Invar Intl., Inc. v Zorlu Enerji Elektrik Uretim Anonim Sirketi
Annotate this CaseDecided on July 23, 2010
Supreme Court, New York County
Invar International, Inc. and Talex International, LLC, Petitioners,
against
Zorlu Enerji Elektrik Uretim Anonim Sirketi, Respondent.
650628/2010
APPEARANCES:
Attorneys for Petitioners:
PAUL WEISS, RIFKIN WHARTON
& GARRISON LLP
New York, NY 10019
By:Moses Silverman, Esq.
Robyn Tarnofsky, Esq.
Yael Fuchs, Esq.
Tara DiBenedetto, Esq.
Attorneys for Respondent: WHITE & CASE LLP
70 Thirteenth Street NW1285 Avenue of the Americas
Washington, D.C. 20005
By:Francis A. Vasquez, Jr., Esq.
Matthew S. Leddicotte, Esq.
Bernard J. Fried, J.
This is a petition under CPLR 7502, seeking a temporary restraining order and preliminary injunction in aid of arbitration, pending in Geneva, Switzerland, between Petitioners, Invar International, Inc. and Talex International, LLC (Invar and Talex, respectively) and Respondent, Zorlu Enerji Elektrik Uretim Anonim Sirketi (Zorlu). Respondent, a Turkish entity. According to the petition, any award issued would be rendered ineffectual if the provisional relief is not granted.
Primarily at issue is whether the Hague Convention on the Service Abroad of Judicial and Extra-Judicial Documents in Civil or Commercial Matters, Nov. 15, 1965, 658 U.N.T.S. 163 (Hague Service Convention), was violated by authorizing service in Washington, D.C. upon respondent's attorneys, White & Case LLP; and if not, whether service on White & Case was properly authorized under CPLR 311 (b), permitting service on a foreign corporation in a manner directed by a court, when traditional service is "impracticable." Personal jurisdiction is also at issue; as is whether, on the merits, there is a basis for the requested relief.
The events giving rise to this Petition are as follows: Petitioners, Respondent, and non-party ICFS entered into an Operating Agreement on or about January 31, 2006. The agreement set forth the parties' rights and obligations as members of ICFS, a limited liability holding company formed under Virginia law, with a principal place of business in New York. Invar, also formed under Virginia law and with a principal place of business in New York retains 24.5% interest in ICFS. Talex, a limited liability company formed under Virginia law with its principal place of business in Virginia, also has a 24.5% interest in ICFS. Zorlu is a Turkish corporation with its principal place of business in Istanbul, Turkey, and has a 51% majority interest in ICFS.
Together, the three companies form ICFS, which the parties intended to use in the facilitation of plans to own, develop, and manage power plants in Moscow, Russia. Construction of two power plants in Moscow has commenced. ICFS owns the plants through two wholly owned subsidiaries: Rosmiks B.V., a Dutch company owned 100% by ICFS, and Rosmiks LLC, a Russian company owned 100% by Rosmiks B.V.. Rosmiks LLC has 100% ownership of the plants in Moscow.
Pursuant to the Operating Agreement, "[a]ny dispute, controversy, or claim arising out of or relating to this contract, or the breach, termination, or invalidity thereof shall be settled by arbitration . . . in accordance with the Switzerland Arbitration Rules . . . ." (V. Pet. Ex. 1, ¶ 16.) The agreement designated Geneva, Switzerland as the arbitral location. (Id.)
At the end of 2007, the parties sought additional financing for the projects in Moscow. On or about December 12, 2007, Zorlu informed Invar and Talex that Bundoran, an independent third-party, unaffiliated with Zorlu, was interested in financing the projects. (V. Pet. ¶¶ 32-33.) Petitioners contend that these representations, which they allege were false and misleading (claiming Bundoran [*2]was, in fact, at that time an affiliate of Zorlu's), fraudulently induced them to agree to move forward with Bundoran on a loan agreement. (Id. ¶¶ 33-34.) The parties met in New York at ICFS's offices on or about January 24, 2008 for two days to finalize terms of the loan. Representatives from Invar and Talex, their counsel, and several representatives from Zorlu, including, Murat Bursa (Bursa), the CEO of Zorlu, were present.
