Bridas S.A.P.I.C. v. Government of Turkmenistan

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT April 21, 2006

_______________________ Charles R. Fulbruge III
Clerk
No. 04-20842
_______________________

BRIDAS S.A.P.I.C., BRIDAS ENERGY INTERNATIONAL, LTD.,
INTERCONTINENTAL OIL AND GAS VENTURES, LTD., and BRIDAS CORP,

Plaintiffs-Appellants,

versus

GOVERNMENT OF TURKMENISTAN, CONCERN BALKANNEBITGAZSENAGAT and
STATE CONCERN TURKMENNEFT,

Defendants-Appellees.

Appeal from the United States District Court
for the Southern District of Texas, Houston Division

Before JONES, Chief Judge, and DeMOSS and OWEN, Circuit Judges.

EDITH H. JONES, Chief Judge:

Bridas S.A.P.I.C. (“Bridas”) appeals the district court’s

vacatur of an arbitration award against the Government of

Turkmenistan (“Government”), a nonsignatory to an arbitration

agreement between Bridas and a government-owned oil and gas

company. Because the totality of the record demonstrates that the

Government should be bound as an alter ego of State Concern

Turkmenneft (“Turkmenneft”), we REVERSE and RENDER for enforcement

of the award.
 This dispute has been in litigation longer than the

agreement that spawned it. Bridas has pursued recovery against the

Government for an oil and gas development deal gone awry. The

catch has been that the Government was never a signatory to the

relevant contractual documents. Bridas has borne the burden,

before an arbitration panel and in federal court, of holding the

Government liable. This appeal, after remand to the district

court, represents the final refinement of numerous theories Bridas

advanced against the Government. We review the district court’s

conclusion on remand that the Government was not an alter ego of

Turkmenneft.

I. Background

In February 1993, Bridas, an Argentine corporation,

entered into a joint venture agreement (“JVA”) to exploit oil and

gas resources with an entity designated by the Government of

Turkmenistan, then recently liberated from the Soviet Union.

Turkmenistan was rich in resources, but poor in technical

expertise. Bridas was designated as the “foreign party” in the

Joint Venture Keimir (named for the region in which exploration

would be conducted). The “Turkmenian Party” to the agreement has

been an entity wholly owned by the Government, whose identity was

designated and re-designated at will by the President of

Turkmenistan and has changed a number of times during the life of

2
the joint venture.1 Turkmenneft is the last entity to step into

the role of “Turkmenian Party.” Under the JVA, the Turkmenian

Party was entitled to receive hydrocarbon production up to the

November 1992 levels, while the parties would split any subsequent

increase in production. The JVA secured an unlimited export

license for hydrocarbons.2

Notwithstanding that the JVA was intended to last twenty-

five years, the relationship among Bridas, the Turkmenian Party,

and the Government soured quickly. The Government insisted, among

other things, on raising its share of future proceeds. To force

Bridas’s submission, the Government ordered Bridas in November 1995

to halt operations in Keimir and cease making imports into and

exports from Turkmenistan.

Six months later, Bridas commenced an arbitration

proceeding, as provided in the JVA, against the Government and

Turkmenneft under the auspices of the International Chamber of

Commerce. After Bridas filed its arbitration complaint, the

Government dissolved the “Turkmenian Party” in the JVA, replacing

1
The original “Turkmenian Party” in the JVA was PA Turkmenneft. The
Government claims that PA Turkmenneft and its successors can trace their roots
back to 1922, and the founding of the Turkmen Oil Department by the All-Russian
Soviet on National Energy, and that the legal status and core functions of the
“Turkmenian Parties” remained essentially unchanged during the life of the JVA.
Even assuming that the assorted “Turkmenian Parties” assumed the responsibilities
and performed the functions of their predecessors, the constant restructuring of
Turkmenian oil concerns belies the Government’s contention that the “Turkmenian
Parties” were somehow identical.
2
Curiously, Bridas has successfully maintained another joint venture
arrangement in Turkmenistan concerning the hydrocarbon resources in a different
province.

3
it with Turkmenneft. The Government further abolished its Ministry

of Oil and Gas. More importantly, the Government decreed that all

proceeds from oil and gas exports in the country were to be

directed to a special State Oil and Gas Development Fund; the

fund’s assets were declared immune from seizure.3

The arbitration was held by agreement in Houston, Texas,

and covered nineteen days of trial proceedings plus the introduc-

tion of voluminous documentary evidence. A series of arbitration

decisions was issued during the next several years by a two-to-one

panel majority. Pertinent here, the panel held that the Government

was a proper party to the arbitration and that the tribunal had the

authority to adjudicate Bridas’s dispute with the Government. The

tribunal held both Turkmenneft and the Government liable for

repudiating the JVA. In early 2001, the tribunal issued its final

award of $495 million in damages to Bridas.

