Facts: M/V Adamastos was owned by Adamastos Shipping and operated by Phoenix Shipping. Both companies were owned and controlled by the Gourdomichalis brothers. The vessel was chartered to Pacific Gulf and sub-chartered. After the vessel ran aground in Brazil, Phoenix abandoned it and the cargo. The ensuing dispute culminated in a London arbitral award against Adamastos in favor of Pacific Gulf.

Unable to enforce the award against undercapitalized Adamastos, Pacific Gulf attached another vessel controlled by the Gourdomichalis brothers (M/V Vigorous) in Oregon. Pacific argued that the vessel’s registered owner (Vigorous Shipping), its 100% parent company which managed the entire fleet (Blue Wall), Phoenix, and Adamastos were alter egos of each other, since they were all controlled by the Gourdomichalises. The defendants posted security and moved to dismiss the complaint.

Despite extensive discovery (over 100,000 pages of documents and 12 depositions), the district court dismissed Pacific’s alter ego claims due to insufficiency of the evidence. Pacific appealed to the Ninth Circuit.

Ruling of the court: Ninth Circuit affirmed the dismissal of Pacific’s complaint.

To pierce the corporate veil in a maritime dispute in the 9th Circuit, a plaintiff must show (1) total domination by the controlling entity over the subservient corporation, as well as (2) injustice from treating the two entities as separate, and (3) that the controlling entity had fraudulent intent or intent to circumvent its obligations (conjunctive standard). This is despite the previous holding in Chan v Society Expeditions, Inc., 123 F.3d 1287 (9th Cir. 1997), which suggested that proof of either total domination or fraud/injustice was enough (disjunctive standard). Even though some federal circuits like the 2nd apply a more lenient disjunctive standard, the proper test in the 9th Circuit is that proof of all three elements is required to pierce the veil.

On the facts, Pacific presented insufficient evidence for a reasonable jury to find that Adamastos, Phoenix, Blue Wall, and Vigorous were alter egos of the Gourdomichalis brothers. The fact that other shareholders and directors of Blue Wall exercised little oversight over how the brothers managed the fleet and the bank accounts does not by itself mean that the brothers completely dominated Blue Wall and its subsidiary Vigorous.

Even if Blue Wall’s board left all ship management and banking decisions to the brothers, this does not show that any fraud or injustice as to third parties was committed. Mere evidence of overlap in stock ownership, management, personnel, contact details and insurance between the defendants is not enough to impose alter ego liability absent a showing of fraud or injustice. Lastly, an audit of the defendants’ books showed no intermingling of funds or raiding of bank accounts, despite minor irregularities.

Comment: the holding in Vigorous offers a welcome clarification of the applicable standard for alter ego claims in the 9th Circuit. Several older decisions in that circuit initially suggested that the test is conjunctive (i.e. stricter)¹. However, in 1997 that view has been thrown into doubt by the holding in Chan, which for almost 25 years has been interpreted as liberalizing the standard for veil-piercing in maritime cases. In an authoritative judgment discussing both potentially applicable tests, the panel in Vigorous re-confirmed that the stricter, conjunctive approach should apply.

On closer analysis, it may be that the 9th Circuit adopted an even more stringent test than other circuits adhering to the conjunctive standard. For instance, the 5th Circuit requires proof of only 2 elements – complete control and fraud or injustice to plaintiff². After Vigorous, plaintiffs in the 9th Circuit will likely have to jump through an additional hoop and show that the controlling company had an intent to defraud creditors or otherwise circumvent its contractual or statutory obligations.

In retrospect, the outcome in Vigorous may eventually backfire on the very maritime law firms which acted for successful owners. The new, more restrictive standard will likely lead to a reduction in the number of alter ego attachments (at least in the 9th Circuit), thus making the US a less attractive forum for maritime creditors overall.

This “shoot yourself in the foot” result is by no means the first such occurrence. For example, in the famous case Vimar Seguros y Reaseguros, S.A. v M/V Sky Reefer, 515 U.S. 528 (1995), counsel for the carriers persuaded the US Supreme Court to uphold foreign arbitration clauses in bills of lading governed by COGSA. Predictably, the decision in Sky Reefer led to the wholesale transferring away of many cargo claims to London arbitration and deprived US firms of a sizeable chunk of their dry work. ■

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