Opinion ID: 1366472
Heading Depth: 1
Heading Rank: 4

Heading: parent liability for torts of wholly-owned subsidiaries

Text: Liability of a parent for actions of a wholly-owned subsidiary in respect to a third entity can occur regardless of whether the subsidiary's separate corporateness is recognized. Where corporateness is recognized, agency principles apply upon which parent liability may be premised. Weisser v. Mursam Shoe Corp., 127 F.2d 344, 348, n. 11 (2d Cir.1942). Where one corporation is under the domination of another, the separate corporate entities or personalities might be recognized, treating the latter as principal and the former as agent, thus making the acts of the latter in effect the acts of the former. Henn and Alexander, Laws of Corporations, Ch. 7 ง 148, p. 356 (3d.ed. 1983). In Idaho, we have not had occasion to disregard the corporate entity of a subsidiary corporation, but have recognized that corporate identity may be disregarded where an individual had such a unity of interest and ownership that separate personalities of the corporation and individual no longer exist and where, if the acts at issue are treated as those of a corporation, an inequitable result would ensue. Chick v. Tomlinson, 96 Idaho 483, 531 P.2d 573 (1975); Surety Life Ins. Co. v. Rose Chapel Mortuary, Inc., 95 Idaho 599, 514 P.2d 594 (1973). Factors which influence whether the corporate veil will be pierced (and a subsidiary deemed an alter ego of the parent) include the obvious under-capitalization of the subsidiary; the failure of either the parent or subsidiary to adhere to corporate formalities; and the formation of the subsidiary to perpetrate a fraud. United States v. Jon-T Chemical, Inc., 768 F.2d 686 (5th Cir.1985); Middendorf v. Fuqua Industries, Inc., 623 F.2d 13 (6th Cir.1980). Regardless of the rubric under which liability is found (i.e. recognition of corporateness or not), the courts have tended to look for factors denoting the existence of control, domination, or unity of purpose, or subsidiary as a mere instrumentality. In Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984), the U.S. Supreme Court held a parent corporation and wholly-owned subsidiary incapable of conspiring with each other for purposes of Section 1 of the Sherman Act due to their unity of purpose or common design. The court stated: A parent and its wholly-owned subsidiary have a complete unity of interest. Their objectives are common, not disparate; their general corporate actions are guided or determined not by two separate corporate consciousnesses, but one. They are not unlike a multiple team of horses drawing a vehicle under the control of a single driver. With or without a formal agreement, the subsidiary acts for the benefit of the parent, its sole shareholder. Id. 467 U.S. at 771, 104 S.Ct. at 2741-42. Although Copperweld dealt with the unique issue of whether a parent and its wholly-owned subsidiary could conspire with each other for purposes of the Sherman Act, and although those cases which have cited to Copperweld are almost exclusively cases involving alleged violations of the Sherman Act, [5] at least one court has applied its principles in a different context. In SI Handling Systems, Inc. v. Heisley, 658 F. Supp. 362 (E.D.Pa. 1986), the court held that a wholly-owned subsidiary and its parent were essentially the same entity for purposes of ownership of alleged trade secrets, attributing ownership of technology acquired by the wholly-owned subsidiary to the parent, SI. Although in Copperweld the court was discussing a different issue, the validity of a parent-subsidiary combination as a basis for liability under the antitrust laws, we consider the description quoted above to be equally applicable to the situation which we here confront... . Thus, we do not find it damaging to plaintiff's claim of ownership of the alleged trade secrets, nor even particularly surprising, that there are no agreements between [the wholly-owned subsidiary] and its parent, SI, relating to a transfer of technology to SI since they are essentially one and the same entity. 658 F. Supp. at 370. The trend, then, under both Copperweld and SI Handling Systems, Inc., seems to indicate that courts are becoming more cognizant of the unity of interest between a parent and its wholly-owned subsidiary. However, the outcomes of cases necessarily result from the unique fact situations presented, and the focus must, of course, be upon the actual relationship between the parent and subsidiary, tempered by the court's own concept of justice, as was aptly detailed in NLRB v. Deena Artware, Inc., 361 U.S. 398, 403-04, 80 S.Ct. 441, 443-44, 4 L.Ed.2d 400 (1960). Yet as Mr. Justice Cardozo said in Berkey v. Third Ave. Railroad Co., 244 N.Y. 84, 95, 155 N.E. 58, 61, 50 A.L.R. 599, Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent. Where control is less than this, we are remitted to the tests of honesty and justice. This is not a complete catalogue. The several companies may be represented as one. Apart from that is the question whether in fact the economic enterprise is one, the corporate forms being largely paper arrangements that do not reflect the business realities. One company may in fact be operated as a division of another, one may be only a shell, inadequately financed; the affairs of the group may be so intermingled that no distinct corporate lines are maintained. These are some, though by no means all, of the relevant considerations, as the authorities recognize. (Emphasis added). A court's own inherent notions of justice remain the hallmark of more recent opinions in this area. In Environmental Protection Dept. v. Ventron Corp., 182 N.J. Super. 210, 440 A.2d 455 (N.J.Sup. 1981), the court found a parent, Velsicol, liable for the consequences of pollution caused by its wholly-owned subsidiary, WRCC, where [e]ven if Velsicol had not, in fact, dominated the affairs of WRCC (and it did), it had the ability through its 100% stock ownership to control those acts of WRCC which might affect the public and the environment. 