The dispute then moved to federal court in Houston as the

parties filed cross motions to confirm, modify, or reject the

arbitration award. The district court initially upheld the award,

concluding that the Government was bound by the JVA under

principles of agency and estoppel. This court, in Bridas

S.A.P.I.C. v. Government of Turkmenistan (“Bridas I”), 345 F.3d 347

(5th Cir. 2003), considered several theories that could bind a non-

3
Six months earlier, the Government had already begun attempting to
limit its exposure to liability when it passed a law expressly defining itself
as only the Council of Ministers.

4
signatory to an arbitration agreement: agency, alter ego, estoppel,

and third-party beneficiary.4 Rejecting all but one of those

theories, Bridas I remanded for further consideration of the alter

ego doctrine, as it found the district court’s analysis of this

“highly fact-based” issue incomplete and insufficient. The

district court was instructed to “take into account all of the

aspects of the relationship between the Government and

Turkmenneft.” Id. at 359-60. Because this court resolved other

issues concerning the award in Bridas’s favor, the sole issue on

remand was reconsideration of the alter ego theory.

The district court on remand reviewed many of the factors

identified by this court as pertinent and held that there was “an

insufficient showing of complete domination or extensive control so

as to warrant a finding that Turkmenneft was the alter ego of the

Government of Turkmenistan.” Bridas has appealed from the district

court’s resulting decision to vacate the award against the

Government.

II. Discussion

As was noted in Bridas I, federal courts are not bound by

the arbitration panel’s findings holding the Government liable to

4
The panel did not consider two other theories, incorporation by
reference and assumption, which Bridas had waived on appeal. Bridas I, 345 F.3d
at 356.

5
Bridas.5 Bridas I, 345 F.3d at 355-56. We review the district

court’s alter ego determination only for clear error. Zahra

Spiritual Trust v. United States, 910 F.2d 240, 242 (5th Cir.

1990). Any errors of law are not entitled to such deference and

are reviewed de novo. W.H. Scott Construction Company v. City of

Jackson, 199 F.3d 206, 219 (5th Cir. 1999).

A bedrock principle of corporate law is that “a parent

corporation . . . is not liable” for actions taken by its

subsidiaries. United States v. Bestfoods, 524 U.S. 51, 61, 118

S. Ct. 1876, 1884 (1998). The same concepts of corporate

separateness have been applied to business entities owned by

foreign governments. First Nat'l City Bank v. Banco Para El

Comercio Exterior de Cuba (Bancec), 462 U.S. 611, 623-27, 103

S. Ct. 2591, 2598-2600 (1983). However, courts will apply the

alter ego doctrine and hold a parent liable for the actions of its

instrumentality in the name of equity when the corporate form is

used as a “sham to perpetrate a fraud.” Pan Eastern Exploration

Co. v. Hufo Oils, 855 F.2d 1106, 1132 (5th Cir. 1988). In making

5
There is an air of unreality to the analysis in this opinion, first
because the JVA specified both that English law would govern the parties’
relationship, and the arbitral tribunal was to convene in Stockholm, Sweden. The
parties, however, agreed to arbitrate in Houston, Texas, and both parties have
relied exclusively on U.S. law. As these agreements do not have jurisdictional
consequences, this court is bound to decide a wholly foreign dispute that has
been fortuitously arbitrated in this country.
Second, while Bridas I noted the parties’ agreement that “federal
common law” governs this case, and we are bound by the earlier panel’s approach
under law of the case doctrine, this agreement rested on a fundamental
misunderstanding. It is highly unlikely that any uniform rule of federal law is
or should be involved here. See United States v. Jon-T Chemicals, Inc., 768 F.2d
686, 690 n.6 (5th Cir. 1985).

6
an alter ego determination, a court is “concerned with reality and

not form, [and with] how the corporation operated.” United States

v. Jon-T Chemicals, Inc., 768 F.2d 686, 693 (5th Cir. 1985).

Unlike the theory of agency, which interprets a contractual

relationship, Bridas I, 345 F.3d at 358, alter ego examines the

actual conduct of the parent vis-á-vis its subsidiary.

