CORPORATIONS - PARENT'S LIABILITY FOR SUBSIDIARY'S OBLIGATIONS

Authors

Michigan Law Review, University of Michigan Law School

Abstract

A parent corporation owned all the stock of a subsidiary which it had organized to hold real estate, its own business being mercantile. The directors and officers of both corporations were identical. The subsidiary sublet premises for ninety-nine years, in turn leasing them to the parent for ten years. Improvements were made in accordance with the subsidiary's contract, and "leasehold trust certificates" were issued by an assignee of the underlying lease. The parent quit the premises before the expiration of its lease, but paid the rent for the whole period. The subsidiary then defaulted on the ninety-nine year lease, having no assets with which to pay the rent. Plaintiffs, holders of "leasehold trust certificates," then sued the parent for the rent. Upon these facts it was held in a recent case that since there was no showing of actual fraud, the fact that one corporation owns all the stock of another or even has created the other to avoid personal liability will not make the parent, which is a separate entity, responsible for the obligations of the subsidiary. Three judges dissented on the grounds that where a corporation is so closely tied up with another and so controlled by stock ownership that it may be said to be a "mere agent, arm, instrumentality, or department of the parent" (which is a question of fact), the court will ignore the technically separate entities and hold the parent on the obligations of the subsidiary, without a showing of actual fraud.

Recommended Citation

Michigan Law Review, CORPORATIONS - PARENT'S LIABILITY FOR SUBSIDIARY'S OBLIGATIONS, 35 Mich. L. Rev. 467 (1937).
Available at: https://repository.law.umich.edu/mlr/vol35/iss3/7