In return for a $780 million loan from Bundoran to Rosmiks B.V., ICFS and the Rosmiks entities pledged their complete interests in the power plants to Bundoran as collateral in the event of default. The borrowers had a 120-day grace period after a notice of default to cure such default before Bundoran could foreclose upon the pledged collateral. Petitioners insist that if they had known of the alleged affiliation between Bundoran and Zorlu at that time, they would never have entered into the loan agreement. (V. Pet. ¶¶ 33-34.)
In February 2009, Zorlu notified Petitioners that it had "acquired" Bundoran. (V. Pet. ¶ 8.) Zorlu, the majority partner in ICFS, had, in fact taken complete ownership of the lender. Zorlu contends it was not previously affiliated with Bundoran. (V. Pet. ¶ 51.) Because Petitioners believed that the relationship between Zorlu and Bundoran, their lender, removed any incentive for Zorlu to prevent an event of default, they requested that the loan agreement be restructured in order to prevent an event of default predicated upon the actions or inactions of Zorlu or its affiliates, in addition to an extension for repayment. Zorlu agreed and the parties met on or about June 4, 2009 in Moscow to discuss restructuring the loan agreement. In an e-mail to Invar, dated June 14, 2009, Bursa referenced the meeting and wrote, "you can be sure that we are bound with our promises and Ahmet Zorlu's commitments. Regarding the amendments to the Bundoran Loan Agreement, our legal department is working on a draft that will be acceptable to everyone but it might take a couple of weeks . . . ." (V. Pet. Ex. 7.)
Based on the new terms as discussed by the parties, Petitioners approved a $20 million drawdown notice on the loan. In an e-mail to Zorlu dated June 15, 2009 Petitioners explicitly stated that the drawdown was a direct result of, and conditioned on, the parties' agreed upon loan restructuring which was to take place in the next couple of weeks. (V. Pet. Ex. 8.) Petitioners continued to approve drawdown requests based on the new terms of the loan as represented by Zorlu. However, the restructuring never took place and Zorlu did not respond to Petitioners' requests for discussions to finalize the new terms.
On March 11, 2010, ICFS, Rosmiks B.V.m and Rosmiks LLC received a default notice from Bundoran dated March 2, 2010. Bursa refused to direct Bundoran to refrain from foreclosing on the loan collateral. Instead, he insisted that the Rosmiks B.V. board send its request, in a letter, directly to Bundoran. However, according to comments made by Bursa during a trip to the projects in Moscow (as reported in an April 11, 2010 e-mail from a Rosmiks LLC Deputy General Manager), Zorlu does not expect Bundoran to honor this request and intends to acquire full ownership of the projects. (V. Pet. ¶¶ 57-58, Ex. 10.)
On April 29, 2010, a representative of Invar/Talex, an independent director from Rosmiks B.V.'s board, and Bursa (Zorlu's representative) attended a meeting of the Rosmiks B.V. Board of Directors in Amsterdam, Netherlands. The independent director and the Invar/Talex representative were interested in protecting their interests in the plants and avoiding foreclosure with the appointment of independent legal counsel for Rosmiks B.V.. Both voted as such, believing it to be in the best interests of Rosmiks B.V.. Bursa, voted against the proposal. Despite Petitioners' [*3]objections, on May 11, 2010 two Zorlu appointed managers for ICFS dismissed the independent director from the Rosmiks B.V. board and, instead, appointed two Zorlu affiliated directors. (V. Pet. ¶¶ 63-65.)
Another meeting took place in Amsterdam on June 14, 2010. A representative of Talex and Invar, Bursa, and the two new Zorlu affiliated board members attended. Once again, the Invar/Talex representative asserted that Zorlu, as sole shareowner of Bundoran, had the power to stop the lender from foreclosing and requested that it do so. Bursa did not deny he had the power, yet, again insisted that the Rosmiks B.V. board send this request to Bundoran. Respondent alleges that in its Verified Petition, dated June 15, 2010, Petitioners made a misrepresentation by stating that they did not know what this letter would say or when it would be sent. (V. Pet. ¶¶ 70-71.) However, when examining the various communications between the parties and the July 1, 2010 Affidavit of Alexander Razinski, the President of Invar, it is clear these allegations are unfounded. Various drafts were sent back and forth between the parties, as well as the final letter, dated June 18, 2010, from Rosmiks B. V. requesting that Bundoran not proceed with foreclosure. This letter is dated June 18, 2010. (Vasquez Affirm. Ex. 14.)
