Corporate Veil Piercing Remains Powerful Tool in New York-Seated Arbitrations

In October 2024 an attempt by Egyptian businessman Michel Lakah to set aside a 2018 ICDR award was rejected by the United States District Court for the Southern District of New York (“SDNY”), marking what the Respondent creditors hope will be the end of a saga that has dragged on for nearly 20 years.  The judge, Loretta A. Preska, also granted long-awaited enforcement motions to Respondents in Switzerland, UAE, and Oman who had initially brought arbitration proceedings in 2006 in response to a default on $100 million in Eurobonds issued by Mr. Lakah’s company, Lakah Funding, which he ran with his brother Ramy Lakah. This marks the last in a series of challenges by the brothers to resist being held liable in their personal capacities to arbitration agreements in the bond documents and avoid the application of the corporate veil piercing laws available under the laws of New York where the arbitration was seated. 

In this Legal Insight, we outline the background to the dispute and analyze the SDNY’s findings and their implications.

BACKGROUND

On June 8, 2006, the UBS AG, Exporters Insurance Company, National Bank of Abu Dhabi, National Bank of Oman, and Arab Banking Corporation (“Respondents”) commenced an arbitration against Michel Lakah, Remy Lakah, as well as other companies, related to the issuance of $100 million in Eurobonds (ICDR Case No. 50-148-T-00251-06). The Lakahs (“Petitioners”) petitioned the Supreme Court of New York to stay the arbitration on the ground that they were not obligated to arbitrate because they did not sign the Eurobond transaction documents in their individual capacities. The action was removed to the SDNY, and Respondents filed a cross-petition to compel arbitration on April 16, 2007 on the basis that the Lakahs should be bound to the arbitration agreements on theories of veil-piercing and equitable estoppel. The parties then engaged in over nine years of litigation. On the eve of trial, the Petitioners moved for recusal of Judge Preska, which was denied. Petitioners thereafter declined to participate in the trial and consented to arbitrate the claims.

On February 14, 2007, the SDNY issued its Findings of Fact and Conclusions of Law (“FOF/COL”), granting Respondents’ cross-petition to compel arbitration ruling that Lakahs are bound to the arbitration agreements by the doctrines of equitable estoppel and piercing the corporate veil.

Arbitration then resumed, with the tribunal ultimately issuing (i) an award holding Petitioners jointly and severally liable in an amount exceeding $192 million plus interest, and (ii) an order dismissing Petitioners’ counterclaims and terminating further arbitral proceedings for non-payment of fees.

In 2019, Michel Lakah (“Petitioner”) then moved pursuant to the Federal Arbitration Act (“FAA”) to vacate the award and the order, claiming that the tribunal was “guilty of misconduct” in “refusing to hear evidence” and had “exceeded their powers.”  The SDNY denied both of Petitioner’s motions and granted a cross-petition by Respondents (Lakah et al. v. UBS AG et al., No. 07-CV-2799 (LAP), 2024 WL 4555701 (S.D.N.Y. Oct. 22, 2024)).

SDNY’S FINDINGS

The Petitioners claimed that the tribunal violated fundamental fairness because it (1) gave collateral estoppel effect to the  SDNY’s FOF/COL, (2) denied them a fundamentally fair hearing, (3) refused to conduct additional evidentiary hearings, and (4) treated Petitioners as parties to the first phase of the arbitration. The SDNY rejected all of Petitioner’s arguments to vacate the award for the following reasons:

1. COLLATERAL ESTOPPEL EFFECT OF THE FOF/COL

First, the SDNY rejected Petitioner’s argument that the FOF/COL did not have a preclusive effect on the tribunal because it was an impermissible judgment on the merits of the arbitration. The SDNY explained that the FOF/COL made determinations about arbitrability based on corporate veil-piercing and equitable estoppel. To make these determinations, the court was required to conduct a fact-intensive analysis of the record in finding that the Lakahs dominated and controlled the guarantor companies in a manner that harmed the Bondholders. Similarly, the SDNY reviewed the factual record to conclude that the Lakahs exploited the Eurobond agreements to receive direct benefits from them and were therefore bound by the arbitration agreements under the doctrine of equitable estoppel. These factual inquiries were directed to the threshold question of arbitrability and did not constitute a judgment on the merits of the dispute.

