its parent for breach of contract appears to be one of first impression. Neverthless, well established principles of corporations law and analogous case law lead us to reject Inamed s position.
One of the most important and pervasive principles underlying corporations law is the "entity theory." Fletcher Cyc. Corp. § 25, at 512-15 (1990); Henn & Alexander, Laws of Corporations § 146, at 345 (1983). This theory provides that a corporation is a separate entity, distinct from its corporate and non-corporate shareholders. Beatrice Foods Co. v. Illinois Insur. Guarantee Fund, 122 Ill. App. 3d 172, 460 N.E.2d 908, 911 (Ill. App. Ct. 1st Dist. 1984). As one commentator has stated:
A corporation is an entity ierrespective of, and entirely distinct from, the persons who own its stock, and it is well settled that all the shares in a corporation may be held by a single person and yet the corporation continue to exist; nor does the fact that one person owns all the stock, make him and the corporation one and the same person. . . . It is also immaterial whether the sole owner of stock is a man or another corporation, and the corporation owning such stock is as distinct from the corporation whose stock is owned as the man is from the corporation of which he is the sole member.
Joyce on Actions By and Against Corporations, § 224 (1910). This entity theory is important in that it provides the necessary foundation for many well-entrenched corporate law principles.
Because of its importance, courts have rigidly recognized the independent existence of the corporate entity distinct from its shareholders. See, e.g., Beatrice Foods Co., 460 N.E.2d at 910-11 (concluding that parent of wholly-owned subsidiary retained separate corporate existence, and therefore parent-shareholder was not legally obligated to pay the judgment entered against subsidiary for its employee's tortious conduct).
The entity theory, however, is not impenetrable. Courts will disregard the corporate entity if necessary to further the interests of "public convenience, fairness and equity." Brookline v. Gorsuch, 667 F.2d 215, 221 (1st Cir. 1981); Gallagher v. Reconco Builders, Inc., 91 Ill. App. 3d 999, 415 N.E.2d 560, 563-64 (1980); Stap v. Chicago Aces Tennis Team, Inc., 63 Ill. App. 3d 23, 379 N.E.2d 1298, 1302 (1978). A common example of such cases is where a subsidiary's creditor seeks to pierce a subsidiary's corporate existence and reach the parent-shareholder. Courts consider a number of factors in these creditor piercing cases. See McCracken v. Olson Companies, Inc., 500 N.E.2d at 491.
Inamed's suit, however, is not the typical piercing suit. Rather, it is a much less commonly known suit referred to as a "reverse piercing" case. Fletcher Cyc. Corp. § 43.50, at 780. In these cases, the shareholder-parent corporation, not a creditor, seeks to disregard its subsidiary's corporate existence. Id. Similar to the creditor piercing suits, notions of equity and justice control; however, beyond this, courts have not established specific facotrs to help guide their decision-making in these cases. See Comment, Corporations: Disregard of the Corporate Entity for the Benefit of Shareholders, 1963 Duke L.J. 722, 722 (1963)("Unlike the corporate creditor," the shareholder who seeks to disregard its corporation's existence "will find few black-letter rules" regarding his case).
Courts also have expressed an unwillingness to disregard the corporate entity in reverse piercing suits. Fletcher Cyc. Corp. § 43.50, at 780. Such reluctance is based on "reciprocity principles." Boggs v. Blue Diamond Coal Co., 590 F.2d 655 (6th Cir. 1979). That is, courts have expressed the belief that "persons who choose to become incorporated may not evade the consequences of corporateness when that would suit their convenience." Henn, at § 149, p.357; see also Superior Coal Co. v. Department of Finance, 377 Ill. 282, 36 N.E.2d 354, 358 (1941)(finding that where corporations observe the "formalities incident to separate corporate existence and receive substantial economic benefits therefrom, they will not be permitted to disregard the distinction for the purpose of avoiding the burdens likewise incident to the maintenance of separate corporate identities"); cf. Lumpkin v. Envirodyne Indus., 933 F.2d 449, 460 (7th Cir. 1991)(applying Illinois law and noting that the "alter ego doctrine is a sword, not a shield, the basis for a cause of action, not a defense").
One illustrative case in which the Sixth Circuit refused to disregard the corporate existence of a wholly-owned subsidiary at the insistence of its parent is Boggs v. Blue Diamond Coal Co., 590 F.2d 655 (6th Cir. 1979). In Boggs, widows of deceased mine workers sued Blue Diamond Coal Co., ("Blue Diamond"), the sole shareholder of Scotia Coal Company. Id. at 657-58. The plaintiffs alleged that Blue Diamond's negligence caused a mine explosion. Id. at 658. Blue Diamond's theory for summary judgment was that plaintiff's exclusive remedy was under Kentucky's workers compensation statute because it and its wholly-owned subsidiary produced "coal as part of an integrated business and should be considered a joint or single 'employer.'" Id.
The Sixth Circuit refused to ignore the subsidiary's independent corporate existence. Id. at 662. In so holding, the court reasoned that Kentucky adhered to "customary principles of corporation law" which recognized a "general aversion" for disregarding the corporate entity. Id. at 661-62. Moreover, the court reasoned that:
[A] business enterprises has a range of choice in controlling its own coporate structure. But reciprocal obligations arise as result of the choice it makes. The owners may take advantage of the benefits of dividing the business into separate corporate parts, but principles of reciprocity require that courts also recognize the separate identities of the enterprises when sued . . . .