In a letter, dated June 22, 2010, Bundoran responded to this request: "In principal, Bundoran agrees to grant a temporary relief until 19 February 2011." (Vasquez Affirm. Ex. 15. (emphasis added)) Respondent argues that this letter shows Bundoran's lack of intention to foreclose upon Rosmiks B.V.'s interests in the near future and that no immediate need for the relief sought exists (Zorlu M.O.L. in Opp., p. 24). However, Razinski contends that stating "[i]n principal" is insufficient and an "actual or imminent threat of harm" still exists, as its agreement to postpone foreclosure hinges on compliance with several demands and conditions, which Rosmiks B.V. might not be able to meet to Bundoran's satisfaction. (Razinski Aff. ¶ 6, June 24, 2010.)
On April 15, 2010, Petitioners initiated arbitration against Respondent in Geneva, alleging that Zorlu fraudulently induced them into entering the loan agreement and subsequently breached its fiduciary duties by preventing the hiring of independent counsel. On May 25, 2010, Petitioners filed an Amendment to the Notice of Arbitration. Zorlu filed an Answer to the Amendment on June 14, 2010. In the Swiss Arbitration, Respondent is represented by U.S.-based counsel, White & Case LLP (White & Case).[FN1] [*4]
On June 15, 2010, Petitioners filed this Petition by Order to Show Cause. In its moving papers, counsel for Zorlu explained that because service under the Convention "would not be complete prior to June 25, 2010" (Silverman Affirm., ¶ 13), pursuant to CPLR 6313(b), he requested permission to serve the Order to Show Cause upon Zorlu's "attorneys in the related Swiss arbitration, White & Case, 701 Thirteenth Street, NW, Washington, D.C." As authorized, service was made upon White & Case. It is this service that is now at issue.
The threshold issue is whether the mandatory provisions of the Hague Service Convention were violated here; and if not, then as has been framed by the parties, the next issue is whether service it was "impracticable" under 311 (b), not under section 6313 (b).[FN2]
The argument that the Convention is mandatory, and that there was a failure to comply with its terms, can be quickly dispatched: certainly, the Convention is mandatory, and it "pre-empts inconsistent methods of service prescribed by state law in all cases to which it applies" (Volkswagenwerk Aktiengesell-Schaft v. Schlunk, 486 U.S. 694, 699 (1988). And there is no dispute that Turkey is a signatory to the Convention. However, as the Supreme Court has made clear, the Convention does not apply where the "service on a domestic agent is valid and complete under both state law and the Due Process Clause" (Id. at 707). This is because the Convention deals with service abroad, and it is only if the law of the forum state requires "the transmittal of [the complaint] abroad, then the Hague Service Convention applies" (Id. at 700). Or, in other words, as (now Circuit) Judge Gerard E. Lynch explained "the Supreme Court held that the Hague [Service] Convention does not preclude domestic service on a foreign corporation pursuant to state statute, where such can be accomplished" (Kwon v. Yun, 2006 WL 416375, *2 [S.D.NY, 2006]; contra Canwest Global Communications Corp. v. Mirkaei etc., 9 Misc 3d 845 [Sup. Ct. NY Cty., 2005][Hague Service Convention is mandatory; unless parties contract to alternative method of service).
The inquiry then, is whether the service on White & Case in Washington, D.C., was in accordance with the law of New York. If it was, then the mandatory provisions of the Convention do not apply. If it was not, then the service is ineffective here in New York, and Convention [*5]requires service abroad, i.e., in Turkey. CPLR 311 (b) provides that if service upon the foreign corporation within the 120 days allowed by CPLR 306 (b) or any other law"is impracticable...service upon the corporation may be made in such manner....as the court directs". Or as Professor David D. Siegel has characterized it: CPLR 311 (b) "allow[s] the court to invent a method upon a showing that the plaintiff can't make timely service on the corporation by the prescribed methods". (Siegel, New York Practice [4th ed.], p. 112). Of course, as Professor Siegel further points out, one should "[k]eep in mind" that this only deals with the "method of service - whom to serve in the corporate behalf - not amenability to jurisdiction" (Id). Petitioner acknowledged as much at argument: conceding that service "would not provide personal jurisdiction. We need to establish that otherwise, and we have done that under CPLR 302 by alleging — and it is uncontested because they've not put in an affidavit by anyone with knowledge — but it is alleged that a critical full day, and into the next day, a meeting took place in New York City where their CEO came to New York, negotiated the Bundoran loan agreement, and made the misrepresentations that are at the heart of our case; to wit, that Bundoran was an independent entity and so forth" (Tr. 7/6/10, p. 15).
