American Fuel Corp. v. Utah Energy Development Co., Inc.

Decision Date25 August 1997
Docket NumberD,No. 972,972
Citation122 F.3d 130
Parties134 Lab.Cas. P 10,047 AMERICAN FUEL CORPORATION, Robert Barra, Individually, and Robert Ainbinder, Individually, Petitioners-Appellees, v. UTAH ENERGY DEVELOPMENT COMPANY, INC., Respondent-Appellant, Robert C. Nead, JR., Respondent. ocket 96-7970.
CourtU.S. Court of Appeals — Second Circuit

Barry Hunter, Brown, Todd & Heyburn, Lexington, KY (Paul E. Sullivan, Robert L. Treadway, Jr., Russell B. Morgan, of counsel), for Respondent-Appellant.

James W. Perkins, White & Case, New York City (Karen M. Asner, Hyon J. Kim, of counsel), for Petitioners-Appellees.

Before: WINTER, Chief Judge, CARDAMONE, Circuit Judge, and WARD *, District Judge.

WINTER, Chief Judge:

Utah Energy Development Co., Inc. ("UEDC") appeals from Judge Sotomayor's order granting American Fuel Corporation's ("AFC") motion to compel UEDC to arbitrate UEDC's claims against AFC before the American Arbitration Association. The district court also ordered UEDC's president, Robert C. Nead, to arbitrate his claims and stayed prosecution of a lawsuit filed by UEDC and Nead against AFC in the Eastern District of Kentucky. The orders were based on an arbitration clause in an employment agreement between Nead and AFC. Although UEDC was not explicitly a party to the AFC/Nead agreement, the court held that the clause also bound UEDC to arbitration because UEDC was Nead's alter ego. UEDC seeks reversal of the district court's order to arbitrate on two grounds: (i) the district court erred in piercing the corporate veil and ordering UEDC to arbitrate its claims against AFC; and (ii) UEDC was entitled to a jury trial on the issue of whether

it should be compelled to arbitrate. Because we hold as a matter of law that UEDC was not Nead's alter ego, it is not bound by Nead's arbitration agreement. In view of this disposition of the appeal, we need not reach the question of whether UEDC was entitled to a jury trial.


In 1993, Nead and Stonie Barker formed UEDC with the intent to develop coal properties. Nead and Barker each own 50% of the stock of UEDC, although Nead claims that half of his interest is held in trust for one Lon Boggs.

AFC is a formative coal and energy recovery company with its principal offices in New York. In January 1994, AFC engaged Nead and Barker as consultants. Nead's consulting contract, renewable every two months, did not mention UEDC. Nead's primary responsibility as a consultant was to solicit new coal-investment opportunities for AFC. Barker's main responsibility was to act as AFC's agent for the sale of coal in Japan.

In late January 1994, Nead advised AFC to purchase a Utah property called the Hiawatha Mines. AFC did so in September 1994. The parties dispute the circumstances surrounding this purchase. Nead and UEDC claim that Nead presented the Hiawatha opportunity to AFC on behalf of UEDC, which had previously sought to buy the Hiawatha Mines for itself. UEDC claims that it agreed to step aside as a purchaser only in exchange for promises by AFC to use UEDC's loading services, to reserve certain portions of the Hiawatha Mines for UEDC to build a load-out facility, and to repay a $55,000 bank loan to UEDC (the "Hiawatha Agreement"). The complaint in the Kentucky action alleges that AFC also promised to employ Nead as a consultant to assist in the Hiawatha purchase. In contrast, AFC claims that Nead advised AFC to buy the Hiawatha property and disputes the existence of any agreement with UEDC.

In 1995, AFC offered Nead, Barker, and Boggs executive positions at AFC. In that connection, Nead signed an employment agreement that required him, inter alia, to arbitrate before the American Arbitration Association in New York "any controversy aris[ing] out of events or provisions related to or included within" the contract. The employment agreement provided that New York law would govern its construction and validity. However, AFC claims that Nead's employment contract was contingent on the success of a public offering that never occurred and that the agreement never became effective, notwithstanding a term of the agreement that provides for an effective date of March 1, 1995. UEDC agrees that Nead's employment agreement never became effective, although Nead, who is not a party to this appeal, may have a different view. Nead continued to work for AFC, at least as a consultant, until November 1995, when he was terminated for allegedly soliciting projects for UEDC from companies with whom he was negotiating as AFC's agent.

