Court says affiliates not free from liability

Real Estate Weekly, June 16, 1993

In a decision released recently, the Appellate Division of the New York State Supreme Court ruled that various affiliates and shareholders of Welton Becket Associates ("WBA") as well as design professionals employed by WBA may be bound by an American Institute of Architects ("AIA") form agreement signed in 1984 between WBA and a developer of a Manhattan office tower.

The agreement contained an arbitration clause. The court unanimously upheld a lower court's decision ordering disclosure and a hearing to determine who is required to submit to arbitration.

The developer's attorneys believe that the appellate decision may have ramifications for design and engineering professionals who believe they can limit risks by conducting their practices through related entities having similar names, overlapping personnel, and common control. The appellate decision, say developer's attorneys, casts doubt upon the efficacy of such arrangements.

The arbitration itself had been brought by the developer against WBA and other entities, including Ellerbe Becket Inc., The Ellerbe Becket Company, and Ellerbe Becket Architects and Engineers, P.A. As well, the arbitration respondents include individual stockholders and officers of WBA and individual architects who worked on the office tower.

The developer asserted that the entities and individuals who had not signed the agreement were nonetheless required to arbitrate because they were WBA's alter egos, successors or assigns. WBA and Ellerbe Associates Inc. in May, 1988 joined their architectural and engineering practices under the name of Ellerbe Becket.

The arbitration demand, filed in April 1991, has been described by the attorneys for the Ellerbe-related entities, in court-filed papers, as "seek[ing] approximately $50-million in damages" and as making "serious allegations of fraud, misrepresentation, conspiracy, architectural malpractice, breach of contract, tort, and violation of federal racketeering laws against The Ellerbe Becket Company, its various subsidiaries and officers, directors, design professionals and shareholders." Those attorneys advised the appeals court that, "If successful in the full measure, the $50 million demand would put Ellerbe Becket out of business."

The appeals court stated that it agreed with the lower court that various of the parties named as respondents in the arbitration "may be bound by the arbitration agreement by reason of being the signatory's [i.e. Welton Becket's] alter egos, successors and/or assigns, and that a hearing, and attendant disclosure, is needed in order to determine the relevant relationships and, ultimately, the proper parties to the arbitration."

In a related matter decided the same day, the New York appeals court affirmed the lower court's ruling upholding the scope of interrogatories which the developer had addressed to the respondents named in the arbitration demand. The interrogatories cover a ten year period, starting in 1982. The Ellerbe lawyers had objected to the interrogatories, arguing that the period involved 27 million pages of material located among 9,973 "bankers" and "transfile" boxes located in a Minnesota warehouse plus a comparable amount of materials in fifteen other locations. The lower court had upheld all but five of the interrogatories, stating that they sought information "that bear directly on the critical issues of alter ego and successor corporation liability, piercing the corporate veil and principal/agent relationships between and among the various [Ellerbe Becket] entities." The developer is represented by the law firm of Reid & Priest.