International shipping is a high-risk business founded on mutual trust and limitation of liability principles. By its nature it involves vessels and cargoes on distant voyages beyond the immediate control of the principals involved.
Shipping ventures usually embody a multitude of parties and transactions. Often, parties to the ventures have never met.
Profits in shipping can be quite significant when compared with those realized in traditional shoreside business.
If the shipping venture is successful, the parties often become preoccupied with sharing profits and planning future enterprises. However, if the venture fails, an interesting phenomenon may occur. Thoughts of profits quickly change to threats of lawsuits among the participants in order to recoup investment losses.
Like their counterparts in shoreside business, participants in international shipping often incorporate their companies in order to limit personal liabilities that might arise from the risks of commercial ventures.
Commonly, shipowners use separate corporations for each of their vessels as an effective means of limiting personal liability. There is nothing immoral or illegal about limiting one’s personal liability by incorporating a business. Indeed, the greatest motive for incorporating is that the corporate structure permits individuals to limit their personal liabilities to the extent of their investments.
By a legal fiction, the corporation is regarded as an entity or person, separate and distinct from the individuals or shareholders who own it. The law permits the corporation to erect a barrier or corporate veil to separate the corporate assets and liabilities from those of the owners of the corporation. As a result of this corporate shield, corporate creditors may only look to the property and assets of a corporation for their security.
When corporations mislead creditors and evade responsibilities, the law will disregard the entities’ protection by piercing the corporate veil. This piercing concept is equitable in nature and designed to prevent individuals and closely associated corporations from escaping legal obligations by hiding behind corporate shields.
Admiralty courts have little difficulty in disregarding corporate entities and imposing personal liability in appropriate cases. A test for piercing the corporate veil in a maritime context was set forth in the Kirno case (618 F.2d 982). The case held that the individual must have used the corporation to perpetrate a fraud or have so dominated and disregarded the corporation’s form that the entity transacted the individual’s business, rather than the corporation’s.
A recent admiralty decision regarding piercing the corporate veil was issued on April 3, 1991, by the U.S. District Court in Connecticut. In the Bergesen case (Lexis 4365), federal and state laws were applied to pierce the veils of numerous real estate companies controlled by two individuals defendants in order to satisfy their shipping companies’ debts.
A Norwegian company (Bergesen) chartered tankers to Lexmar, Liberia. Lexmar, Connecticut, guaranteed the hire payments. Lexmar, Liberia, failed to pay hire, and Bergesen sued to attach the defendants’ real estate assets.
There are 36 corporate defendants involved in this case that are either in shipping or real estate. Two individuals effectively controlled and dominated all of them.
All the corporations operated with a common staff out of a single office in Greenwich, Conn.
The plaintiff claimed that the two individual defendants deliberately choreographed the movement of assets from the shipping corporations to the real estate defendants to render the shipping corporations incapable of paying their debts (hire). Over $52 million was transferred to the real estate group as unrecorded, unsecured, interest free loans.
The court found the two individual defendants derived enormous personal benefits from this filtration process. Both defendants lived in rent free incorporated palatial estates in Greenwich. Fifteen separate mortgages totaling $30 million were recorded on the defendants’ properties in Greenwich two weeks before the lawsuit was commenced. In one instance, a $4 million invoice evidenced a debt for carpentry work and renovations to these properites.
At present, the court has permitted plaintiff to place a lien on defendants’ real estate assets before the case is tried on the merits. The defendants now have filed a motion for reconsideration. The case, however, again illustrates that courts will not hesitate to disregard a corporate veil if justice so requires.