Control over subsidiary adds liability

March 1, 2007 By    

The Illinois Supreme Court recently handed down an important decision in the area of liability of parent corporations for acts of their subsidiaries and could give rise to injuries of employees of the subsidiary.

John McCoy LP/Gas Magazine Columnist
John McCoy LP/Gas Magazine Columnist

The case is Forsythe v. Clark USA, Inc. and concerns an explosion at a refinery that was owned and operated by Clark Refining, whose sole shareholder was its parent, Clark USA.

In this case, two mechanics that worked for Clark Refining were killed in a fire that occurred during their lunch break at work. They sued the parent of their employer, Clark USA, under a theory of “direct participant liability” for controlling its subsidiary’s budget in a way that led to a workplace accident.

In response and in the appellate courts, the parent, Clark USA, claimed it was protected by the immunity provided to employers under the Worker’s Compensation Act.

In support of its liability theory the plaintiffs alleged that the parent company fostered an overall budget strategy that may have led to the accident that caused the deaths of the plaintiffs. Specifically, the plaintiffs alleged that Clark USA:

  • Required the subsidiary to minimize operating costs, including costs for training, maintenance, supervision and safety;
  • Required the subsidiary to limit capital investments to those which would generate cash for the refinery, thus preventing expenditures on needed safety upgrades at the refinery; and
  • Failed to properly evaluate the safety and training procedures in place at the refinery of the subsidiary.

Finally the plaintiffs argued that the parent’s capital cutbacks forced the subsidiary to have unqualified employees act as maintenance mechanics which, in turn, led to the fire that killed the plaintiffs.

In response, the Clark USA argued that as a holding company of the refinery, it owed no legal duty to the plaintiffs as it was connected to the subsidiary only as a shareholder. The company maintained that it had no control over the day-to-day activities of the subsidiary.

Plaintiffs established that the parent had sought to create a budget for the subsidiary that would position it as a “low-cost refiner and marketer” with the goal fo replenishing defendant’s cash reserve by “decreasing capital spending . . . to a minimum.”

For the first time in the state, the Illinois Supreme Court recognized the viability of a direct participant theory of liability. Before liability could attach, however, the court cautioned that budgetary oversight alone is insufficient for liability, as is a parent company’s commission of acts consistent with its investor status.

A parent company can be held liable if, for its own benefit, it directs or authorizes the manner in which its subsidiary’s budget is implemented, disregarding the discretion and interests of the subsidiary, and creating dangerous conditions that lead to injury or death. In such situations parent companies would not be protected by the exclusive remedy provision of the Worker’s Compensation Act.

When a parent company interacts with the actions of its subsidiary it is important that it avoid acts that could create liability outside the Workers Compensation Act immunity that it is typically granted.

This is something that corporate counsel and officers and directors of parents and subsidiaries need to become sensitive to so as to avoid an unwelcome liability exposure.

John V. McCoy, Esq, is an attorney in Waukesha, Wisc. that represents propane companies nationally. He can be reached at jmccoy@mh-law.us or 262-522-7007.

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