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Article: Second Circuit Clarifies Process for Enforcement of Nondomestic Arbitral Awards Against Alter Egos of Award Debtor

Business Litigation Reports

In a recent pair of opinions, the United States Court of Appeals for the Second Circuit clarified that the procedure for enforcing a nondomestic arbitration award does not require a separate “confirmation” step. CBF Indústria de Gusa S/A v. AMCI Holdings, Inc., 846 F.3d 35 (2d Cir. Jan. 18, 2017) (the “initial opinion”); CBF Industria de Gusa v. AMCI Holdings, Inc., Nos. 15-1133-cv(L), 15-1146-cv(CON), 2017 U.S. App. LEXIS 3815 (2d Cir. Mar. 2, 2017) (the “revised opinion”). The Second Circuit also held that enforcement of the award against third parties is a matter of local law (in this case, the law of the Southern District of New York), not a matter of the scope of the parties’ arbitration agreement.

Background

In CBF v. AMCI, a producer of pig iron (a type of metal) had entered into a series of sales contracts with a purchaser. When the price of pig iron crashed, the purchaser failed to perform under the contracts. The producer initiated an ICC arbitration against the purchaser and obtained an award for approximately $48 million. However, the purchaser had transferred its assets to other companies and, following Swiss bankruptcy proceedings, stopped existing under Swiss law. During the arbitration, the producer claimed that the purchaser had committed fraud by through secret asset transfers, but the tribunal did not allow the producer to proceed against any third parties for lack of evidence of fraud in the Swiss bankruptcy proceedings.

Nonetheless, with the award in hand, the producer initiated enforcement proceedings in the Southern District of New York against alleged alter egos and successors-in-interest of the purchaser. In April 2014, the Southern District of New York dismissed the enforcement proceedings because the producer had not “confirmed” the award at the seat of the arbitration (i.e., Switzerland). Citing a 1963 Second Circuit decision, Orion Shipping & Trading Co., 312 F.2d 299, 301 (“Orion”), the court held that the producer could not pursue enforcement of the “unconfirmed” award. The court also dismissed the producer’s fraud claims because the producer had raised similar claims in the arbitration.

In response to the dismissal, the producer then initiated new proceedings to “confirm” the award in the Southern District of New York. By that time, however, the purchaser had ceased to exist, and the court dismissed the confirmation proceedings on that basis. The producer appealed both of the district court’s dismissals.

No Separate “Confirmation” Step Is Required Before Recognition and Enforcement of Award

In the first of two opinions, on January 18, 2017, the Second Circuit reversed the district court. The Second Circuit held that the producer was not required to “confirm” the award in a step separate from enforcement proceedings. In doing so, the Second Circuit provided important clarification on the process for confirming arbitration awards under the Federal Arbitration Act (“FAA”) and the Convention for the Enforcement and Recognition of Foreign Arbitral Awards (“New York Convention”). The Second Circuit’s opinion largely tracked the United States’ amicus brief, whose stated interest was in “ensuring the proper interpretation and implementation” of the New York Convention and “encouraging the reliable and efficient enforcement of international arbitral awards in aid of international commerce.” U.S. amicus br. at 1.

The Second Circuit explained the nature of the confusion over “confirmation” versus “recognition and enforcement” of awards. Before 1970, when the United States ratified the New York Convention and added Chapter 2 to the FAA to implement the New York Convention, the 1927 Geneva Convention provided the framework for enforcing arbitration awards. Under the Geneva Convention, an award creditor was required to obtain recognition of the award in the state where it was rendered before he could attempt to enforce it abroad. This enforcement regime, known as “double exequatur,” governed when the Second Circuit issued its 1963 Orion decision, on which the district court relied in dismissing the producer’s enforcement proceedings.

The addition of Chapter 2 to the FAA in 1970 did not eliminate the confusion over whether double exequatur was still required. In fact, as the Second Circuit noted, Chapter 2 of the FAA uses the word “confirm,” allowing a party to an arbitration to apply for “an order confirming the award.” 9 U.S.C. § 207 (emphasis added). And in the same section, the FAA also refers to “recognition” and “enforcement” of awards. Id. This may have led to confusion, including in the district court, over the difference between “confirmation,” “recognition,” and “enforcement” of arbitration awards.