The alter ego doctrine, like all variations of piercing

the corporate veil doctrine, is reserved for exceptional cases. In

re Multiponics, Inc., 622 F.2d 709, 724-25 (5th Cir. 1980). The

doctrine applies only if “(1) the owner exercised complete control

over the corporation with respect to the transaction at issue and

(2) such control was used to commit a fraud or wrong that injured

the party seeking to pierce the veil.” Bridas I, 345 F.3d at 359.

Given the difficulty of analyzing the control factors in this case,

we first address the “fraud or injustice” prong.

A. Fraud or Injustice

To prevail, Bridas had to demonstrate that the Government

used its control over Turkmenneft to commit a “fraud or injustice”

against Bridas. See Bancec, 462 U.S. at 630, 103 S. Ct. at 2601;

Edwards Co. v. Monogram Indus., Inc., 730 F.2d 977, 984 (5th Cir.

1984). The Government asserts that only fraud – and no other type

of injustice – satisfies this prong of the alter ego test. Edwards

and other cases plainly envision a broader scope that includes the

misuse of the corporate form to promote injustice. See Edwards,

7
730 F.2d at 981, 984. In both Jon-T and Subway Equip. Leasing

Corp. v. Sims (In re Sims), 994 F.2d 210 (5th Cir. 1993), this

court explained that “fraud” may be required to pierce the

corporate veil in contract cases, because the party seeking to

utilize the doctrine has had the opportunity, during negotiations

with a subsidiary, to obtain assurances of payment from its parent.

Even there, however, the decisions acknowledge that the test may be

met through an “illegal act” or “[misuse of] the corporate form.”

Sims, 994 F.2d at 217-18. In this contract dispute, Bridas thus

had to connect the Government misuse of its “subsidiary”

Turkmenneft to the fraud or injustice against it.

In this case, the act of injustice on which the district

court focused was the Government’s 1995 export ban, which was

accomplished through “the Government’s exercise of sovereign

control of Turkmenistan’s borders, not through governmental control

of Turkmenneft.” The Government’s exercise of its sovereign powers

may have constituted a wrong to Bridas, but it was not a wrong

based on misuse of the corporate organizational form. Contrary to

the court’s conclusion, the 1995 export ban is not a “fraud or

injustice” for alter ego purposes.

This court may, however, affirm the district court’s

determination that the “fraud or injustice” prong was satisfied if

there is other evidence on the record, and argued by Bridas below,

to support such a holding. See Bickford v. Int’l Speedway Corp.,

654 F.2d 1028, 1031 (5th Cir. 1981).

8
 As it happens, there is ample evidence that after the

1995 export ban the Government misused Turkmenneft to harm Bridas

by destroying the value of the JVA. In 1996, when the Government

dissolved the Turkmenian Party and replaced it with Turkmenneft,6

Turkmenneft was initially capitalized with the equivalent of only

$17,000 U.S. and was funded by a State Oil and Gas Development Fund

expressly rendered immune from seizure under newly enacted

Turkmenian law. Yet Turkmenneft became the party bound to arbi-

trate under the JVA and liable for any adverse award. At the same

time, the Government issued a number of decrees distancing itself

from the joint venture and attempting to limit its potential

exposure to liability. The Government’s manipulation of

Turkmenneft to prevent Bridas from recovering any substantial

damage award satisfies the “fraud or injustice” prong. See Patin

v. Thoroughbred Power Boats, Inc., 294 F.3d 640, 648-49 (5th Cir.

2002)(piercing the corporate veil where a company transferred its

operations from one party to another to escape liability).

B. Control

The more difficult issue is whether the Government

exercised such complete control over Turkmenneft as to be its alter

ego. Bridas I held that the district court erred in failing to

6
This should not imply that the act of changing parties was an
indication of fraud or injustice per se, as such power was recognized in the
Turkmenian President by the JVA, and was approved of by Bridas on other
occasions. However, the Government’s manipulation of the Turkmenian Party in
this instance indicates that the Turkmenian Party was utilized to disadvantage
Bridas in any contractual dispute.

9
consider “the totality of the circumstances in which the

[corporation] functions.” Bridas I, 345 F.3d at 359. The panel

remanded to the district court with a long though non-exclusive

list of factors to consider in its application of the alter ego

doctrine. Id. at 360, n. 11.

