TNS Holdings, Inc. v. MKI Securities Corp.

• Citation: 663 N.Y.S.2d 144,243 A.D.2d 297
• Parties: , 1997 N.Y. Slip Op. 8354 TNS HOLDINGS, INC., etc., et al., Plaintiffs-Respondents, v. MKI SECURITIES CORP., et al., Defendants-Appellants.
• Decision Date: 14 October 1997
• Court: New York Supreme Court — Appellate Division

Page 144

663 N.Y.S.2d 144

243 A.D.2d 297, 1997 N.Y. Slip Op. 8354

TNS HOLDINGS, INC., etc., et al., Plaintiffs-Respondents, v. MKI SECURITIES CORP., et al., Defendants-Appellants.

Supreme Court, Appellate Division First Department.

Oct. 14, 1997.

Omar D. Lopera, for Plaintiffs-Respondents.

Meryl E. Wiener, for Defendants-Appellants.

Before MURPHY, P.J., and SULLIVAN, MILONAS and MAZZARELLI, JJ.

MEMORANDUM DECISION.

Order, Supreme Court, New York County (Beatrice Shainswit, J.), entered May 22, 1996, which denied the motion of defendants MKI Securities and MAI,PLC to stay an arbitration proceeding between plaintiffs and themselves, and directed all parties to arbitration, is modified, on the law and the facts, to the extent of granting the motion to stay the arbitration as to MAI only, and otherwise affirmed.

Between 1992 and 1993, plaintiff TNS Holdings, Inc. ("TNS"), formerly known as "Tradenet, Inc.," negotiated with defendant MKI Securities Corp. ("MKI") for the sale of TNS's primary asset, a software system designed to provide on-line trading information to bond brokers known as "Tradenet." MKI, a stock and bond brokerage firm with its main offices in New York City, is a wholly owned subsidiary of defendant MAI,PLC ("MAI"), an international financial, media and information services company based in London, England. Defendant Batchnotice, PLC ("Batchnotice") is also a wholly owned subsidiary of MAI and the sister corporation of MKI.

The negotiations between TNS and MKI led to a series of agreements entered into on September 3, 1993, including a Software Purchase Agreement, a Hardware Purchase Agreement ("hardware agreement"), and a Software Licensing Agreement ("licensing agreement"). TNS also alleges an oral employment agreement was made requiring MKI to hire key employees of TNS for five years. All the negotiations for the buyer's side were conducted by representatives of MKI. MKI was to be the sole beneficiary and user of the Tradenet software as well as the exclusive entity to market the software to third parties.

A short time before September 3, 1993, the date the hardware and licensing agreements were signed, MKI informed TNS that while MKI would execute the other agreements relating to the purchase, its subsidiary Batchnotice would execute the Software Purchase Agreement as buyer. Unlike the other agreements, the Software Purchase Agreement contained an arbitration clause stating: "For the purposes of this Agreement only, Buyer, Seller and each of the Shareholders hereby agree that all claims arising out of or relating to this Agreement shall be resolved by arbitration."

The instant dispute arose out of the alleged oral employment agreement. According to TNS, the agreement required MKI to employ Richard Zachar and George Bloukos and certain other lower level TNS employees for the 5-year duration of the Software Purchase Agreement. TNS further alleges that the income earned by its employees in bond trades on behalf of MKI, and the income generated by the use of the Tradenet software or its sale to third parties, were to be used as factors in determining the final purchase price for Tradenet.

In January 1994, MKI dismissed Zachar and Bloukos. In response, plaintiffs sent a letter to defendants informing them that the dismissals rendered all the agreements, including the Software Purchase Agreement, a nullity. Plaintiffs claimed that MKI's breach of the employment agreement would result in defendants obtaining the Tradenet software for "next to nothing," because, contrary to the agreement, the efforts of the TNS employees would not be factored into the calculation of the purchase price for the Tradenet software.

Plaintiffs commenced this action, and, in July 1994, moved by order to show cause for a preliminary injunction, and a temporary restraining order to prevent defendants from using, marketing or transferring the Tradenet software. Plaintiffs asserted that the agreements were null and void because, in response to the dismissals of the TNS employees, they had rescinded the Software Purchase Agreement prior to the defendants' actual execution of that agreement on March 4, 1994. Alternatively, plaintiffs argued that the termination of the TNS employees constituted a breach of the interrelated agreements by MKI and its "alter ego" Batchnotice, making TNS' performance impossible.

