iPayment, Inc. v. 1st Americard, Inc., No. 15-cv-01904 (S.D.N.Y. Feb. 23, 2017) [click for opinion]

1st Americard and iPayment entered into an asset purchase agreement in May 2013, pursuant to which iPayment paid 1st Americard about $5 million. The agreement contained an arbitration clause. Although Kelly Grainger (sole shareholder and president of 1st Americard) and Greg Grainger (CEO of 1st Americard) were not parties to the agreement, iPayment initiated arbitration against the Graingers and 1st Americard for, inter alia, breach of contract. In March 2015, the arbitrator issued a final award against 1st Americard and the Graingers, finding that the Graingers were "proper parties" in the arbitration because iPayment satisfied its burden of proving that piercing the 1st Americard corporate veil was appropriate.

iPayment brought an action to confirm the arbitral award. Defendants moved to vacate the award as to the Graingers individually, as they were not parties to the agreement. The district court confirmed the award as against 1st Americard, "but deferred determination of whether to confirm it as to the Graingers pending further briefing on whether the evidence supported piercing the veil and holding the Graingers accountable for 1st Americard's breaches."

In its decision to substantively review the arbitrator's decision to pierce the corporate veil and accept new evidence not previously submitted in the arbitration, the district court relied on the Third Circuit decision in Kaplan v. First Options Chicago, Inc., which similarly considered alter ego liability de novo, where the parties did not explicitly assign the issue of arbitrability to the arbitrator. The court also cited a 2017 decision from the Southern District of New York, where the district court stated that, absent an express agreement to arbitrate arbitrability, the court reviews de novo the tribunal's decision to bind a non-party to the agreement.

The question of whether the Graingers were bound by the arbitral award thus turned on the question of arbitrability of issues arising from an agreement to which the Graingers were not parties. The district court held that it "can and should consider any admissible evidence presented by the parties and that 'de novo review' in this context means simply review without the deference traditionally given to the decision of an arbitrator on the merits."

In considering this evidence, including new evidence withheld by defendants in the arbitration proceeding, the district court found that iPayment satisfied its burden of establishing that 1st Americard was in fact the alter ego of the Graingers. It found that there was more than enough evidence to conclude that the Graingers "exercised complete domination" of 1st Americard in respect of the transaction at issue.

The arbitration award was confirmed as to all three defendants jointly and severally. The district court also awarded iPayment its reasonable attorneys' fees pursuant to the asset purchase agreement.