Two workers employed as maintenance mechanics for Clark Refining & Marketing, Inc. (“Clark Refining”), which operated an oil refinery in Blue Island, Illinois, were killed when a fire erupted at the refinery while they were on their lunch break. The fire apparently was caused by other Clark Refining employees who attempted to replace a four-inch valve on an operating unit known as the Isomax without ensuring that flammable materials within the pipe had been depressurized. According to plaintiffs, the personal representatives of the deceased employees, those employees were not maintenance mechanics and not trained or qualified to work on the Isomax. After Clark Refining paid the estate of each decedent pursuant to the Workers’ Compensation Act, plaintiffs brought a wrongful death suit against defendant, Clark USA, Inc. (“Clark USA”), Clark Refining’s sole shareholder.
According to their complaints, plaintiffs alleged that defendant had developed an “overall business strategy” for Clark Refining which “focused on minimizing operating costs and limited capital expenditures” in order to increase revenue for its parent corporation. Plaintiffs alleged Clark USA had a duty to use reasonable care in imposing its overall business strategy on Clark Refining so as not to create an unreasonable risk of harm to others, “but breached that duty by (1) requiring (Clark Refining) to minimize operating costs including costs for training, maintenance, supervision and safety, (2) requiring (Clark Refining) to limit capital investments to those which would generate cash for the refinery thereby preventing (Clark Refining) from adequately reinforcing the walls of the lunch room or relocating the lunch room to a safe position within the refinery, and (3) failing to adequately evaluate the safety and training procedures in place at the Blue Island Refinery.” As a result of defendant’s overall business strategy of capital cutbacks, Clark Refining was required to have unqualified employees act as maintenance mechanics. Their inexperience resulted in the refinery fire which killed the decedents. Thus, plaintiffs alleged that defendant’s overall business strategy was a proximate cause of the fire.
Defendant, Clark USA, argued that, as a mere holding company whose only connection to Clark Refining was its status as sole shareholder, it owed no duty to either deceased. In support of its argument, Clark USA submitted numerous depositions and documents showing that its subsidiary Clark Refining owned and operated the refinery, and that it had no control over the day-to-day operations.
Plaintiffs responded that despite defendant Clark USA’s legal status in relation to Clark Refining, Clark USA was directly responsible for creating conditions in which such a fire could occur. Specifically, plaintiffs alleged that Clark USA’s “overall business strategy” for Clark Refining resulted in a series of cutbacks at the Blue Island refinery that undermined safety, training, and maintenance and, in turn, created an unreasonable risk of harm to others, including the employees of Clark Refining.
To support their arguments, plaintiffs relied on evidence that defendant’s directors drew up and approved Clark Refining’s budget; the boards of both Clark USA and Clark Refining often met simultaneously, according to Clark USA’s strategic business plan; Clark USA mandated that Clark Refining “position itself as a low cost refiner and marketer”; and Clark USA strove to “replenish (its own) strategic cash reserve to $200 million” by “decreas(ing) capital spending . . . to minimum sustainable levels” and instituting a “survival mode” philosophy to its business plan. Plaintiffs further relied on evidence that while Clark Refining employees prepared its budget for expenditures, the president of Clark USA (who was also the chief executive officer of Clark Refining) instructed those employees to reduce the budget by 25%. As a result, Clark Refining was forced to cut back on its maintenance department staff and cancel its training program for new operators, causing both a deterioration of the infrastructure at the refinery (as evidenced by a number of citations from the Occupational Safely and Health Administration for rules infractions including several related to the maintenance of the Isomax) and an overload of work on the undermanned maintenance staff.
Generally, a corporation as a legal entity exists separately from its shareholders, directors, and officers, who are not ordinarily liable for the corporation’s liabilities. Where a corporation is the sole shareholder of another corporation (as Clark USA was here), the general rule is that the shareholder-corporation is not liable for the conduct of its subsidiary unless the corporate veil can be pierced, that is, unless the shareholder exercised complete domination over the corporation’s decision-making, treating the corporation as a mere instrumentality or “alter ego” to advance the shareholder’s personal interests.
There is, however, a well-established though seldom employed exception to the general rule that the corporate veil will not be pierced in the absence of large-scale disregard of the separate existence of a subsidiary corporation, that exception being “direct participant” liability. Parent companies may be “directly” liable for their subsidiaries’ actions when the alleged wrong can seemingly be traced to the parent through the conduct of its own personnel and management, and the parent has interfered with the subsidiary’s operations in a way that surpasses the control exercised by a parent as an incident of ownership.
Plaintiffs here alleged defendant, Clark USA, was a proximate cause of the decedents’ deaths because of its own direct conduct, i.e., by mandating that Clark Refinery operate the refinery at “survival mode” and by reducing the capital expenditures to the “minimum sustainable level,” defendant, Clark USA, created conditions within the refinery which posed an unreasonable risk of harm to refinery employees like the decedents. In other words, by mandating how Clark Refining was to operate the Blue Island Refinery (at a 25% cost reduction), plaintiffs alleged that defendant “interposed a guiding hand” in Clark Refining’s management of the refinery, leaving Clark Refining “no choice but to obey.” The Illinois Appellate Court held there was sufficient evidence that defendant breached its duty to decedents and this breach was a proximate cause of their deaths. Accordingly, the case was sent back to the trial court for trial on the facts.
The bottom line: parent corporations should not think they are automatically immune from liability for the wrongdoings of their subsidiaries. There are standards of organization and operation that a parent corporation can adopt that may aid, but do not guarantee, parent company insulation. Please call a member of the firm if you desire more information on the appropriate corporation governance procedures parent corporations should adopt vis-à-vis their subsidiaries.