Parent corporations may be liable for the sins of their subsidiaries, according to Calvin McNulty.
With today's faltering economies, there is an increasing number of subsidiaries of multinational corporations breaching reinsurance relationships, and subsequently becoming insolvent or filing for bankruptcy protection. For the unlucky cedants stuck in the middle of these situations, all is not necessarily lost. Under certain circumstances, the parent corporation of the subsidiary may be responsible for the liabilities of its subsidiary despite the separate legal entity status between the two.
Many US courts have held that a parent corporation may be liable for its subsidiary's actions/obligations when the parent uses its subsidiary's separate corporate form to defeat public convenience, commit fraud or defend crime. This is the well-known 'piercing of the corporate veil', though this does not always need to involve fraudulent activities. In fact, under New York law, the corporate veil will be pierced to achieve equity, even absent fraud, when a corporation has been so dominated by an individual or another corporation, and its separate entity so ignored, that it primarily transacts the dominator's business instead of its own and can be called the other's alter ego. It is quite clear, however, that the courts must examine each case on an individual basis. In one case, the court held that the two subsidiaries were the alter egos of the parent company and permitted piercing when the following factors were present:
In another case, however, the court held that the parent and subsidiary corporations were found to be separate personalities and did not permit piercing even where:
Here, the court stated that the factors simply revealed, "a parent that took an active interest in the affairs of its subsidiary."
While there is no official mere instrumentality test, over the past few decades, an informal list has developed and is used by some courts:
It should be noted that, while no single factor determines whether a parent will be liable for its subsidiary's actions, when examined in their totality the two corporations may be considered so closely intertwined that they do not merit treatment as separate legal entities. If this happens, what appears to be a fruitless collection effort against the multinational's subsidiary may actually turn into a collection effort against a parent corporation with deep pockets.
By Calvin J McNulty
Calvin J McNulty is an associate with Bazil & Associates PC.