Id. at 662. Therefore, the court refused to integrate Blue Diamond's corporate existence with that of its wholly-owned subsidiary.
Like the Boggs court, we will not disregard the corporate separateness of a wholly-owned subsidiary. Illinois law clearly recognizes the importance of a corporation's independent legal existence. Superior Coal Co., 36 N.E.2d at 358 (acknowledging the "general rule" of recognition and that "courts will ignore the fiction of corporate entity only with caution"); Loy v. Booth, 16 Ill. App. 3d 1077, 307 N.E.2d 414, 417 (Ill. App. Ct. 2nd Dist. 1974)(noting that Illinois courts will "not lightly disregard the law's fiction of a separate corporate identity"). Inamed has pointed to no inequity or injustice that will result by recognizing Cooperative's corporate existence. Moreover, it is clear that Inamed freely chose to form a subsidiary and consequently has reaped the benefits of its subsidiary's independent corporate existence.
Inamed cannot reap the benefits of incorporation while at the same time side-stepping its reciprocal pit-falls. Furthermore, Inamed's position is logically flawed.
Accordingly, we find that Cooperative is a separate entity capable of suing other parties, including its parent corporation.
We find further support for our decision in a number of federal circuit bankruptcy cases. These cases hold that a number of states law permit a wholly-owned subsidiary to sue its parent under an alter-ego theory. See Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987)(Illinois law); In re SI Acquisition, Inc., 817 F.2d 1142 (5th Cir. 1987); St. Paul Fire and Marine Insurance Co. v. Pepsico, Inc., 884 F.2d 688 (2d Cir. 1989). But see Williams v. California First Bank, 859 F.2d 664 (9th Cir. 1988); Mixon v. Anderson, 816 F.2d 1222 (8th Cir. 1987). These decisions stand for the novel proposition that a wholly-owned subsidiary can sue its parent to pierce its own corporate veil.
These courts have reasoned that such a holding is consistent with the equitable nature underlying the piercing remedy and the primary policy objectives of the Bankruptcy Code. See e.g., In re SI Acquisition, Inc., 817 F.2d at 1152-53.
Our decision is consistent with this line of cases. If a wholly-owned subsidiary can sue its parent in an attempt to pierce its own corporate existence, a subsidiary surely can sue its parent for breach of contract. This is particulary true where the contract action is brought by a trustee or liquidator on behalf of a judicially recognized insolvent subsidiary. Additionally, our reasoning is not inconsistent with the decisions of those circuit courts that have held that a subsidiary cannot sue its parent under an alter-ego theory. See Williams v. California First Bank, 859 F.2d 664 (9th Cir. 1988); Mixon v. Anderson, 816 F.2d 1222 (8th Cir. 1987). Nowhere in these cases did the courts conclude that a subsidiary and parent were one and the same entity and therefore could not sue each other. Rather, their reasoning was premised on the underlying nature of the states' laws at issue. These states' laws viewed the "alter ego theory of piercing the corporate veil" as "one personal to the corporate creditors rather than the corporation itself." Mixon v. Anderson, 816 F.2d at 1225. This reasoning does not adversely affect our conclusion since the underlying cause of action here clearly permits a third party beneficiary to sue a contracting party. Therefore, we find that Director can sue Inamed on behalf of Cooperative for breach of contract since Cooperative could have done so.
Inamed's reliance on Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752 (1984), is misplaced. In Copperweld, the Supreme Court held that a wholly-owned subsidiary and parent are incapable of conspiring with each other under section 1 of the Sherman Antitrust Act. Id. at 770-71. The key to the Court's reasoning, however, was its focus on the underlying concern of the Sherman Act which is to prohibit the concerted activity of "two independent sources of economic power [that] previously pursued separate interests." Id. (emphasis added). Our conclusion is entirely consistent with the Copperweld decision. We do not hold that a wholly-owned subsidiary has a separate economic agenda than its parent. We merely conclude that they are independent entities, each worthy of recognition here. Therefore, Copperweld does not require dismissal.
Inamed's reliance on cases that have applied Copperweld's reasoning and expanded it to civil conspiracy cases also must fail. See Pizza Management, Inc. v. Pizza Hut, Inc., 737 F. Supp. 1154 (D. Kan. 1990)(applying Copperweld's reasoning and holding that for purposes of civil conspiracy a parent and wholly-owned subsidiary are not two entities); Laxalt v. McClatchy, 622 F. Supp. 737 (D. Nev. 1985)(same). These decisions differ from this Court's articulated view of Copperweld generally and civil conspiracy among affiliated corporations in particular. See In Re Conticommdity Services, Inc., 733 F. Supp. 1555, 1568 (N.D. Ill 1990)(limiting Copperweld "to the context of antitrust actions" and refusing to hold that a wholly-owned subsidiary can never engage in civil conspiracy with its parent); cf. Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir. 1989)(refusing to extend the Copperweld reasoning to RICO actions). Accordingly, Inamed's civil conspiracy cases are not controlling, and its motion to dismiss pursuant to 12(b)(6) is denied.
For the foregoing reasons, the defendant's motion to dismiss plaintiffs' complaint is denied.
Charles P. Kocoras
United States District Judge
Dated: October 18, 1991