It was evident from the papers submitted, and it is not disputed, that service upon Zorlu abroad under the Hague Service Convention could not have been accomplished prior to the date the petition alleges that the grace period expires, either July 9, 2010 or June 22, 2010. Thus, there was an adequate showing of impracticability, in light of the exigencies presented. It is no answer to contend, as does the respondent, that "Boundoran has stated in writing that it will forbear on enforcing the Loan agreement until February 2011 while the parties discuss restructuring" (Zorlu M.O.L in Opp., p.1), in view of the actual language of the writing, which prefaces this statement with the words "In principal" (Silverman letter, dated July 1, 2010, Ex., A). Clearly, not a commitment Invar could have relied upon in forgoing this request for provisional relief.; which, buttresses the statement made in the application for the Order to Show Cause, that formal service - abroad - under the Hague Service Convention "would not be complete prior to June 25, 2010" (Silverman Affirm., ¶ 13). This now leads to the question whether the service upon Zorlu's counsel in the Swiss arbitration, White & Case, was proper.
Here, petitioners knew from the filings in the arbitration, that Zorlu was represented by its United States-based counsel, White & Case, in Washington, D.C. This is undisputed. Under the circumstances, where "invention" was necessary, it was reasonable to expect that service in Washington D.C., upon the very counsel which was representing Zorlu in Switzerland, would provide it with "notice reasonably calculated, under all the circumstances, to apprise [the defendant] of the pendency of the action and afford [it] an opportunity to present their objections" (Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 [1950]). Indeed, certainly White & Case must have been in contact with Zorlu in relation to the arbitration in Switzerland. While predecessor counsel in the federal action may have been advised that White & Case stated it was not authorized to accept service of process for Zorlu [FN3], this was not known to present counsel when [*6]the Order to Show Cause was submitted. But in any event, even if White & Case had so advised present counsel, this still may not have defeated effective service, since White & Case was representing Zorlu in the Swiss arbitration and clearly was in contact with Zorlu., and this petition directly related to that arbitration (cf RIO Properties, Inc. v. RIO International Interlink, 284 F.3d 1007 [9th Cir. 2002]; see also Ehrenfeld v. Salim a Bin Mahfouz, 2005 WL 696769 [S.D.NY 2005][service on defendant's United States counsel permitted as an alternative means under FRCP 4([f][3][FN4].) Thus, it can hardly be claimed that the constitutional requirements of notice, i.e., the Mullane standard, were not satisfied by service in Washington D.C., on White & Case[FN5]. Meeting this standard, there can be no question that the service was proper under New York law (E.g., Kennedy v. Mossafa, 100 NY2d 1, 9 [2003]).
With regard to personal jurisdiction, at argument, Zorlu's counsel stated that "we have put in some factual evidence here, and if the Court doesn't feel that's sufficient, then we would have to go on and develop that more." However, I am satisfied that the petition's allegations are sufficient to facially demonstrate the existence of personal jurisdiction under CPLR 302 (a)(1) & (2).
Initially, it appears to me that Petitioner has met the traditional three-pronged test for such relief, and in addition, has established that a mandatory injunction is necessary to maintain the status quo. It seems evident, that there is a basis to conclude that absent such relief, an arbitration award would be rendered ineffectual. Implicitly recognizing this is Zorlu's assertion that "Bundoran has stated in writing it will forbear on enforcing the Loan Agreement until February 2011...." The flip side, of course, is that if it does not, the award would be rendered ineffectual. However, as noted earlier (p. 8), this is a promise in "principle" only. Consequently, to ensure that there will not be action on the Loan Agreement until there is in place an arbitral panel in Switzerland, which once constituted will be able to issue any necessary interim relief during the pendency of the arbitration, the requested preliminary mandatory injunction is granted. Additional discussion is unwarranted. [*7]
Furthermore, since it is claimed Bundoran "will forbear on enforcing the Loan Agreement until February 2011, there is no reason to require Petitioner to provide an undertaking as requested by Zorlu "of at least US$10 million - the amount that Zorlu...has requested in damages in the Swiss Arbitration" (Zorlu's M.O.L in Opp., p.25). This request, suggests that perhaps the claimed forbearance is really in "principle" only; or if not, then it would be unnecessary. I take seriously Zorlu's counsel's statement that there are no "new legal proceedings imminent prior to the constitution of the arbitral tribunal in the Swiss Arbitration." (Id. at p. 1). Therefore, I decline to exercise my discretion and require an undertaking.