440 A.2d at 462. Despite lack of either inadequate capitalization or substantially exclusive business with the parent corporation, Velsicol, the court pierced the corporate veil of WRCC because the separate corporate form ... unless pierced, might be a shield behind which Velsicol would be immune from liability for operations which it substantially controlled and from which it exclusively profited, resulting in massive mercury pollution to the public detriment and peril. 440 A.2d at 463. (Emphasis added.) Recent cases involving the specific relationship between Coast and Coleman have resulted in disparate results. In Ogg v. City of Springfield, 121 Ill. App.3d 25, 76 Ill.Dec. 531, 458 N.E.2d 1331 (Ill. App. 1984), Coleman was held liable for an electrocution accident involving a Hobie Cat and a low-hanging power line under strict liability theory. The jury found Coleman, as the parent, liable due to the control it exercised over Coast and the economic benefit it received from the manufacture of the Hobie Cat. A parent company which participates in the manufacture, marketing and distribution of an unsafe product or which derives economic benefit from placing it in the stream of commerce or which is in a position to eliminate the unsafe character of the product is liable for the loss caused by the product.... The jury in the present case heard testimony that in 1976 Coleman acquired all of Coast's stock and installed one of its own officers as chairman of the board and president of Coast. Coleman then instituted a policy requiring product development committee meetings every month at Coast. The committee was responsible for all design changes and Coast's existing products, including the Hobie Cat 16. Chief executive officers from Coleman received copies of the committee's minutes and attended several of the meetings. In addition, the Hobie Cat 16 instruction and assembly manual, issued in 1978, the year of the accident, stated that Hobie Cat was a Coleman Company product. After hearing the above evidence, the jury found Coleman liable for the injuries caused by the accident. Because Coleman exercised some control over the design of the Hobie Cat, was identified in some Hobie Cat literature and received economic benefit from the same of the boat, such facts proved a sufficient basis for the jury's findings. 76 Ill.Dec. 536, 458 N.E.2d at 1336. Conversely, in Hassinger v. Tideland Electrical Membership Corp., 622 F. Supp. 146 (D.C.N.C. 1985), the court found Coleman not liable for any damage caused by the Hobie Cat sailboat, as the evidence [did] not show complete domination and control by Coleman at the time the Hassinger Hobie Cat was designed, manufactured and sold. Coleman does not so dominate the finances, policies and practices of Coast Catamaran that Coast has no separate mind, will or existence of its own. 622 F. Supp. at 151. The Hassinger court noted that North Carolina law required that Coleman would only be held liable provided Coast's corporate entity was a mere shell, device or puppet of the shareholder or shareholders. 622 F. Supp. at 150. In view of these holdings, there appears to be no infallible measuring stick from which parent liability for torts of their wholly-owned subsidiary can be determined โ even in the specific Coleman/Coast context, although in the instant case the Illinois tests appear to be more appropriate than the unduly restrictive North Carolina tests. Accordingly, I would accord a jury verdict on the issue of whether Coleman exercised such control over Coast as was necessary to activate agency concepts the substantial deference we normally accord any jury verdict. That is, all reasonable inferences would be drawn in favor of the verdict and the verdict would not be disturbed unless the evidence and inferences are so clear that reasonable minds could not differ on them. Quincy v. Joint School Dist. No. 41, Benewah County, 102 Idaho 764, 640 P.2d 304 (1981); Goodwin v. Wulfenstein, 107 Idaho 492, 690 P.2d 947 (Ct.App. 1984). Here, however, we are presented with a jury verdict which gives us no firm indication of which view was taken on the agency issue. Instead, there are two possible interpretations of the answers to the jury instructions regarding the relationship between Coast and Coleman. One view points first to Instruction No. 13, which reads as follows: Do you find that Coast Catamaran Corporation and Coleman Company, Inc., under these instructions, are equally at fault by reason of their business relationship which was a proximate cause of the injuries to Michael Ross? The jury unanimously answered no. Question No. 14 then listed various entities (i.e. Ross, Idaho Power Company, unknown party, Coast and Coleman), with the jury to designate contribution to the cause of the accident by each: Question No. 14: We find the parties contributed to the cause of the accident in the following percentages: a. Michael Ross 10% b. Idaho Power Company 75% c. Unknown or Unnamed party 0% d. By reason of a yes answer to Question No. 13: Coast Catamaran Company, and Coleman Company, Inc. 0% e. By reason of a no answer to Question No. 13: (1) Coast Catamaran Company 10% (2) Coleman Company, Inc. 5% TOTAL 100% ..... In answering Question No. 14, use subparagraph d if you answered yes to Question No. 13; but use subparagraph e if you answered no to Question No. 13. (Emphasis supplied.) In answering Question No. 14, the percentages of causation you find attributable to each party, whether you use subparagraphs a, b, c and d; or you use subparagraphs a, b, c and e; must total 100% for all parties. One can interpret Instructions 13 and 14, when read together, as denoting a lack of relationship between Coast and Coleman โ agency or otherwise โ upon which liability might be imputed to Coleman, since