Opinion ID: 503762
Heading Depth: 2
Heading Rank: 5

Heading: Parental Liability

Text: 60 The district court entered judgment in favor of Phoenix on its breach of contract claim for undercalculated royalties for the final quarter of 1973 and the first two quarters of 1974. Phoenix also had sought to extend that liability to the parent corporations, Texaco, Inc. and Gulf Oil Corporation. The district court denied this request. 61 Proceeding only on the basis of an agency theory of parental liability, the district court ruled that the parent corporations would not be liable for the actions of their subsidiaries. The court found that the parents and the subsidiaries here shared several common officers and directors, though their boards otherwise were separate. The parents also participated in the substantial financial dealings of the subsidiaries, who were required to secure approval from their parent corporations for large investments and acquisitions or disposals of major assets. 62 On the other hand, the subsidiaries kept separate books and records, maintained their own bank accounts, paid their own taxes, and were responsible for their own day-to-day operations in Ecuador, including drilling oil wells and constructing the pipeline. Relying on Japan Petroleum Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F.Supp. 831 (D.Del.1978), the district court concluded that it can hardly be said that the facts presented to the court in this case show complete domination or control by Texaco and Gulf over their subsidiaries. Phoenix IV, 658 F.Supp. at 1085. 63 The relationship between parent and subsidiary corporations has been a fruitful source of litigation and although the case law on the subject is extensive, it is neither uniform nor clear. Some decisions apply an agency theory to assess parental liability, others focus on an alter ego basis, and some speak in terms of piercing the corporate veil. Much of the confusion stems from a failure to distinguish between subsidiaries treated as independent entities and those in fact not independent, but considered part of the parent corporations. 64 Courts most often pierce the corporate veil where fraud would result if the corporate structure were allowed to shield shareholders from liability. Thus, in DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 685-87 (4th Cir.1976), the court noted that independent corporate status may be disregarded when such factors as gross undercapitalization, fraud, failure to observe corporate formalities, non-functioning of officers and directors, or similar circumstances indicate that the subsidiary is merely the shadow of the parent. If, as in this case, the shareholder happens to be another corporation, piercing the corporate veil results in disregard for the separate existence of parent and subsidiary. 65 In determining whether two corporations are truly separate, significant factors to consider include adequacy of capitalization, overlapping directorates and officers, separate record keeping, payment of taxes and filing of consolidated returns, maintenance of separate bank accounts, level of parental financing and control over the subsidiary, and subsidiary authority over day-to-day operations. See 1 Fletcher, Cyclopedia of the Law of Private Corporations Sec. 43, at 194 (cum. supp. 1987). In that context, the concept of complete domination by the parent is decisive. See Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145 (3d Cir.1988). The activities bearing on the issue of corporate independence need not have any particular relationship to the cause of action being asserted. 66 There is a second theory under which a parent may be held liable for the activities of its subsidiary: an application of general agency principles. One corporation whose shares are owned by a second corporation does not, by that fact alone, become the agent of the second company. However, one corporation--completely independent of a second corporation--may assume the role of the second corporation's agent in the course of one or more specific transactions. This restricted agency relationship may develop whether the two separate corporations are parent and subsidiary or are completely unrelated outside the limited agency setting. See Restatement (Second) of Agency Sec. 14M, comment (a) (1958). Under this second theory, total domination or general alter ego criteria need not be proven. 67 When one corporation acts as the agent of a disclosed principal corporation, the latter corporation may be liable on contracts made by the agent. See Restatement (Second) of Agency Sec. 144 (1958). Liability may attach to the principal corporation even though it is not a party named in the agreement. See Restatement (Second) of Agency Secs. 147, 149 (1958). 4 See also W. Seavey, Handbook of the Law of Agency Sec. 70 (1964); W.E. Sell, Agency Sec. 103 (1975). 