Direct Participation Liability Comes to Illinois

Last month, Illinois tort law gained a new theory of liability for corporate entities known as "direct participation liability." Forsythe v. Clark USA Inc., No. 101570 (Feb. 16).

This theory, first discussed in a law review article co-written by former Supreme Court Justice, but then-Professor, William O' Douglas (W.O. Douglas and S. Shanks, "Insulation from Liability though Subsidiary Corporations," 39 Yale L.J. 193 (1929)), states that a parent corporation can be directly liable for the tortious acts of its subsidiary when "the alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management." U.S. v. Bestfood, 524 U.S. 51, 58 (1998).

Under this theory, the plaintiff must show that the parent ignored the separate legal personal of its subsidiary, meddled in the affairs of the subsidiary, and that the meddling caused the injury. The benefit of this theory for plaintiff is that it allows an injured party to seek redress against the parent corporation even if he is an employee of the subsidiary and would otherwise be barred by the exclusive remedy provision of the Workers' Compensation Act from filing suit against the parent corporation by piercing the corporate veil. See Kotecki v. Cyclops Welding Corp., 146 Ill.2d 155 (1991).

In Forsythe, the plaintiffs' decedents were employees of Clark Refining, which operated an oil refinery in Blue Island. Clark Refining was a subsidiary of Clark USA, which the defendants characterized as a holding company. The plaintiffs' decedents were killed while on their lunch break when a fire broke out at the refinery. Apparently, other Clark Refining employees had attempted to replace a valve on a pipe without ensuring that flammable materials within the pipe had been depressurized.

The plaintiffs claimed that those employees were not trained or qualified to perform that work. Their theory against Clark USA was that those unskilled employees were forced to perform those tasks because Clark USA had unduly meddled in Clark Refining's operating budget. In sum, the plaintiffs alleged that Clark USA forced Clark Refining to enter into "survival mode" solely for the benefit of Clark USA and that Clark USA knew or should have known its strategy would adversely affect safety at the refinery.

To support their claims, the plaintiffs produced evidence that the boards of directors of both Clark USA and Clark Refining met simultaneously. They also relied on evidence that the belt-tightening budget was overseen by Paul Melnuk, who served as both Clark USA's president and Clark Refining's chief executive officer.

Clark USA filed a motion for summary judgment, arguing that it owed no duty by virtue of its status as a mere holding company of Clark Refining. The trial court granted the motion without explanation. In an opinion written by Justice Patrick J. Quinn, the 1st District Appellate Court reversed, becoming the first court in Illinois to recognize the direct participation liability theory.

Over dissent, the court held that the plaintiffs "presented sufficient evidence to raise an issue of material fact as to whether defendant directly participated in creating conditions within the refinery which led to the deadly fire.: 361 Ill.App.3d at 655.

After reviewing "the substantial weight of authority" from other jurisdictions that supported recognition this doctrine, the Supreme Court found that direct participant liability was "a valid theory of recovery under Illinois law."

"[B]udgetary mismanagement," the court found, "accompanied by the parent's negligent director or authorization of the manner in which the subsidiary accompanies that budget can lead to a valid cause of action under the direct participant theory of liability."

Though "allegations of mere budgetary mismanagement alone" would not support liability under this theory, the court noted, where there is evidence "sufficient to prove that a parent company mandated an overall business and budgetary strategy and carried that strategy out by its own specific direction or authorization, surpassing the control exercised as a normal incident of ownership in disregard for the interests of the subsidiary, that parent company could face liability."

The court noted that the key elements are "a parent's specific direction or authorization of the manner in which an activity is undertaken: and foreseeability that injury could occur as a result of that direction or authorization.

Similarly, where a "parent company mandates an overall course of action and then authorizes the manner in which specific activities contributing to that course of action are undertaken, it can be liable for foreseeable injuries."

In applying the direct participant liability doctrine to the case before it, the court noted that the question was whether the budget cuts at the refinery were negligently directed by or conducted in a manner authorized by Clark USA at the expense of Clark Refining. The court found that answering "this question requires a close look at the role of" Melnuk, who was both Clark USA's president and Clark Refining's CEO.

To establish liability, the plaintiffs had to show that Melnuk did more than make policy decisions and supervised Clark Refining's activities; they had to show that Melnuk's complained-of conduct occurred while acting in his capacity as an officer of Clark USA. Reviewing the evidence before it, the court found that there was, at the very least, a genuine issue as to which "hat" Melnuk was wearing.

The court also rejected Clark USA's argument that the exclusive remedy provision of the Worker's Compensation Act barred the plaintiffs' claims. Clark USA had contended that the plaintiffs' theory of liability "should be treated no differently than a conventional veil-piercing theory" and, therefore, Clark USA "should be treated as if it were the subsidiary."

Agreeing with Quinn's comment that Clark USA was trying to "have its cake and eat it too" by arguing on the one hand that it was merely a holding company and that maintaining that it and Clark Refining were one in the same, the court held that, "Direct participant liability, as we k now recognize it, does not rest on piercing the corporate veil....

"On the contrary, this form of liability is asserted, as its name suggests, for a parent's direct participation, superseding the discretion and interest of the subsidiary, and creating conditions leading to the activity complained-of."

By opening an other avenue for liability for corporate misfeasance, the Supreme Court's decision in Forsythe should make parent corporations think twice before forcing a policy on its subsidiary that could create a potentially dangerous condition.

Though the court noted that "this theory of liability gives rise to a duty only in limited circumstances," that threat alone should give corporate boards pause before disregarding its subsidiary's legal persona for its own benefit and to the detriment of its subsidiary. Moreover, where evidence of corporate misconduct is present and that misconduct can be connected to the resulting injuries, plaintiffs should seriously consider utilizing this newly recognized theory of liability.