Accordingly, this motion for a Temporary Restraining Order and Preliminary Injunction is granted.
Dated:July 23, 2010
________________________________
J.S.C. Footnotes
Footnote 1:
On April 16, 2010 Petitioners - by different counsel - initially sought similar interim relief in the United States District Court for the Southern District of New York. After obtaining an Order to Show Cause, Petitioners' realized that diversity of citizenship did not exist. On June 16, 2010, Allie Lin, Petitioners' counsel in the federal action, faxed a letter to the district judge explaining the situation and asking for dismissal. (Lin Affirm. Ex. A.) The same day, Respondent's counsel, White & Case, responded to an April 19 requesting that White & Case wave service, stated in a letter delivered via UPS that they were not authorized to accept service of process on behalf of Zorlu and refused to consent to waive formal service pursuant to Rule 4(f) of the Federal Rules of Civil Procedure. (Vasquez Affirm. Ex. 5.) A request for consent to dismissal was e-mailed on June 18, and on June 22, White & Case consented to dismissal of the federal action via e-mail. In the June 22 e-mail, White & Case added, "As we stated in our letter on June 16, 2010, White & Case is not authorized to accept service on behalf of Zorlu Holding or Zorlu Enerji." (Lin Affirm. Ex. B, D.). On June 30, 2010, the federal action was dismissed.
Footnote 2:
Section 6313(b) provides that "[u]nless the court orders otherwise," service of an Order containing a "temporary restraining order" is to be "in the same manner as a summons". While the TRO was not signed at the time the OSC was brought, it was evident that there was insufficient time to comply with the Convention. Consequently, I authorized service in the manner requested. There was not a separate request CPLR 311 (b), to determine that service of the Order to Show Cause, containing the Petition and the Request for both a TRO and a preliminary injunction, that service within the 120 day requirement of CPLR 306-b "is impracticable under...any other law [Convention"]. Zorlu has argued that even if the requirements of the Convention could be avoided, "[p]etitioners have still failed to establish why such service would be impracticable as required by NY C.P.L.R. 311 (b)" (M.O.L. in Opp., p.2). This argument was repeated at the June 24, 2010 argument (Tr., pp. 11, 19-20). Discussion of section 311 (b) continued in the supplemental briefing (M.O.L. in Further Support, pp 1-2; Zorlu M.O.L. in Further Opp., pp. 1-3).. No mention has been made of section 6313 (b) by either of the parties.
Footnote 3:
Broman v. Stern, 172 AD2d 475 (2nd Dept. 1991) relied on by Respondent for the argument that because "[t]here is no evidence that White & Case [was] authorized to accept service of process" (Zorlu's Supp. M.O.L. in Further Opposition, p. 4), this Petition should be dismissed, did not involve section 311 (b).
Footnote 4:
Rule 4(f)(3) governs service of process overseas; however, it permits a court to fashion service "by other means not prohibited by international agreement, as the court orders." There is no comparable New York statute.
Footnote 5:
The cases cited by Respondent for the proposition that in New York "service on a respondent's counsel, even when directed by court order does not effectuate proper service on the respondent for purposes of personal jurisdiction" (Zorlu's Supp. M.O.L. in Further Opp., p. 3), when analyzed do not stand for that proposition. Carlton Boiler Repair, Inc. v. D.N.G. Ass'n, Inc., 2007 WL 4856389 (Sup. Ct., NY Cty., 2007) explicitly held that the order permitting service on an attorney did not find that service under section 311 (b) was impractical; David v. Total Identity Corp., 50 AD3d 1484 (4th Dept. 2008) also held that there was a failure to show that service was impracticable.
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