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AM. TRADING & PRO. CORP. v. FISCHBACH & MOORE

March 24, 1970

AMERICAN TRADING AND PRODUCTION CORPORATION ET AL., PLAINTIFFS,
v.
FISCHBACH AND MOORE, INCORPORATED, ET AL., DEFENDANTS. THE AMERICAN INSURANCE COMPANY, INC., ET AL., PLAINTIFFS, V. FISCHBACH AND MOORE, INCORPORATED, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Decker, District Judge.

MEMORANDUM OPINION

McCormick Place, an exposition hall in Chicago, Illinois, was destroyed by fire on January 16, 1967. Also destroyed were exhibits scheduled to be displayed at the Semi-Annual National Housewares Show, which was to begin that day. The plaintiffs in these consolidated cases are these exhibitors and their subrogees, and insurance company subrogees of the Metropolitan Fair and Exposition Authority, which owned and operated McCormick Place. Defendants are Fischbach and Moore, Incorporated and its wholly-owned subsidiary, Fischbach and Moore Electrical Contracting, Inc.*fn1 The complaints sound in tort and allege that faulty electrical wiring installed by defendants in McCormick Place for the Housewares Show was the cause of the fire.

Defendant Fischbach and Moore, Incorporated has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, contending that it has neither performed electrical work in McCormick Place nor acted in a manner making it liable for the alleged torts of its Subsidiary. Because the pleadings, affidavits, depositions, answers to interrogatories and exhibits on file demonstrate that no genuine issue of material fact exists, and because the undisputed evidence clearly shows that the Parent did not itself furnish the allegedly defective electrical work, nor operate the Subsidiary as its "mere instrumentality," the motion for summary judgment is granted.

Fischbach and Moore, Incorporated is a publicly held New York corporation with its principal place of business in New York City. Active primarily in the business of electrical contracting and related endeavors, it has divisions and approximately 20 subsidiaries throughout the United States and Canada which are similarly engaged. Among the latter is defendant Fischbach and Moore Electrical Contracting, Inc., a Delaware corporation with its principal place of business in Chicago, Illinois.

It is undisputed that the Parent corporation has never been a party to a contract with the management of McCormick Place, and that none of its employees has provided electrical installation or supervisory services for McCormick Place. Its asserted liability for damages must rest, therefore, not on its own performance of electrical work but on such performance by the Subsidiary.

For a corporation to be held liable for the torts of a subsidiary, it must appear that the subsidiary was operated as a "mere instrumentality" of the parent. Taylor v. Standard Gas & Electric Co., 96 F.2d 693 (10th Cir. 1938), rev'd on other grounds, 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669. This rule is rarely applied, and only under special circumstances, for it runs contrary to the established principle of corporate limited liability. "The instrumentality rule should only be invoked after mature consideration and caution. Indiscriminate application would destroy the purpose of the corporate law." Brown v. Margrande Compania Naviera, 281 F. Supp. 1004, 1006 (E.D.Va. 1968).

The tests to be applied were set out in Steven v. Roscoe Turner Aeronautical Corporation, 324 F.2d 157 (7th Cir. 1963), at 160:

  "In order to establish that a subsidiary is the mere
  instrumentality of its parent, three elements must be
  proved: control by the parent to such a degree that
  the subsidiary has become its mere instrumentality;
  fraud or wrong by the parent through its subsidiary,
  e.g., torts, violation of a statute or stripping the
  subsidiary of its assets; and unjust loss or injury
  to the claimant, such as insolvency of the
  subsidiary."

Application of these principles to this case requires a narration of the facts relating to the interrelationship of the two defendant corporations. The pertinent factual details, which are undisputed, follow.*fn2

At the time of the fire, all four of the Subsidiary's directors were also directors of the Parent, and four of the Subsidiary's eight officers were also officers of the Parent. However, the corporations maintain separate offices and conduct separate directors' meetings. The financial books and records of the Subsidiary are maintained by its employees in Chicago, and contain only entries related to its own operations. The Subsidiary has its own bank accounts and negotiates its own loans from third parties; however, these loans are reviewed and guaranteed by the Parent. On occasion, the Subsidiary has borrowed money from the Parent; these loans are evidenced by notes and call for interest at the prime rate.

The Subsidiary and Parent file separate tax returns. However, financial statements of the Parent and all subsidiaries are consolidated. The payroll of the Subsidiary is paid by the Subsidiary rather than the Parent, and salary levels are determined by the Subsidiary subject to review by the Parent. The Subsidiary has never purchased goods or services from the Parent, nor has the Parent purchased goods and services from the Subsidiary. Purchasing is independently handled by each corporation, as are labor union relations.

The Subsidiary notifies the Parent of bids made on contracting jobs and of contracts awarded. However, neither bids nor contracts are reviewed by the Parent, nor are matters relating to the manner of performance and the materials to be used subject to review. On contracts exceeding $5,000,000 the profit "mark up" to be charged may be determined after consultation with the Parent. The Subsidiary forwards schedules to the Parent regarding new jobs acquired and contracts on hand for each three month period, and submits reports on material purchases, estimates, salary changes and financial data on a more frequent basis.

On one occasion the Subsidiary sought review by the Parent of a lease it had negotiated for additional yard space for its equipment. On other occasions, the Parent has determined which of its subsidiaries should bid on a particular project. There is evidence that the Parent's management considered it and the subsidiaries to be one "family". This is reflected in some annual reports and in advertising in Fortune magazine, wherein the Parent claimed the credit in its own name for projects (including McCormick Place) in fact performed by the Subsidiary.

Financial data of record reveals that the Subsidiary's net worth was $511,503 in 1966 and $684,574 in 1967. It paid dividends of $100,000 in 1966 and $369,000 in 1967, which amounts represented substantially all of its after tax earnings. The corresponding gross income figures for those years, $6,128,000 and $12,798,000, represent 4.42% and 8.07%, respectively, of the consolidated gross income of the Parent and its subsidiaries. ...


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