The SDNY further rejected the Petitioner’s arguments (i) that the tribunal improperly found the FOF/COL binding and exceeded its authority in doing so and (ii) for vacatur under the manifest disregard of the law doctrine, finding that the tribunal applied the relevant law to its decision.

2. PETITIONER HAD A FUNDAMENTALLY FAIR HEARING

The SDNY also rejected the Petitioner’s three arguments that he was denied a fundamentally fair hearing.

First, the SDNY rejected Petitioners’ argument that issue preclusion should not apply to the court’s FOF/COL because Petitioner never attempted to appeal the court’s denial of that motion, and this failure bars the Petitioner from arguing that the tribunal could not apply collateral estoppel to the FOF/Col.

Second, the SDNY ruled that Petitioner did not “effectively default” when he chose not to participate at trial, because he had significant involvement up until the eve of trial. Issues on default are not given preclusive effect. However, here, the Petitioner had a high level of involvement in the litigation prior to trial and thus did not “effectively default,” so that it was not fundamentally unfair for the tribunal to find that the FOF/COL was binding.

Finally, the SDNY held that petitioner’s last-minute consent to arbitration did not make the tribunal’s reliance on the FOF/COL a violation of fundamental fairness, as the FOF/COL was necessary to determine the issue of arbitrability as a threshold matter so Petitioner’s consent did not render the FOF/COL unnecessary.

3. REFUSAL TO HOLD MORE EVIDENTIARY HEARINGS

In addition, the SDNY held that the tribunal’s decision not to hold additional evidentiary hearings after the petitioner chose not to participate at trial did not deny the petitioner a fair hearing. The tribunal decided that Petitioner had ample opportunity to present evidence throughout the litigation, and the petitioner voluntarily and knowingly declined his opportunity to litigate at trial. Thus, the petitioner risked that the court’s FOF/COL would have a binding effect on the tribunal.

4. PETITIONER TREATED AS A PARTY IN FIRST PHASE OF THE ARBITRATION

Finally, Petitioner argued that he was not a party to the first phase of arbitration and thus could not offer evidence in his defense. However, the SDNY rejected that argument because Petitioner’s attorney made numerous appearances on behalf of Petitioner in the first phase of the arbitration.

ORDER TERMINATING THE ARBITRATION AND DISMISSING PETITIONER’S COUNTERCLAIMS FOR NON-PAYMENT OF FEES

Petitioner also moved to vacate the tribunal’s order terminating the arbitration and dismissing his counterclaims. The SDNY ruled that the order was not an award for purposes of vacatur. Under the FAA, courts may only vacate an award, or adjudicate on the merits. Here, the court reasoned that the termination and dismissal was solely based on non-payment of fees and did not address the merits of Petitioner’s argument. Thus, the SDNY held that it did not have the authority to vacate the order because it was not an award under the FAA.

IMPLICATIONS

This multi-decade dispute may finally be at an end, much to the relief of the creditor Respondents.  But the outcome is a cautionary tale worth heeding by parties who may believe that they cannot be bound to arbitration agreements by virtue of corporate structuring or refusing to participate in proceedings. 

The SDNY has confirmed its “strong presumption in favor of enforcing an arbitration award” in rejecting Petitioner’s arguments. This demonstrates how difficult it is for a party to vacate an arbitral award in New York under the theory of a violation of fundamental fairness.

Moreover, the outcome confirms that the use of the corporate veil piercing laws available in New York can be robustly applied by both arbitral tribunals and the courts to parties in arbitrations seated there to bind individuals personally to an arbitration agreement, regardless of whether the individuals involved are foreign or domestic.

It also demonstrates that a failure to pay fees can result in the dismissal of a party’s claims with no recourse to obtain a substantive judicial review, and a party’s decision to stop participation in proceedings will not be grounds for a defense to enforcement of an award against them.

This case serves as a reminder that New York remains an effective seat for international arbitration with a judiciary which actively supports arbitration and a strong presumption towards binding parties to arbitration agreements and enforcing arbitral awards.