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Common Ownership of Sister Corporations Does Not Permit Piercing Corporate Veil of One Corporation in Order to Reach Insurance Policy of Second Corporation

In law school we are taught the sanctity of the corporate veil; that one of the purposes of the corporate structure is to protect the owners/shareholders of corporations from personal liability. One of my favorite law school examples was the taxi owner who owned 20 taxis. He created 10 corporations, two taxi cabs per corporation, and carried only the statutory minimum amount of insurance on each taxi. Although the owner was the sole stockholder in each of the ten corporations, he was not personally liable to a pedestrian who was struck by one of the cabs. Only the corporation that owned the cab was liable.
That law school example focused only on the personal liability of the stockholder, although it was obvious that the stockholder had created 10 corporations so that 90 percent of his corporate assets would be shielded from liability in the event that one corporation was successfully sued. Recently, though, the Supreme Court of Ohio ruled in a similar situation and answered the unanswered law school question, holding that an injured plaintiff could not seek to recover from a sister corporation of the corporation that was potentially liable for the damages that might be due to the plaintiff.
In Minno v. Pro-Fab, Inc., 121 Ohio St.3d 464, 905 N.E.2d 613 (2009), the plaintiff, an ironworker, was seriously injured when he fell 19 feet at his job. In his initial complaint, he sought damages against his employer, See-Ann, Inc., for an intentional tort of failing to provide a safe working environment. He then amended his complaint to include a claim against Pro-Fab, which was a sister corporation, on the basis that Pro-Fab was the alter ego of See-Ann. The plaintiff alleged that See-Ann and Pro-Fab were owned by the same two shareholders, had common owners and officers, maintained the same address, and were in a similar line of work. The plaintiff’s main interest was that while See-Ann did not carry general liability insurance, Pro-Fab did have such insurance.
Pro-Fab sought summary judgment, asserting that the plaintiff was only employed by See-Ann, that the two corporations were separate legal entities with different incorporation dates, and that neither corporation had an ownership interest in the other. The trial court granted summary judgment, but the appellate court reversed, finding that the plaintiff presented sufficient evidence to demonstrate a genuine issue of material fact as to whether Pro-Fab was fundamentally indistinguishable from See-Ann so that the plaintiff could pierce See-Ann’s corporate veil and reach Pro-Fab’s assets, including its general liability insurance policy.
The piercing of the corporate veil rule as previously set forth by the Ohio Supreme Court in Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Co., Inc., 67 Ohio St.3d 274, 617 N.E.2d 1075 (1993), is that “The corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when (1) control over the corporation by those to be held liable was so complete that the corporation has no separate mind, will, or existence of its own, (2) control over the corporation by those to be held liable was exercised in such a manner as to commit fraud, an illegal act, or a similarly unlawful act against the person seeking to disregard the corporate entity, and (3) injury or unjust loss resulted to the plaintiff from such control and wrong.” The somewhat different question presented in Minno v. Pro-Fab, Inc., though, was whether a corporation's veil could be pierced in order to hold a second corporation liable for the corporate misdeeds of the first, when the two corporations had common individual shareholders, but neither corporation had an ownership interest in the other corporation.
The Supreme Court noted that the rule as to sister corporations was different that the rule seeking to pierce the corporate veil to reach the stockholders. “In contrast to a shareholder's ownership of a corporation or a parent corporation's ownership of another corporation, the common shareholder ownership of sister corporations does not provide one sister corporation the inherent ability to exercise control over the other. Any wrongful act committed by one sister corporation might have been instigated by the corporation's owners, but it could not have been instigated by the corporation's sister.”
Thus, the Supreme Court reversed the appellate court and found that the plaintiff did not have a right of recovery against Pro-Fab because the doctrine of piercing the corporate veil was inapplicable. “A plaintiff cannot pierce the corporate veil of one corporation to reach its sister corporation. A corporation's veil may not be pierced in order to hold a second corporation liable for the corporate misdeeds of the first when the two corporations have common individual shareholders but neither corporation has any ownership interest in the other corporation. Despite the element of common shareholder identity, sister corporations are separate corporations and are unable to exercise control over each other in the manner that a controlling shareholder can. This lack of ability of one corporation to control the conduct of its sister corporation precludes application of the piercing-the-corporate-veil doctrine.”
The plaintiff’s theory in Minno v. Pro-Fab, Inc. is known as triangular piercing of the corporate veil. The dissent in the lower appellate court had called the plaintiff’s theory “unprecedented”, and the concept has been referred to as controversial by other courts. While the Ohio Supreme Court’s ruling might be seen as an affirmation of the sanctity of the corporate veil, it should be remembered that the case is unique in that the plaintiff was seeking to reach the general liability insurance of the sister corporation. The plaintiff did not seek to hold the stockholders liable, which would have then brought the corporate assets of Pro-Fab in play.