In January 1996, Nead and UEDC filed suit in the Eastern District of Kentucky. The complaint alleged, inter alia, that AFC breached the Hiawatha Agreement with UEDC and its employment agreement with Nead. AFC thereafter filed a petition in the Southern District of New York to compel arbitration of both Nead's and UEDC's claims pursuant to the arbitration clause in Nead's employment agreement. The district court found that the employment agreement bound Nead to arbitrate his claims because all the claims were "related to" that agreement. Although UEDC was not a party to Nead's employment agreement or even mentioned in it, the district court found that the agreement also compelled UEDC's arbitration of its contract claims against AFC because UEDC was Nead's alter ago. The court stayed prosecution of the Kentucky action pending the outcome of the arbitration.

On appeal, UEDC disputes the district court's finding of alter ego status. Nead has not appealed.


AFC's arbitrability claim with regard to UEDC is not facially strong. The district court's order compels UEDC to arbitrate the claims it asserted in the Kentucky action. Although the parties treat the matter only obliquely, much of the present dispute, therefore, turns on a reading of the complaint filed jointly by Nead and UEDC in the Kentucky action. In AFC's view, as expressed in a single sentence in its brief, the complaint alleges that UEDC seeks damages for, inter alia, AFC's breach of its employment contract with Nead. Appellees' Br. at 19. UEDC responds only by stressing that it is not a party to that agreement and is thus not bound by its arbitration clause. The nature of UEDC's claims in the Kentucky action is not unimportant because while UEDC might arguably be bound to arbitrate a claim asserted in its own right for damages suffered from a breach of the employment agreement, it is certainly not bound to arbitrate its claims for not being cut in on the Hiawatha mining operations or for AFC's failure to repay the $55,000 bank loan owed by UEDC, unless it is asserting the claims as Nead's alter ego. Even then, the claims would have to be founded on the employment agreement and its breach.

We do not view the Kentucky complaint as asserting a claim by UEDC in its own right for AFC's alleged breach of Nead's employment agreement. First, in the only count of the Kentucky complaint that explicitly seeks damages for breach of the employment agreement, Nead alone is mentioned as a plaintiff. Although the complaint asserts various legal theories to support a recovery by UEDC--breach of contract, breach of fiduciary duty, estoppel, and fraudulent misrepresentation--it is not fairly read as including claims by UEDC other than those stemming from AFC's breach of the alleged contract to cut UEDC in on the Hiawatha mining operations and to repay UEDC's bank loan in exchange for UEDC's refraining from its efforts to buy the property. Indeed, the complaint alleges nothing that would support a claim in its own right for damages for breach of Nead's employment contract. 1 Second, UEDC's insistence from the very beginning of the present action that it is not a party to Nead's employment agreement is itself a denial, binding in this and the Kentucky action, that it seeks damages for breach of that agreement.

Therefore, the only theory on which UEDC can be compelled to arbitrate is that it is asserting breach of contract claims regarding the purchase of the Hiawatha property as Nead's alter ego and that because Nead is bound to arbitrate under the employment agreement, so is UEDC. All this assumes that the dispute over whether AFC promised to cut UEDC in on the Hiawatha mining operations is within the arbitration clause of Nead's employment agreement as a "controversy aris[ing] out of events ... related to" that agreement. However, we need not reach that issue.

UEDC resists arbitration based on the principle that a party cannot be compelled to arbitrate unless it has agreed to do so. United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960) ("a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit"). Nevertheless, a "nonsignatory party may be bound to an arbitration agreement if so dictated by the 'ordinary principles of contract and agency.' " Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir.1995) (quoting McCallister Bros., Inc. v. A & S Transp. Co., 621 F.2d 519, 524 (2d Cir.1980)); see also Interbras Cayman Co. v. Orient Victory Shipping Co., 663 F.2d 4, 7 (2d Cir.1981) (per curiam) (granting trial on whether alleged principal-agent relationship bound nonsignatory party to arbitration agreement). In Thomson-CSF, we recognized that piercing the corporate veil between a signatory and nonsignatory party may bind the nonsignatory party to an arbitration agreement of its alter ego. 64 F.3d at 776.

Amidst their disagreements, the parties agree that UEDC cannot be compelled to arbitrate unless we uphold the district court's ruling that UEDC was Nead's alter ego for purposes pertinent to this proceeding. We believe, however, that ruling must be reversed.

In a diversity case, we apply the choice of law rules of the forum state--in this case New...

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