Piercing the corporate veil?

Piercing the corporate veil?    A U.S. Surface Transportation Board decision last fall highlights provisions in some ocean carriers' tariffs that could possibly hold not just the company, but also its principals responsible for the payment of freight. (West Point Relocation Inc. and Eli Cohen. FD 35290. Surface Transportation Board. Oct. 28, 2010; also Horizon Lines v. West Point Relocation. CV-08-6362. U.S. District Court for Central District California, Dec. 3.)
   West Point was a freight forwarder that arranged shipments of household goods between the mainland and Hawaii. Horizon said it carried 107 shipments for West Point from October 2007 to May 2008, and that West Point failed to pay bills totaling $410,207.48 for those shipments. Horizon sued West Point and Cohen in the U.S. District Court for the Central District of California on Sept. 26, 2008. Horizon identified Cohen as the principal and sole shareholder of West Point.
   West Point eventually sought bankruptcy protection.
   In trying to collect its freight, Horizon tried to use a provision it said allowed it to collect from Cohen. The tariff under which it sought to collect from Cohen stated the 'shipper, consignee, holder of the bill of lading, bill to party, owner of the goods and principals of said liable parties shall be jointly and severally liable to carrier for the payment of all freight ' charges.'
   Horizon said the tariff was incorporated into the terms of the 107 shipments by a clause found at the bottom of freight bills, invoices, and remittance copies sent to West Point that said: 'Shipments invoiced herein are subject to the terms and conditions of Horizon Lines tariffs as filed with the Surface Transportation Board.' The STB regulates Jones Act carriers much as the Federal Maritime Commission regulates international shipping.
   On Aug. 13, 2009, West Point and Cohen sought a declaratory order that the provision under which Horizon could hold a principal personally liable was an 'unreasonable practice' under 49 U.S.C. '13701.
   The matter was referred to the STB by the district court, and after a hearing last March, the STB issued its decision in October 2010 finding that the challenged tariff provision cannot hold an individual responsible for a corporation's debts when there is no other indication that the individual has expressly agreed to assume that obligation.
   On Dec. 3 the U.S. District Court dismissed Cohen as a defendant.
   West Point and Cohen argued that corporate law insulates individuals from personal liability for the corporation's actions, absent unusual circumstances, for example a showing of fraud or inequitable conduct.
   They asked the STB to declare Horizon's tariff unreasonable, arguing a tariff provision cannot, on its own, circumvent the legal protections afforded by the distinction between corporations and their officers.
   'There's law governing when the corporate veil may be pierced, but the mere fact that a corporation has financial difficulty, and is unable to pay all of its bills has never been sufficient justification for piercing the corporate veil,' said Brendan Collins of GKG Law, who represented West Point and Cohen before the STB.
   'There's been no allegation of fraud or anything that satisfies the criteria for imposition of personal liability under piercing the corporate veil standards,' he said during arguments last March.
   West Point and Cohen further argued that for a tariff to be reasonable, the carrier must provide actual notice of tariff provisions that are not mandated by law.
   Horizon, they said, had an obligation to provide specific notice that it sought to impose liability on the West Point 'principal' because the imposition is not mandated by law and runs counter to normal legal and commercial rules.
   But Horizon argued the tariffs were enforceable as valid and binding contracts for the shipments they govern and that the STB proceeding was not a matter of corporate 'veil piercing,' but instead merely a matter of strictly applying the tariff language.
   Horizon cited several U.S. District Court cases involving Maersk, in which similar tariff provisions were found binding as applied to 'officers' of a corporation.
   In a commentary on the STB decision posted on the Web site of the Toy Shippers Association, attorney David Street of GKG said, 'clearly, if you are an officer, director or shareholder in a company that ships cargo in international ocean commerce, these decisions do not make for comforting reading. If your company uses Maersk or Horizon Lines ' or any other steamship line with similar bill of lading or tariff provisions ' and falls on hard financial times, you might find yourself as the defendant in a case seeking payment of ocean freight charges. Not a pretty picture, is it?'
   In an affidavit, a Horizon manager noted some of Horizon's competitors employ similar language, pointing to an online tariff posted by Alaskan carrier Totem Ocean Trailer Express Inc. It's not clear how commonplace such clauses are.
   Horizon argued the collection provision was reasonable because it 'helps to create a system that promotes expeditious movement of cargo and relieves both shippers and Horizon of burdens associated with more complex credit and collection methods.' It also allowed Horizon 'to extend credit to small businesses that have minimal attachable assets and unknown credit status.'
   But the STB in a unanimous decision found the collection provision unreasonable as it applied to Cohen, because 'while the tariff is binding on parties operating under its terms, Cohen was not personally operating under the tariff.' And because 'West Point's operations under the tariff do not establish that Cohen intended to assume personal responsibility for any unpaid freight charges.
   'When courts have considered whether written provisions that purport to hold corporate officers or shareholders directly and personally responsible for corporate activity are enforceable, they typically evaluate whether those officers or shareholders have made 'personal guarantees,' ' the STB said. 'The collection provision that Horizon seeks to enforce here fails to satisfy these standards and is unreasonable.
   'Taken to its logical conclusion, Horizon's tariff interpretation could allow it to pursue individually the officers and shareholders of a multibillion-dollar corporation to satisfy corporate shipping debts, even though those officers or shareholders have not agreed to assume those debts,' the STB said.
   It said the Maersk cases Horizon cited, as well as a 2009 one Horizon brought, were not pertinent because they didn't address whether 'the tariff provisions imposing liability on principals, without some form of accompanying personal guarantee from those principals, are reasonable. Rather, they seem to take as a given that the tariff language is reasonable, and then simply apply a strict reading of that language.'