revenue.Thus, the determination of the pending arbitration proceeding may well dispose of or limit theissues to be determined in this action (see Belopolsky v Renew Data Corp., 41 AD3d 322 [2007]).
We have considered the parties' remaining arguments for affirmative relief and find themunavailing. Concur—Andrias, J.P., Friedman, DeGrasse, Freedman and Manzanet-Daniels,JJ.