As their owners, operators, and charterers are all too aware, foreign-flagged vessels calling in U.S. ports routinely face the threat of becoming entangled in U.S. civil litigation, such as through arrest and/or attachment actions. This can happen even when the underlying
litigation involves matters completely unrelated to the affected vessel. A recent decision from the U.S. Court of Appeals for the Fifth Circuit, Licea v. Curacao Drydock, No. 14-20619, 2015 WL 7445504 (5th Cir., November 23, 2015), highlights this particular aspect of the complex web of risks attendant to U.S. port calls.
2008: The Florida Human Trafficking Case against Curacao Drydock
The plaintiffs in Licea were seeking to recover a portion of a default judgement they had previously obtained in Florida federal court against Curacao Drydock Company. The earlier Florida case involved sensational and highly disturbing claims: according to court filings, the plaintiffs
were “victims of a forced labor scheme through which Curacao Drydock, in concert with and employing the full threat of the totalitarian
regime of Fidel Castro, trafficked them to Curacao and extracted their labor … Curacao Drydock, well-aware of the brutal tactics and repressive schemes that the Cuban regime employed to extract forced labor from Cubans, conspired with Cuba to take advantage of that forced labor by hosting an outpost of the Cuban forced labor system
Curacao Drydock initially appeared and defended itself
in the Florida case. However, at some point, Curacao
Drydock stopped participating and eventually the Florida
court granted default judgment on liability against Curacao
Drydock. In October 2008, the Florida court granted an $80
million judgment for the plaintiffs.
2013: Licea Plaintiffs Seek to Collect Their Judgment in Texas
Fast forward to 2013. As part of their international efforts to collect the judgment they had obtained, the plaintiffs registered their judgment in the U.S. District Court for the Southern District of Texas, whose jurisdiction includes the busy ports of Houston, Texas City, and Galveston. The plaintiffs then began filing garnishments against various entities that, while having no involvement at all in the underlying case, the plaintiffs believed were indebted in some manner to Curacao Drydock.
The three entities involved in the Licea appeal were from a “related corporate family”: Formosa Brick Marine Corporation (“FBMC”), Formosa Plastics Marine Corporation (“FPMC”), and Formosa Plastics Corporation, America (“FPCA”). FBMC and FPMC were overseas entities with no apparent contacts with Texas, while FPCA operated a large refinery in Texas and had a registered agent for service of process. Garnishee FPMC was the operator of two foreignflagged cargo ships, the M/V FPMC 30 and the M/V FPMC 19. The vessels were owned by a separate entity that was not a named garnishee in the action, but was apparently part of the same “related corporate family” as the garnishees. FBMC did not have any direct relationship with either vessel.
Perhaps because the underlying claims against Curacao Drydock did not fall within the categories of maritime tort or breach of contract,1 the plaintiffs did not invoke the garnishment remedies
available under Supplemental Rule of Admiralty B. Instead, they relied on Federal Rules of Civil Procedure 64 and 60, which provide that the law, both substantive and procedural, of the state where the federal court sits, governs writs of garnishment unless a federal statute provides otherwise, to invoke Texas state law garnishment remedies.
The plaintiffs were able to serve FPCA with a writ of garnishment through its registered agent in Texas. Service of the foreign entities was more problematic. Absent being able to invoke the arrest and attachment remedies of Rules C and B, which allow service to be made on vessels and other property located in the U.S., serving overseas entities can be a difficult, expensive, and time-consuming process. Perhaps in recognition of the foregoing, the plaintiffs attempted to effect service of process of the garnishments on FPMC and FBMC by having U.S. Marshals deliver the service papers to the masters of the M/V FPMC 30 and M/V FPMC 19 during separate Texas port calls.
The Texas District Court Awards the Licea Plaintiffs $2,639,000
FPMC and FBMC answered the writs of garnishment in the Houston federal court proceeding and moved to dismiss on the basis that the court lacked personal jurisdiction over them and that service of process was improper. FBMC admitted it owed $2,639,000 to Curacao Drydock, but FPMC denied any indebtedness. The plaintiffs then demanded that FBMC deposit $2,639,000 with the court, which FBMC did, subject to the motion to dismiss. The court denied the motion to dismiss, finding that the owner of the FPMC 19, garnishee FBMC, and garnishee FPMC were all “alter egos” of each other, and therefore, service on the master of the FPMC constituted sufficient service of process on FBMC and FPMC. The district court issued a final judgment on September 19, 2014, awarding the $2,639,000 to the plaintiffs. FPMC and FBMC appealed.
The Fifth Circuit Reverses on Appeal Due to Lack of Jurisdiction over the Garnishees
The Fifth Circuit reversed, taking particular issue with the district court’s findings on alter ego. Specifically, the Fifth Circuit noted that for jurisdictional purposes, Texas law uses the alter ego doctrine to determine whether “a corporation is organized and operated as a mere tool or business conduit of another corporation.” Under the doctrine, to “fuse” the parent company and its subsidiary for jurisdictional purposes, a plaintiff must prove the parent controls the internal business operations and affairs of the subsidiary to a degree greater than that normally associated with common ownership and directorship. Specifically, the plaintiff must have evidence that the two entities cease to be separate so that the corporate fiction should be disregarded to prevent fraud or injustice. There must be a “plus factor, something beyond the subsidiary’s mere presence within the bosom of the corporate family.” The Fifth Circuit noted that for evidence of alter ego, the district court had relied almost exclusively on two “organizational charts” submitted by the plaintiffs and purportedly obtained from the garnishees’ website. The Fifth Circuit held that the charts were simply not probative on the issue of alter ego, stating as follows:
- First, the charts do not actually depict corporate structure. There is no indication of ownership; they do not indicate which entity owns what, which entities are parents, or subsidiaries, or brother/sister. Nor is it even clear that the “entities” on the chart are formal entities, because they have no corporate form designations. Normal organizational charts make distinctions for, e.g., corporations, LLCs, disregarded entities, or foreign entities. Further, garnishees FPCA and FBMC are not even represented on the charts.
- Second, the charts do not show the functional relationship among the entities. The organizational charts show only the structure, but not the relationships between the Formosa entities. They do not indicate any “plus factor” that entails “something beyond the subsidiary’s mere presence within the bosom of the corporate family.” At best, they demonstrate mere affiliation, which is insufficient to pierce the veil, or common names, which are irrelevant to jurisdictional veil piercing. They do not even appear to show that the entities share common functions; the “Group Administration” boxes report to the Executive Board, but there is no indication that these functions are performed for the entities listed on the chart. In no way do these descriptions suggest control “greater than that normally associated with common ownership and directorship” or that the “entities cease to be separate so that the corporate fiction should be disregarded to prevent fraud or injustice.”
Based on the foregoing, the Fifth Circuit reversed the district court’s decision and remanded the case to the district court with instructions to dismiss it. The Fifth Circuit also ordered the return of $2,639,000 to FBMC.
The Licea opinion is a reminder to those involved in international vessel commerce of the critical importance of strictly maintaining corporate/business enterprise formalities at all levels of commercial operations. Even though the garnishees ultimately prevailed, the time and costs involved in achieving the victory were likely substantial, and had the Fifth Circuit not ruled for the garnishees, the costs could have grown exponentially. While U.S. port calls always involve the risk of arrest, attachment, and other civil litigation actions, paying attention to such details can undoubtedly play a significant role in mitigating these risks