The Corporate Shell Game; Forsythe Vs Clark Challenges Presumed Innocence
One of the interesting trends amongst corporate interests whom frequently tell others to accept responsibility, is the creation of sham corporations designed to insulate themselves (i.e., often a guilty party) from liability.
The rule is defined: where a holding company treats the properties of its subsidiaries as its own it cannot take the benefits of direct management without the burdens.
It usually works this way. Services are provided to by Corporation A. Corporation A, however, is simply a shell corporation, as it has no assets. Consider a nursing home, for example, in which the building is leased, as are the beds, the medical equipment, the computers, and anything else not permanently nailed down.
Corporation A rents its building from Corporation B, to whom it pays outrageous monthly rental fees.
The management for Corporation A is provided by Corporation C. Corporation C is also paid handsomely for these "services."
Corporations B and C are shams also. These dummy corporations have few if any employees and their sole purpose in life is to receive income from Corporation A, but the revenue is swept out of the accounts on a daily basis.
Corporations B and C are owned by another shell corporation; Corporation D.
Corporation D is owned by yet another corporation, Corporation E; a holding company that ultimately is the only true beneficiary of the revenue generated by the services, management and rental fees generated by Corporations A, B, C and D.
Corporation E is the only corporation that carries liability insurance or has assets sufficient to satisfy a legal judgment, but because it has distanced itself so from the primary services of Corporation A, it is often shielded from any ultimate liability, often referred to as a “corporate veil”.
A corporate veil exists when a parent or holding corporation has a financial interest (and investment) in a subordinate corporation, but has no direct influence or management authority over the subordinate company.
An injured person only knows that Corporation A injured them and a lawsuit is filed. Corporation A defends itself stating it has no liability insurance and no assets, therefore it cannot pay for any judgment and the injured victim is without recourse. Eventually, an injured person's attorney, if skillful and industrious, can follow the corporate maze all the way to Corporation F. Suit is filed against Corporation F, which defends itself by stating it is simply a holding company and it cannot be held liable absent any direct influence or ‘piercing’ of the corporate veil.
The legal doctrine of piercing the corporate veil is legal ‘fiction’ that protects shareholders and corporations which hold a financial interest in another corporation. Such fiction reads that a shareholder is not liable for the obligations of a corporation unless the shareholder exercised "complete domination" over the corporation's decision making. A parent corporation will not be held liable for the actions of a subsidiary unless the legal separateness of parent and subsidiary has been disregarded in a wide range of corporate matters.
Simply put, unless the shareholder or ‘parent corporation’ takes some action or exercises some authority that has a direct impact on the management and decision making of a subsidiary, the corporate veil remains intact and the parent corporation is not liable for any of the subsidiary’s actions or injuries.
The rule allowed, so it was always believed, that a corporate holding company had the right to dictate policy for a subsidiary corporation on key issues while remaining shielded from liability for its decisions. Not exactly taking responsibility is it?
The legal profession has for years just assumed this was, in fact, the rule, and the complete rule; of law between parent and subsidiary corporations for what was an embarrassingly long period of time. Then, one day, the doctrine of direct participant liability was revisited.
Direct participant liability has long provided that a parent corporation may be held liable for meddling in the affairs of its subsidiaries, even if the corporate veil remains impenetrable. It is called direct liability because the connection between the injury and the interference of one corporation with another is so intimate that it makes the resulting liability, well, uh …direct.
The rule is defined: where a holding company treats the properties of its subsidiaries as its own it cannot take the benefits of direct management without the burdens. Stated differently, a parent corporation is liable for the actions of its subsidiary when the alleged ‘wrong’ can be traced to the parent …as a result of the actions and/or direction of its own personnel and management.
As an example, Corporation F directly interfered with the management decisions of Corporation A and that caused injury to Joe Smith. Under direct participant liability, Joe Smith can hold Corporation F responsible for its actions, and his injury.
One would think that anyone who believes personal responsibility is a good thing would applaud the concept of direct participant liability. However, you might be surprised to see those who have embraced the idea of forcing an injured victim to accept personal responsibility for their injury and not seek damages, and how they are actually lobbying against this version of corporate personal responsibility.
The case that prompted me to write this is Forsythe v. Clark, USA,
The Illinois Supreme Court recently agreed to hear this case. One can expect the very people who have spent years criticizing the legal system for its approach to personal responsibility to be the very people trying to sell the courts and the public on the reasons why a corporation shouldn't have to be responsible for its actions.
Yes, once again hypocrisy will be in full bloom this spring and summer courtesy of those who desire to dismantle the legal rights and protections still available to those injured by corporate carelessness and indifference.