The Second Circuit clarified this situation, holding that the New York Convention, as implemented by Chapter 2 of the FAA, envisions a “single-step process for reducing a foreign arbitral award to a domestic judgment.” CBF v. AMCI, 2017 U.S. App. LEXIS 3815, at *31 (citation omitted). According to the Second Circuit, the word “confirm” in Chapter 2 of the FAA should be understood as a synonym of “recognition and enforcement” under the New York Convention. Id. at *32. And although “recognition” and “enforcement” are distinct concepts, they “occur together, as one process” under the New York Convention. Id. at *31.

This decision is significant because it reduces uncertainty in the enforcement of arbitration awards in the United States (or at least before the courts of the Second Circuit) and allows award creditors to rely on the simpler, single-step procedure under the New York Convention and the FAA. Though the award debtor can still bring a set-aside challenge in the jurisdiction where the award is rendered, the Second Circuit has made clear that confirmation of the award at the seat is not required to recognize and enforce the award under the FAA and the NY Convention.

For the producer, however, this decision did not resolve everything. Though the Second Circuit eliminated any need for pre-enforcement “confirmation,” the text of the FAA only provides for enforcement of awards “against any other party to the arbitration.” 9 U.S.C. § 207. Since the purchaser—the only “other party to the arbitration”—was bankrupt and nonexistent, the producer wished to enforce the award against third parties, which the bare text of the FAA does not address.

Enforcement of Awards Against Third Parties Is a Matter of Local Law, Not Arbitrability

Having found that separate “confirmation” proceedings were not required, the Second Circuit turned to whether the producer could enforce the award against entities that were not parties to the arbitration agreement or the arbitration award. In its initial opinion, the Second Circuit held that issue preclusion did not apply to the producer’s fraud claims, which underpinned its alter ego theories. However, this led to some difficult questions. Was the joining of third parties an issue subject to the parties’ arbitration agreement? Or could the producer attempt to enforce the arbitration award against third parties, regardless of the scope of the arbitration agreement?

In its initial opinion, the Second Circuit characterized the question as one of “arbitrability” under the First Options line of cases (First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)). The concept of “arbitrability”—and even more so the “arbitrability of arbitrability”—is an especially confusing one, as the Second Circuit framed the inquiry as whether the parties “agreed to have an arbitrator decide whether they decided to arbitrate the question of whether a nonsignatory could be bound to an award under the Contracts.” CBF v. AMCI, 846 F.3d at 54. This left open the possibility that “the district court must refuse to decide the issue” or that “the question must go to the arbitrator,” which could have been the end of the case or at least very burdensome for the producer. Id.

The Second Circuit cleared up this confusion and uncertainty in a rehearing. Leading up to the rehearing, the New York City Bar Association (“NYC Bar”) submitted an amicus brief, citing the importance of avoiding confusion or impeding award enforcement “in what may be the United States’ most significant enforcement jurisdiction.” NYC Bar amicus br. at 1. The NYC Bar contended that the First Options line of cases, which concerns the intent of an arbitration agreement, did not apply to the enforcement of an arbitration award that “does not by its terms purport to bind non-signatories to the arbitration agreement.” Id. at 2. Instead, the NYC Bar contended that the enforceability of an award (as opposed to an agreement) against third parties “should be determined by legal principles concerning enforcement of awards or judgments under applicable state law, not by New York Convention and Federal Arbitration Act principles concerning the ambit of an arbitration agreement.” Id. at 3. The NYC Bar also explained that restricting an award creditor’s enforcement options according to the arbitration agreement “could invite an award debtor to engage in improper activity with impunity—such as transferring its assets and striking itself from the corporate registry,” which was what the purchaser was alleged to have done in this case. Id. at 9–10.

The Second Circuit issued a revised opinion, which no longer cites First Options or mentions “arbitrability.” Instead, the revised opinion provides, simply, that the “sole issue” for the district court on remand is the producer’s alter ego theory, to be evaluated under “applicable law in the Southern District of New York.” CBF v. AMCI, 2017 U.S. App. LEXIS 3815, at *43. The revised opinion is otherwise identical to the initial opinion.

This revised opinion represents an important clarification and simplification of the process for enforcing arbitration awards against third parties. It is now clear that, at least in the courts of the Second Circuit, not only is “confirmation” unnecessary, but once the award is in hand, there is no need to engage in confusing and uncertain analyses of arbitrability in order to determine the targets of all-important enforcement proceedings.