Bridas I first identified twelve “private law” factors

commonly utilized by this circuit in making a corporate alter ego

determination:

(1) the parent and subsidiary have common stock
ownership; (2) the parent and subsidiary have common
directors or officers; (3) the parent and subsidiary have
common business departments; (4) the parent and
subsidiary file consolidated financial statements;
(5) the parent finances the subsidiary; (6) the parent
caused the incorporation of the subsidiary; (7) the
subsidiary operated with grossly inadequate capital;
(8) the parent pays salaries and other expenses of
subsidiary; (9) the subsidiary receives no business
except that given by the parent; (10) the parent uses the
subsidiary's property as its own; (11) the daily
operations of the two corporations are not kept separate;
(12) the subsidiary does not observe corporate
formalities.

Id. The court then referenced three more private law factors:

“(1) whether the directors of the ‘subsidiary’ act in the primary

and independent interest of the ‘parent’; (2) whether others pay or

guarantee debts of the dominated corporation; and (3) whether the

alleged dominator deals with the dominated corporation at arm’s

length.” Id. Finally, the panel instructed the district court to

take into account six “public law” factors held relevant in this

court’s cases, to determine whether a state agency shares the

state’s Eleventh Amendment sovereign immunity:

10
 (1) whether state statutes and case law view the entity
as an arm of the state; (2) the source of the entity’s
funding; (3) the entity’s degree of local autonomy;
(4) whether the entity is concerned primarily with local,
as opposed to statewide, problems; (5) whether the entity
has the authority to sue and be sued in its own name; and
(6) whether the entity has the right to hold and use
property.

Id. In all, the district court was given the task of evaluating

how up to twenty-one factors bear on the facts of this case.7

The district court ultimately concluded that the

Government did not “exercise complete domination or extensive

control” over Turkmenneft. The district court conscientiously

attempted to analyze the relationship between the Government and

Turkmenneft according to our opinion in Bridas I and prior case

law. We respectfully but firmly disagree with the district court’s

conclusion and find it clearly erroneous. The court’s error lay in

elevating the form over the substance of the relationship as it

pertained to the transaction with Bridas. Compare Jon-T, 768 F.2d

at 693 (stressing that in applying the alter ego doctrine, courts

must be “concerned with reality and not form”).

The court first examined the “formalities factors” in the

Government-Turkmenneft relationship.8 The court observed that the

7
We note that in Jon-T, 768 F.2d at 691-92, this court provided a
“laundry list” of factors that may be relevant in a corporate veil-piercing case,
but we commented that it may not be necessary to analyze each of them in every
case.
8
The district court included in this part of the discussion: whether
the parent and subsidiary have common stock ownership; common directors or
officers; common business departments; parent cause incorporation of the
subsidiary; subsidiary’s authority to sue and be sued in its own name;
subsidiary’s observance of corporate formalities; subsidiary’s right to hold and

11
Government caused the incorporation of Turkmenneft and that there

was some identity between high-ranking Government and Turkmenneft

officials. Further, Government officials attended the JVA’s board

meetings. More important to the court, however, were that

Turkmenneft’s “legal status was explicitly recognized on the face

of the JVA”; that Turkmenneft is “solely responsible for its own

obligations”; and Turkmenneft existed “as a juridical entity long

before the events in question.” The court also found that

Turkmenneft and its predecessors had the right to and did actually

hold and use property, and that Turkmenneft can sue and be sued in

its own name.

The court did not consider “all of the formalities

required by corporation law, including keeping separate books and

records and holding regular meetings of shareholders and of the

board of directors.” Jon-T, 768 F.2d at 693. Nevertheless, based

on the evidence that it considered, the court reached a plausible

outcome that Turkmenneft exhibited certain “corporate formalities.”

Those aspects of the equitable calculation are, however,

subordinate to ascertaining the reality of the corporate

relationship. Jon-T, 768 F.2d at 693.

use property.

12
 The court found, with regard to the “operations” factors,

that Turkmenneft was “operationally separate from the Government.”9

The court relied heavily on the assertions that Turkmenneft could

trace its origins back many decades within the structure of the

then-Soviet Union, but see note 1, supra, and that it had engaged

in joint ventures with other foreign concerns. The court recited

the arbitrator’s conclusion that under the JVA, “[Bridas] tended to

run the project as their own fiefdom, which to some extent by the

terms of the JV Agreement, it was.” Further, in two instances,

Turkmenneft officials had sided with Bridas against the Government.

On these grounds, the court found Turkmenneft was operationally

separate from the Government.

Immediately preceding that conclusion, however, and

contradicting it, the court described Turkmenneft as a “closely

held subsidiary, demonstrated by how the Government is continuously

changing the name of the organization,” and by how the Government

used its sovereign powers to force Bridas to give Turkmenneft a

financial advantage which would ultimately benefit the Government.

