Freeman v. Complex Computing Co., Inc.

United States District Court for the Southern District of New York · Corporations

CorporationsPiercing the corporate veilArbitrationveil piercingequitable ownerarbitrationFAA section 4genuine issue

Facts

Freeman contracted with C3 to serve as an independent sales representative and was entitled to substantial commissions on sales to listed customers, including Thomson, and potentially to a percentage of merger or acquisition consideration under Section 8. After Freeman helped procure Thomson business, Glazier terminated Freeman's contract expressly to force renegotiation because he thought the compensation terms were too generous. Glazier then caused C3 to transfer substantially all of its assets to Thomson, while Thomson assumed most liabilities except C3's obligations to Freeman, and Glazier personally received a signing bonus, salary, and incentive compensation. After the transaction, C3 was essentially nonoperating and left with very limited assets, leaving Freeman as a general creditor of an essentially defunct corporation.

Issue

Whether Glazier used his control over C3 to commit a fraud or other wrong that resulted in an unjust loss or injury to Freeman, such that the corporate veil should be pierced and Glazier compelled to arbitrate Freeman's claim. The court also considered whether Glazier was entitled to a trial on that issue under FAA § 4.

Rule

An equitable owner may be compelled to arbitrate through veil piercing when he uses his control over the corporation to commit a fraud or other wrongful act that causes unjust loss or injury to the claimant. Under FAA § 4, a party resisting arbitration is entitled to a trial on the existence of an arbitration agreement only if he creates a genuine issue of fact by unequivocally denying the factual basis for being bound and producing evidence substantiating that denial.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Chicago, Lena Ortiz signed a sales-representative agreement with North Harbor Analytics, a software company, containing an arbitration clause. After Lena landed major accounts, the company's controller, Devin Cross, told colleagues her commission package was "too rich," terminated her to force a cheaper deal, then caused North Harbor to sell nearly all of its assets to a buyer that assumed most liabilities except Lena's commission claim; Devin separately received a lucrative employment package from the buyer.

If Lena seeks to compel Devin to arbitrate even though he never signed the contract personally, which is the strongest basis for doing so?

Explanation. The majority rule is that an equitable owner or controller may be compelled to arbitrate through veil piercing when he used control over the corporation to commit a fraud or other wrongful act that caused unjust loss or injury to the claimant. The facts support that inference because Devin terminated Lena to force renegotiation and then stripped the company of assets while preserving his own benefits. (Derived from Freeman v. Complex Computing Co., Inc. (n.d.).)