Defendants opposed the motion for injunctive relief, and moved for an order staying the action and compelling arbitration between plaintiffs and "Batchnotice Limited." Defendants argued that only Batchnotice signed the Software Purchase Agreement, and that the arbitration provision in that agreement required arbitration only between plaintiffs and Batchnotice. They further asserted that no breach occurred since their was no provision in the Software Purchase Agreement for the employment of the individual plaintiffs, or for the contributions of the those plaintiffs to be used as a factor in calculating the purchase price. Therefore, according to defendants, injunctive relief was inappropriate.

The IAS court, by order entered October 19, 1994, denied plaintiffs' motion for injunctive relief and granted defendants' motion to compel arbitration. Specifically, the court found that the dispute over the rescission and/or breach of the Software Purchase Agreement fell within the scope of the arbitration clause in that agreement, and ordered that "the parties are directed to proceed promptly to arbitration" (emphasis added). Given the finding of arbitrability of this dispute, the court denied the motion for a preliminary injunction and vacated the temporary restraining order.

Plaintiffs commenced an arbitration proceeding against all three defendants on April 12, 1996. Defendants MAI and MKI moved, by order to show cause signed May 7, 1996, to stay the arbitration as against them on the grounds that there was no agreement to arbitrate between TNS and MAI or MKI. In the order appealed from, the IAS court denied the motion, stating in pertinent part: "This court, on [defendants] application, ordered arbitration for all parties involved; it is not for defendants, 18 months later and having filed no appeal, now to challenge that order."

Defendants MAI and MKI contend that the IAS court erred in directing them to arbitration in the absence of any agreement on their part to arbitrate. It is established law that parties to a commercial transaction will not be compelled to arbitrate in the absence of an express agreement (see, Matter of Marlene Indus. Corp. [Carnac Textiles], 45 N.Y.2d 327, 333, 408 N.Y.S.2d 410, 380 N.E.2d 239; Matter of Smullyan v. SIBJET, S.A., 201 A.D.2d 335, 335-336, 607 N.Y.S.2d 316; CPLR 7503[b] ). An exception exists however where it is necessary to hold one corporation responsible for the acts of its subsidiary or "dummy" corporation, "to prevent fraud or to achieve equity" (Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 223 N.E.2d 6, quoting International Aircraft Trading Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249; see, Matter of Sbarro Holding, Inc., 91 A.D.2d 613, 614, 456 N.Y.S.2d 416).

For example, where one corporation acts as an "alter ego" of a second corporation, the second may be compelled to arbitrate a dispute although it is not a signatory to any arbitration agreement, which was signed by the alter ego (see, Matter of Sbarro Holding, Inc., supra; see also, Horsehead Industries v. Metallgesellschaft AG, 239 A.D.2d 171, 657 N.Y.S.2d 632; Matter of Lubin & Schlesinger, Inc. [Scheinberg], 234 A.D.2d 203, 651 N.Y.S.2d 502, lv. denied 89 N.Y.2d 814, 659 N.Y.S.2d 854, 681 N.E.2d 1301). The "alter ego" theory, in this context, is a variation of the principle of "piercing the corporate veil." However, New York courts, respecting the principle of independent corporate existence, will not lightly disregard the corporate form (Port Chester Elec. Constr. Co. v. Atlas, 40 N.Y.2d 652, 389 N.Y.S.2d 327, 357 N.E.2d 983). "[P]iercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury" (Matter of Morris v. State Dept. of Tax. and Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157).

In determining the question of control, courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation's debts by the dominating entity (Freeman v. Complex Computing Co., 119 F.3d 1044 [2d Cir.1997]; see also, Wm. Passalacqua Builders v. Resnick Developers S., 933 F.2d 131, 139 [2d Cir.1991] ). No one factor is dispositive (Freeman v. Complex Computing Co., supra ).

Contrary to the dissent, there is evidence in the record to establish that plaintiffs asserted their alter ego argument in the court below, and that Batchnotice indeed acted as an alter ego of MKI. The affidavits of TNS's president and its counsel, offered in their 1994 motion for injunctive relief, included the argument that Batchnotice was acting as an alter ego of MAI and MKI.

There is also ample evidence of control over Batchnotice by MKI. The negotiations regarding the sale of Tradenet to Batchnotice were conducted exclusively by representatives of MKI; no evidence exists that Batchnotice exercised any corporate independence or discretion; and the Tradenet software was to be used exclusively for MKI's benefit. Additionally, that Batchnotice's sole asset was the newly-acquired Tradenet software, and MKI guaranteed Batchnotice's performance...