Casting a Wide Net: The Impact of US Law on International Transactions and Conflicts

INSOL World Q1 2015:

by Bryan Scott Perkinson – Director at KRyS Global USA

Introduction

Winston Churchill once stated, “you can always count on Americans to do the right thing – once they’ve tried everything else.” This attitude about American ways, probably shared far beyond the walls of Chartwell, may be correct; however, it can be dangerous if it leads to a failure to understand exactly how U.S. law might impact the outcome of an international transaction or conflict.

There are myriad areas where U.S. law might impact a transaction or conflict that has seemingly little to do with the U.S. The FCPA, U.S. tax law, maritime law, and insolvency law are a few examples of U.S. legal regimes that can affect an international transaction or litigation unless properly anticipated. This article emphasizes how imperative it is for parties engaged in international business (and the conflicts that inevitably result) to receive the proper guidance from professionals that understand the interaction of U.S. legal principles to foreign situations.

Flame S.A. and Glory Wealth Pte. Ltd. v. Vista Shipping et al.

Flame S.A. v. Vista Shipping is an excellent case study to analyze the potential impact of U.S. law on conflicts and insolvencies involving foreign companies. KRyS Global recently served as expert witness in this litigation.

In late 2013, two parties, Flame and consolidated plaintiff Glory Wealth, filed motions for an order of attachment in the District Court in Virginia requesting that the Court attach a ship, the CAPE VIEWER, which at the time was anchored in Norfolk, Virginia. The plaintiffs, Flame, a Swedish coal trader, and Glory Wealth, a Singapore-based shipping company, attached the vessel because they believed the ultimate owner of the CAPE VIEWER, Vista and its owner Viktor Baranskyi, had received fraudulent transfers from, and were in fact the alter egos of, Industrial Carriers, against whom the plaintiffs were judgment creditors. Industrial Carriers was an Ukranian-based shipping company incorporated in the Marshall Islands. Vista, a BVI company, Freight Bulk PTE Ltd., a Singapore company, Viktor Baranskyi, and Industrial Carriers, were named as defendants.

Viktor Baranskyi was an eighteen percent shareholder in Industrial Carriers and, together with his father, owned a majority share of the company. Industrial Carriers filed bankruptcy in Piraeus, Greece in the fall of 2008. Simultaneous with the bankruptcy filing, Viktor Baranskyi founded a new shipping company, called Vista, and began operating through that entity. Vista was a BVI company based in the Ukraine. Over the following five years Vista, acquired hundreds of millions of dollars of vessels and paid Viktor Baranskyi tens of millions of dollars in dividends.

Industrial Carriers attempted to file bankruptcy in Greece claiming that was its main place of business despite having most of its operations and employees in the Ukraine. No other voluntary or involuntary insolvency proceedings were ever commenced in any other jurisdictions. The filing was eventually dismissed by the Greek court for lack of jurisdiction in 2010. However, by that point Industrial Carriers had already shut down operations and defaulted on hundreds of millions of dollars of obligations.

Two of the parties on the opposite side of those obligations were Flame and Glory Wealth. Both parties pursued claims against Industrial Carriers after it defaulted on its obligations. Glory Wealth obtained an arbitration award in London that was recognized and converted to a UK judgment and was recognized in New York. Flame obtained a judgment in London and obtained recognition of that judgment in New York and Virginia. Judgments were brought in New York because Industrial Carriers had registered as a foreign business entity with the New York secretary of state. At some time following Industrial Carriers bankruptcy filing in 2008, both Glory Wealth and Flame identified Vista as a recipient of Industrial Carrier funds, a transferee of one of more profitable contracts, and a target for potential recoveries. In November 2013, a ship beneficially owned by Vista came into port in Norfolk, Virginia leading to the trial in Virginia District Court.

Using U.S. intermediary bank discovery, Glory Wealth’s U.S. counsel obtained wire transaction data from New York banks, which enabled it to recreate the financial history of the defendants that served as evidence supporting Glory Wealth’s claims. This discovery, available only in New York, allowed Glory Wealth to show the Court that all the defendants were linked. This third-party discovery was done at a time that defendants refused to produce any records in the Virginia litigation.