The court also found that the Government “did not really deal with

Turkmenneft at arm’s length.”

9
The “operations” factors include whether: parent and subsidiary have
common business departments; subsidiary receives no business except that given
by the parent; parent uses the subsidiary’s property as its own; separateness of
the two corporations’ daily operations; whether directors of the “subsidiary” act
independent and primary interest of the “parent;” whether the parent deals with
the subsidiary “at arm’s length;” impact of statutes on whether the entity is an
arm of the state; entity’s degree of local autonomy; and the entity’s concern
primarily with local, as opposed to statewide, problems.

13
 Although the balance of “formalities factors” and some of

the “operational factors” may be consistent with Turkmenneft’s

existence as an independent and self-supporting entity, the court’s

skepticism about Turkmenneft’s arm’s-length status is critical.

The Government manipulated Turkmenneft legally and economically to

repudiate the contract with Bridas and then render it impossible

for Bridas to collect damages. This conclusion is reinforced by

the court’s brief but revealing review of the “finances” factors.10

As the court noted, not only was the Turkmenian Party financed by

the Government, but when the Government created Turkmenneft as the

Turkmenian Party’s successor, Turkmenneft was grossly under-

capitalized with the equivalent of $17,000 U.S., a paltry sum to

finance oil and gas exploration and production. The court noted

the absence of any financial statement or balance sheet for

Turkmenneft, whether under U.S. or local law. Turkmenneft’s

revenues were diverted to a State Oil and Gas Fund that also

collected revenues from other state-owned entities. Although the

Government contends that the joint venture, not the Government,

paid the joint venture’s salaries and expenses, Turkmenneft’s costs

of arbitration have been paid entirely from the State Fund. The

court accordingly found that Turkmenneft was not financially

10
The “finances” factors include whether: the parent and subsidiary
file consolidated financial statements; the parent finances the subsidiary; the
subsidiary operated with grossly inadequate capital; the parent pays salaries and
other expenses of the subsidiary; others pay or guarantee debts of the dominated
corporation; and the source of the entity’s funding.

14
independent from the Government and that the Government used the

lack of financial separateness “to commit a fraud or another wrong

on plaintiffs.”

With this conclusion, we concur. Undercapitalization is

often critical in alter ego analysis. Gardemal v. Westin Hotel

Co., 186 F.3d 588, 594 (5th Cir. 1999); see also, Trs. of the Nat'l

Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk,

332 F.3d 188, 198 (3d Cir. 2003). The fact that Turkmenneft owned

producing rights and equipment that it contributed to the joint

venture does not in this case support a claim of financial

separateness, because such resources could only carry value if the

venture were allowed to keep its own revenues, which it was not.

Further, the Government changed the law to prevent Turkmenneft’s

assets from being seized by a creditor such as Bridas, after the

initiation of arbitration proceedings. The fact that a subsidiary

maintains what amounts to a “zero balance,” and relies exclusively

upon another entity to service its debts, is strong evidence that

the subsidiary lacks an independent identity. Hystro Prods., Inc.

v. MNP Corp., 18 F.3d 1384, 1389 (7th Cir. 1994); see also Nat’l

Elevator Indus., 332 F.3d at 198 (noting that an “element of

injustice or fundamental unfairness” is present where incoming

revenues are directed away from an undercapitalized corporation and

into the hands of the controlling party).

Despite some indicia of separateness, the reality was

that when the Government’s export ban forced Bridas out of the

15
joint venture, the Government then exercised its power as a parent

entity to deprive Bridas of a contractual remedy. Intentionally

bleeding a subsidiary to thwart creditors is a classic ground for

piercing the corporate veil. It is true that the standard for this

equitable remedy should be more stringent in breach of contract

cases, because the creditor has willingly transacted business with

a subsidiary and, as here, forewent the opportunity to obtain a

guarantee of Turkmenneft’s debts by the Government. The standard

is met in this case, however, because Turkmenneft assumed full

responsibility for its obligations under the joint venture. The

Government, as Turkmenneft’s owner, made it impossible for the

objectives of the joint venture to be carried out.

In this rare case, we are compelled to reverse the

district court’s finding and conclude that the Government acted as

the alter ego of Turkmenneft in regard to this Joint Venture

Agreement with Bridas.

Accordingly, the judgment of the district court is

REVERSED, and JUDGMENT RENDERED for Bridas authorizing enforcement

of the arbitration award.

16