Illinois Opinion Increases Liability Exposure of Parent Corporations
August, 2005
Our friends who handle casualty defense or risk management for parent corporations should be aware of a significant decision recently issued by the Illinois Appellate Court that could substantially increase the exposure of parent corporations to liability for injuries to subsidiary employees or third parties.
The case is: Forsythe v. Clark USA, Inc., 2005 WL 2397724 (Ill. App. 2005).
Facts
Clark USA is a holding company and sole shareholder of another corporation (Clark Refining) that operates a refinery. Two refinery employees were killed when a fire broke out during maintenance operations, and their estates brought wrongful death actions against Clark USA.
Clark USA’s motion for summary judgment on the ground that its subsidiary owned and operated the refinery, and that it, as the sole shareholder, owed no duty to the subsidiary’s employees, was granted by the trial court.
On appeal, plaintiffs argued that the parent was directly responsible for creating conditions in which the fire could occur, because it developed an “overall business strategy” that “focused on minimizing operating costs and limiting capital expenditures,” and that in imposing that strategy on the subsidiary, it required the subsidiary to cut costs for training, maintenance, and safety, and that as a result, inexperienced employees were used as maintenance mechanics, and their inexperience resulted in the deadly fire.
Analysis
A divided Illinois Appellate Court, First District reversed. The majority acknowledged that a shareholder corporation is generally not liable for a subsidiary’s conduct unless the corporate veil is pierced, and that plaintiffs did not claim they could pierce the corporate veil here.
However, it reasoned that plaintiffs could nonetheless prevail under a “seldom employed” exception to the general rule that it described as “direct participant” liability. The court acknowledged that Illinois courts apparently have not previously recognized the exception, but noted that it has been recognized by several authorities. Under the “direct participation” exception, liability arises from the parent’s direct intervention or intermeddling in the affairs of the subsidiary and particular transaction involved, in disregard of the normal procedure of corporate control through the subsidiary’s directors and officers and their direction of its affairs. In addition, the liability is “transaction-specific” and is limited to instances in which the parent’s intermeddling in the subsidiary’s affairs is directly tied to the subsidiary’s wrongful conduct.
The majority held that plaintiffs could prevail at trial under the “direct participation” liability exception, because they offered evidence that the subsidiary was following “the parent’s directions” to decrease capital spending to minimum sustainable levels when it cut expenditures for maintenance and safety, and that the employees’ deaths were arguably the proximate result of those cuts.
The majority also held that the parent could not invoke the exclusive remedy provision of the workers compensation statute, reasoning that it could not
assert, on the one hand, that it was merely a shareholder that owed no duty to the decedents, and, on the other hand, invoke statutory immunity available to an employer.
The dissent did not object to recognition of “direct participant” liability for parent corporations, but concluded that the evidence cited by the majority would not support a finding that the parent corporation had ordered the budget cuts.
Learning Point:
The Forsythe opinion will be published and thus become binding precedent. In addition to claims by injured employees of a subsidiary, the “direct participation” liability recognized in Forsythe could also subject parent corporations to claims by third parties injured while on a subsidiary’s premises or by a subsidiary’s employee. In the event this case is accepted for review by the Illinois Supreme Court, a decision could be issued in late 2006 or early 2007. Future issues of the CM Report will report on any significant developments in the case, and further discuss the decision and its ramifications. •
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