The litigation was complex and extended for eight months (notwithstanding the fact that the vessel remained at anchor off the coast of Norfolk full of coal and with an entire crew on board.) Although there was an abundance of interesting legal issues and extraordinary facts in the case, the highlights relevant to this article are as follows:

Law and Standards Applied

Both plaintiffs and all defendants in the case were foreign entities or citizens with their main centers of business in foreign locales. All events central to the claims held by the plaintiffs occurred outside of the U.S. All previous legal proceedings in the case had taken place in other jurisdictions. There had never been any voluntary or involuntary U.S. bankruptcy proceedings filed by or against the defendants. Notwithstanding all of those facts, the court applied U.S. law throughout the proceeding because the ship was anchored in the port at Norfolk. The relief Plaintiff’s sought from the Court was based on U.S. Maritime fraudulent transfer and alter ego principles.

Corporate law, governance, and standards were important issues in the case. These issues revolved around shareholders access to documentation, transparency, fiduciary duties, and other insolvency issues. Although defendants focused on the fact that business practices are different in the Ukraine, the Court stated at trial that Industrial Carriers was a Marshall Islands company and was governed by Marshall Islands corporate law. The Court also stated that Marshall Islands corporate law is based on Delaware corporate law and held the defendants to the standards applicable in Delaware. In fact, plaintiffs submitted legal authority to the Court that U.S. legal cases interpreting Delaware corporate law would be instructive in determining issues of corporate governance of Marshall Islands companies. As such, Grant Lyon, of KRyS Global, served as Glory Wealth’s expert on Delaware corporate governance and fiduciary responsibilities. The Court accepted Mr. Lyon as the forensic expert and an expert in areas of corporate governance under Delaware law. The Court heard testimony from Mr. Lyon, about fiduciary duties in Delaware, zone of insolvency issues, and other related topics that would not have been relevant had Delaware corporate standards not come into play.

Discovery

Throughout the litigation both Industrial Carriers and Viktor Baranskyi refused to provide any information requested by the plaintiffs. Viktor Baranskyi claimed that he did not have the information and could not gain access to it despite the fact that he and his father owned a majority of shares of Industrial Carriers. Even after the Court ordered defendants to produce the requested information, they refused. The Court ultimately sanctioned the defendants and imposed an adverse inference on any topics relating to information that the Court deemed should have been produced. The Court’s sanction also circled back to the application of Marshall Islands corporate law and Delaware standards. The Court determined that a) as a Marshal Islands corporation, Industrial Carriers had an obligation to maintain a proper level of documentation and book keeping and b) that Viktor Baranskyi, as a significant shareholder, had the right to obtain records from Industrial Carriers and could have sought to compel Industrial Carriers to produce such records by bringing a shareholder action under Marshall Islands law.

Numerous times throughout the trial the defendants attempted to challenge certain analyses conducted by KRyS Global and other plaintiff experts; however, the Court repeatedly applied the adverse inference and gave weight to circumstantial evidence provided by the plaintiffs due to defendants’ failure to produce documents. The defendants clearly underestimated the impact discovery would have on the outcome of the litigation.

Conclusions

Not only did the Court find that fraudulent transfers had occurred sufficient to justify the judicial sale of the ship, but the Court also found that the defendants were alter egos of Industrial Carriers and as such, potentially liable for all Industrial Carriers debts. The Court applied federal common law and “looked to state law” when necessary. Some of the federal maritime common law alter ego factors include the following: siphoning funds, failure to observe corporate formalities, non-functioning of officers, control by a dominant stockholder, intermingling of funds, and non-arms length transactions. The fact that such actions are commonplace in foreign countries did not have an impact on the analysis of the Court. By finding that Vista Shipping, Viktor Baranskyi, and Industrial Carriers are alter egos of one another, the Court established that they are each jointly and severally liable for the others debts.

It is unclear how any future litigations against the defendants will play out but both Flame and Glory Wealth have taken action elsewhere in the world based on the factual findings of the Court that would likely be followed in foreign jurisdictions. However, regardless of the extent of foreign action taken by Glory Wealth and Flame it is clear that, by obtaining counsel and other advisors with experience working at the intersection of U.S. law and foreign conflicts, the plaintiffs put themselves in the best possible position to recoup their losses. Conversely, the defendants’ continual failure to understand the implications of U.S. law and standards resulted in, not only the loss of the CAPE VIEWER, but potentially other assets as well.