In a case of first impression, the Supreme Court of Illinois has held that a parent corporation may be liable for its subsidiary corporation’s debt under the direct participation theory. In Forsythe v. Clark USA, Inc., plaintiff’s decedent was killed while working at an oil refinery owned and operated by Clark Refining and Marketing (Sub),a wholly owned subsidiary of Clark USA, Inc. (Parent). After recovering workers’ compensation payments from Sub, plaintiff sued Parent.
Plaintiff’s theory of the case was that Parent’s business strategy at the time of the accident consisted of being in “survival mode” and adopting a policy of reducing spending to “minimum sustainable levels” until Parent’s cash reserve reached $200 million. Plaintiff alleged that implementing this strategy resulted in foreseeable reductions in safety at Sub, which reductions were a proximate cause of the accident. Parent’s defense was that it owed no duty to plaintiff’s decedent simply because it owned all the stock of Sub.
Justice Garman distinguished direct participant liability from piercing theories and noted that parent corporations owe no duties to third parties to ensure that subsidiaries act with due care. However, relying on inapposite federal and state cases, Justice Garman held that a parent may be liable as a direct participant where the parent specifically directs or authorizes the manner in which an activity of the subsidiary is undertaken, that direction or authorization surpasses the control exercised as a normal incident of ownership in disregard for the interests of the subsidiary, and the harm is sufficiently foreseeability.
Here, summary judgment for Parent was precluded because evidence suggested that Melnuk, Parent’s president and Sub’s CEO, might have planned the budget cuts in his capacity as Parent’s president, might have directed or authorized the manner in which those cuts were implemented knowing that safety at the refinery might be compromised, and that he did those things superseding the discretion and interest of Sub.
To the extent that this case combines Agency law with director/officer liability under the direct participation theory (e.g., Saltiel v. GSI Consultants, Inc., casebook page 307), it seems to me to be on solid ground. The court doesn’t talk about Agency, however, but it could readily be implied by any decent business entities prof. Further, if there’s really evidence here that Melnuk’s actions as Parent’s agent were intended to cause Sub to reduce safety (or that Melnuk should have known that they would have that effect) then liability is fine with me. What this case sounds like, though, is a claim for relief for malbudgeting. That is, it may well be that Melnuk, acting as agent for Parent, devised or required a budget for Sub that required cutbacks in many areas and that costs that do not directly constrict revenues or net profits, including safety costs, would be the most natural items to cut. In the absence of more, that does not seem to me to be appropriate facts on which to hold Parent (or Melnuk, for that matter) liable.