68 Unlike the alter ego/piercing the corporate veil theory, when customary agency is alleged the proponent must demonstrate a relationship between the corporations and the cause of action. Not only must an arrangement exist between the two corporations so that one acts on behalf of the other and within usual agency principles, but the arrangement must be relevant to the plaintiff's claim of wrongdoing. 5 69 In reaching its decision to exonerate the parents, the district court relied heavily on Japan Petroleum. In that case, despite extensive interaction between parent and subsidiary, the court found them to be separate and, thus, held the parent not liable for the acts of its subsidiary. Apparently, the fact that the Nigerian subsidiary had powers granted by the Nigerian government that were unavailable to the parent was the decisive factor in finding the parent not liable. Cf. Fitz-Patrick v. Commonwealth Oil Co., 285 F.2d 726 (5th Cir.1960) (incorporation of foreign subsidiary to meet governmental requirement did not insulate parent from liability). 70 The 1978 holding in Japan Petroleum was not appealed to this court, and consequently we have not been called upon to examine the correctness of its analysis. Nor do we embark on a review of that case at this time. We are content with noting that the facts here are sufficiently distinguishable so that the same result would not necessarily follow. Nevertheless, because the issue is one of fact, see 1 Fletcher, supra, at Sec. 43, at 472 (rev. perm. ed. 1983), we cannot say that the district court's finding of no complete domination here is clearly erroneous. 71 However, the district court did not analyze customary agency principles as another possible source of parental liability. When using that approach, the completeness of the subsidiary's domination by a parent is not material--the focus instead centers on whether the Ecuadorian corporations, though separate and independent from the United States corporations, acted as agents for disclosed principals. 72 In conducting this review, the focus must be directed to the pertinent cause of action. Thus, only the judgment in favor of Phoenix on the undercalculation of royalties due for the three quarters in 1973 and 1974 is relevant. The evidence of relationship between the parents and subsidiaries as it bears on that breach of contract is the proper subject of our inquiry. 73 We can appreciate the difficulty which the district court confronted as a result of the parties' failure to carefully identify the affiliations of many of the actors. For example, in numerous instances individuals identified with Texaco or Gulf are not specifically classified as employees of the Ecuadorian subsidiaries, of the United States' parents, or perhaps employed by one and acting on behalf of the other. Similarly, correspondence which could prove important in assessing attribution of activity to parent or subsidiary is not definitive. 74 With these uncertainties in mind, we observe with some diffidence that several significant events may bear on the creation of, or absence of, an agency relationship between the subsidiaries and the parents in connection with the 1965 contract. 75 It appears that the parents negotiated and drafted the 1965 agreement, but it was actually executed by Compania Texaco de Petroleos del Ecuador C.A. and Gulf Ecuatorana de Petroleos S.A. In 1969 when oil was discovered, the parents issued a joint press release announcing that they each owned a fifty percent working interest in the discovered reserves, subject to a two-percent royalty. The release said: Texaco and Gulf obtained the Coca concession by assignment from Minas y Petroleos Del Ecuador .... 76 When the royalty agreement underwent renegotiation in 1972, employees of the parent corporations apparently assumed a controlling role in the process. It was the parents who recommended the use of West Texas crude as the reference price for calculating the two-percent royalties. 77 CEPE made its 1977 buyout payment for the Gulf interest to the parent, Gulf Oil Corporation, at the parent's home bank in Pittsburgh. Although that event occurred several years after the three quarters breach of contract, it nevertheless may shed some light on the nature and extent of the control exercised by the parent as principal in earlier years. See Verreries De L'Hermitage v. Hickory Furniture Co., 704 F.2d 140, 142 (4th Cir.1983). 78 Because the district court did not explore customary agency principles as a possible source of parental liability, we will remand for further inquiry and fact-finding to determine the applicability of those principles to the case at hand. We note that, under usual agency principles, complete domination by the parents in the general conduct of the subsidiaries' affairs is not a prerequisite. The parents and subsidiaries may fully maintain their separate corporate existences; yet, as any two unrelated companies, they might have entered into a limited agency relationship for a specific transaction. Whether this occurred here is a question of fact reserved to the district court.