the jury answered no to Instruction 13 and, thereby, responded to subsection e of Instruction 14. The words by their business relationship appear in Instruction 13, and, by their no answer, the jury's response could be interpreted to mean that there did not exist a business relationship between Coast and Coleman such as would lead to imputed liability. Further, in Instruction No. 34, the Seppi v. Betty, 99 Idaho 186, 579 P.2d 683 (1978) Instruction, the jury was informed that: ... If you find the plaintiff's negligence equal to or more than the total amount of negligence of either defendant or Idaho Power Company, he will receive nothing from that entity, regardless of the amount of damages you may find that he was sustained. To the extent that you find the plaintiff negligent in an amount less than any of these entities the total amount of damages sustained by him will be reduced by the amount of percentage of negligence you may attribute to him... . To the extent that the jury's answers can be interpreted as denoting a finding that Coleman and Coast were distinct entities for purposes of imputing liability, the jury's assessment of 10% negligence to plaintiff Ross, 10% to defendant Coast and 5% to defendant Coleman would indicate an intent on the part of the jury that Ross receive nothing from either Coast or Coleman. Another equally plausible interpretation of the jury answers determines that the jury did in fact make a finding that Coast and Coleman engaged in a composite business enterprise, which may, or may not, be the kind of interrelationship upon which liability could be imputed. Under this interpretation, the jury finding to Instruction No. 13 is read to be entirely understandable, since the jury had, in fact, found Coast and Coleman unequally negligent. Coast Catamaran was found 10% negligent, while Coleman was found 5% negligent. Ten percent and five percent are not equal amounts of negligence and, therefore, the jury finding to Question No. 13 was mandated by the jury's own assessments of negligence. This view also notes that an unequal allocation of negligence as between Coast and Coleman is not inconsistent with a finding that the two were involved in a composite business enterprise of the kind which might lead to imputed liability. One participant in a business venture may be more culpable than another. The view that the jury did, in fact, decide the imputed liability issue also gains credence when Instruction No. 26 is viewed: You may find Coleman Company liable for a defect in the design of the Hobie 16 sailboat, provided that you find all of the elements of product defect liability or negligence as required by these instructions previously given, were proved by plaintiff, and if you find that Coleman Company for a profit or other benefit participated in a composite business enterprise with Coast Catamaran Corporation whereby a consumer demand for a product and reliance upon the product was created by Coleman Company which placed a defective product in the stream of commerce. (Emphasis added.) It can be presumed that, when the jury returned a finding that Coleman was, in fact, 5% negligent, they did so with knowledge that such a finding could not be made unless they had already found Coleman Company engaged in a composite business enterprise with Coast Catamaran Corporation, as specified in Instruction No. 26. In short, this view maintains that it was a necessary prerequisite to a finding of any fault on the part of Coleman Corporation that the jury find the existence of a composite business relationship as between Coast and Coleman. As both of the views discussed above are equally plausible, we are left in a position where we simply cannot discern a definitive finding of the jury regarding the relationship between Coast and Coleman and I conclude that this is due to a failure to propound to the jury instructions designed to elicit a clear finding in this regard. While it is the duty of the party asserting the issues (here, plaintiff Ross) to give notice by requesting appropriate jury instructions, I.R.C.P. 51(a)(1); Joyce Brothers v. Stanfield, 33 Idaho 68, 189 P. 1104 (1920), I find that here the deficiencies in the instructions are not due to plaintiff's failure to request adequate instructions, but that counsel for defendants was at least equally the cause of the deficient instructions. In fact, it was defense counsel who argued that the issue of imputation of negligence not be included on the special verdict form (plaintiffs having argued for inclusion), stating: Well, I'm not going to suggest an instruction [on imputation of negligence] that, in effect, gives away the store and admits an imputation of negligence.... One thing you can obviously do is to leave it the way we've got it, and then, after we get the percentages, get down stream, and then come in and argue what should be done with them. [Plaintiff's counsel]: Oh, come on we can't argue the jury's verdict after they've given their verdict . .. We'd have to know clearly what the jury wanted to do ... [Defense counsel]: ... Accumulating is something the judges do all the time. They take and add one percentage to another percentage, if they see fit, and refuse to, if they don't see fit, and you don't ask the poor damn jury to be involved in the process. Accumulating is something that goes on all the time. In view of the deficiencies and confusion in the jury instructions, I would rule that the case must be remanded for new trial on the issue of liability. For guidance on retrial, I would agree with counsel for Coleman that the decision, whether to aggregate is for the trial court to make as a matter of law, based upon the evidence of the presence or absence of a composite business enterprise. Should the trial court desire to submit the issue of the business relationship to the jury for an advisory finding, the issue should be framed more cogently than was done here.