Many companies use subsidiaries (including corporations or limited liability companies) to insulate a parent company from some types of liability. The most common consideration is to use these forms to limit potential liability if the subsidiary negligently causes very expensive property damage or one or more serious personal injuries. Under normal circumstances, the claimant can look to the assets of the subsidiary, but not the parent.
Generally, companies take steps to separate the parent from the subsidiary, to avoid “piercing the corporate veil” and making the parent liable for the acts of the subsidiary. However, a recent Texas case demonstrates another way that a parent can be responsible for personal injuries at a subsidiary.
In Little v. Delta Steel, Inc., recently decided by the Fort Worth Court of Appeals, the court held that the parent could be liable for the death of a subsidiary’s employee. This is especially important because parent companies typically will not be protected by the limitations on recovery afforded by the worker’s compensation system.
The court did not base its decision on a “piercing the corporate veil” analysis, but on evidence of the parent’s control over the subsidiary’s safety activities. Indeed, the parent-subsidiary relationship had little to do with the parent’s liability. The decision makes clear that, had any company controlled the subsidiary’s safety practices in the way the parent did, the controlling company could be held responsible.
The key facts cited by the court included that the parent required certain provisions in the subsidiary’s safety manual; that the parent specifically controlled inspection policies for the equipment (a crane) involved in the worker’s death; that the parent had the power to audit the subsidiary’s safety practice and to require changes by the subsidiary based on the audit; that the parent audited other subsidiaries, but had not audited where the worker was killed; that the parent had the authority to order the subsidiary to take the crane out of service; and that the parent required the subsidiary to mail monthly reports on accidents and safety incident investigations to the parent. As support for its holding, the court cited Restatement (Second) of Torts § 324A(b), which says, in part, that one who undertakes to render services to another for the protection of third parties can be liable to a third party for injuries caused by failing to exercise reasonable care in completing the undertaking.
While this decision is from an intermediate appellate court and is potentially subject to rehearing and appeal to the Texas Supreme Court, companies can use its extensive analysis to ensure that their own safety policies do not have the potential of creating unsuspected liability for a parent or other affiliated company. A few suggestions that come from reading this opinion include the following:
- Make clear that the subsidiary’s management has ultimate authority over the subsidiary’s safety policies, such as its safety manual;
- Submit any proposed changes in safety practices as “suggestions” from the parent, and not requirements;
- For LLC’s, establish in writing a governing authority, and adhere to the governing authority document;
- Have the subsidiary’s own board of directors or other governing authority formally adopt policies directed to the subsidiary’s management (rather than such policies coming directly from the parent), if a conflict arises based on a parent’s suggestion;
- Submit reports of accidents and investigations to a representative of the subsidiary’s board of directors or other governing authority, and have that governing authority provide the reports to the parent; and
- Have the subsidiary’s own board of directors or other governing authority adopt policies giving authority to as many subsidiary employees as practical to stop a practice deemed unsafe, but make clear that only subsidiary employees have such authority.
For a copy of the Little v. Delta Steel, Inc. opinion click here.