Rule B maelstrom – High Court Judgment, alter egos, collateral estoppel, and res judicata

February 24, 2016

Nearly every commercial transaction entails a certain degree of risk, and maritime business can present unique challenges for creditors.  Contracts are entered into with foreign entities that have no permanent presence within an accessible jurisdiction.  Assets may be shielded by a seemingly impenetrable thicket of corporate structures, making any attempt to ensure security precarious.  Debts can go unpaid, and a maritime creditor’s ability to address financial losses can appear extremely limited.

Maritime creditors often look to “Rule B” of the Supplemental Rules for Certain Admiralty and Maritime Claims for recourse.  Rule B was designed to address the transient nature of assets in the maritime industry, and permits creditors to seek pre-trial, ex parte attachment of assets belonging to a debtor that cannot be found within the jurisdiction.  Rule B actions are quasi in rem, meaning that the creditor-plaintiff essentially files a lawsuit seeking to seize property belonging to the debtor-defendant in order to provide security for the plaintiff’s underlying claim, which is often being arbitrated in a foreign proceeding.  If the assets are hidden through some other entity related to the debtor – the “impenetrable thicket of corporate structures” noted above – the plaintiff can still obtain Rule B attachment by showing that the other entity is the “alter ego” of the defendant.  Accordingly, it’s no surprise that alter ego issues have become increasingly common in U.S. maritime actions.

While proving alter ego is notoriously difficult, maritime creditors arguably have an edge in light of the ex parte nature of Rule B actions.  Simply put, there is often very little for the court to consider outside the alter ego allegations of the Rule B complaint, and the seizure of assets might be the first time a defendant learns of a Rule B action.  While these realities have generated some commentary about possible prejudice to defendants in Rule B actions, there hasn’t been as much attention paid to the potential legal repercussions that may result from unsuccessful attempts to attach assets allegedly controlled by a debtor’s alter ego. For example, if a plaintiff tries and fails to get a Rule B attachment against an alleged alter ego, is he or she precluded from trying again?

A recent decision from the United States District Court for the Southern District of New York addressed this issue.  In D’Amico Dry Ltd. v. Primera Maritime (Hellas) Ltd., 116 F.Supp.3d 349 (S.D.N.Y. 2015), the District Court considered a Rule 12(c) motion to dismiss a plaintiff’s action to enforce a foreign judgment against Primera.  The plaintiff, D’Amico, amended its complaint to add a number of individuals and entities that it alleged were the alter egos of the Primera. Sixteen of the alter ego defendants moved to dismiss the claims against them, arguing that D’Amico’s action against them was claim (res judicata) and issue (collateral estoppel) precluded by decisions from the United States District Courts for the Eastern and Southern Districts of Texas.

The defendant’s arguments were rooted in an in rem complaint and writ of arrest against a vessel from May of 2010 in the Eastern District of Texas.  Flame SA – a non-party to the d’Amico action – sought to enforce an English judgment against Primera by arresting the M/V Lynx.  The M/V Lynx was owned by Camela Navigation, Inc., another non-party to the d’Amico action that was allegedly an alter ego of Primera.  Flame SA successfully opposed Camela’s motion to vacate the attachment, and in June of 2010 d’Amico filed an intervening complaint seeking to enforce its own English judgment against Primera, naming only Camela and Primera as defendants. Neither Camela nor Primera ever responded to d’Amico’s complaint.

In July of 2010 a trial was held on the alter ego issue.  Shortly thereafter, Camela and Flame entered in a stipulation of dismissal agreeing to dismiss Flame’s claims and vacate its arrest of the Lynx.  The district court then issued an opinion discussing the relationship between Camela and Primera, but ultimately found that there was insufficient evidence to establish that Camela is the alter ego of Primera.  The district court noted that Flame had already vacated its arrest of the vessel, and ordered that d’Amico’s writ of attachment be vacated as well.  D’Amico eventually filed a notice of voluntary dismissal of its complaint pursuant to Rule 41(a)(1) of the Federal Rules of Civil Procedure, and the district court accordingly ordered the dismissal of D’Amico’s claims without prejudice.

D’Amico tried to enforce its English judgment against Primera again in January 2015, this time filing a complaint in the Southern District of Texas against Pasha Finance, Inc., another alleged alter ego of Primera.  D’Amico attached a vessel owned by Pasha, the M/T Cape Talara, pursuant to Rule B. Pasha was the only defendant named in d’Amico’s complaint. Shortly after D’Amico filed its complaint, the district court held a hearing to determine if the Rule B attachment should be vacated. Only D’Amico and Pasha appeared at the hearing, and the district court expressed concern that Pasha would not have any redress if the seizure turned out to be improper unless D’Amico provided some sort of counter-security while the alter ego issue was resolved.  At the end of the hearing the district court vacated the seizure without making any determination regarding the alter ego issue. Thereafter, D’Amico again voluntarily dismissed its claims without prejudice pursuant to Rule 41.

Turning back to the D’Amico action in the Southern District of New York, the alleged alter ego defendants in that case moved to dismiss d’Amico’s claims on the basis that they were precluded by the Texas actions noted above.  The District Court denied the defendants’ motion, noting that both of the Texas judgments were preliminary, fact-intensive, and collectively pertained to only one of the sixteen moving defendants, Pasha.  Because D’Amico voluntarily dismissed its claims without prejudice (meaning there was no adjudication on the merits), and the prior courts made no determination regarding the alleged alter ego status of the defendants involved in the Southern District of New York action, there was no preclusive effect.  Additionally, the District Court observed that the vacatur of a Rule B attachment is not a final judgment for the purposes of claim preclusion, and that “the plaintiff should not be barred from filing additional Rule B attachment motions to enforce the English Judgment simply because it filed one previously.” Moreover, the burden of proof associated with the prior actions was more stringent than the notice pleading standard associated with a 12(c) motion for judgment on the pleadings.

The District Court in D’Amico also rejected the moving defendants argument that they should be treated as in privity with Camela and Pasha because the plaintiff alleged that they too were alter egos of Primera.  The principle of privity bars re-litigating the same cause of action against a new defendant known by a plaintiff at the time of the first suit where the new defendant has a sufficiently close relationship to the original defendant.  The District Court found that it could not conclude that all sixteen defendants are in privity with Camela and/or Pasha based solely on the plaintiff’s allegations that the defendants are in privity with Primera; allegations which the defendants denied.

In other words, the D’Amico action was fundamentally different from the Eastern and Southern District of Texas actions because it involved different defendants.  While the Texas actions involved questions regarding Primera’s relationship with Camela and Pasha, the New York action involved the relationship between Primera and the alter ego defendants in that action. Rule B is a powerful tool for creditors seeking to satisfy debts owed by foreign entities, but the devil is in the details. Defendants must be prepared to challenge the sufficiency of alter ego allegations on a case-by-case basis, and plaintiffs may need to file multiple complaints seeking an attachment.