North v. Higbee Co.
| Decision Date | 15 July 1936 |
| Docket Number | 25868. |
| Parties | NORTH et al. v. HIGBEE CO. et al. |
| Court | Ohio Supreme Court |
Appeal from Court of Appeals, Cuyahoga County.
Syllabus by the Court .
The separate corporate entities of a parent and subsidiary corporation will not be disregarded and the parent corporation will not be held liable for the acts and obligations of its subsidiary corporation, notwithstanding the facts that the latter was controlled by the parent through its stock ownership, and that the officers and directors of the parent corporation were likewise officers and directors of the subsidiary, in the absence of proof that the subsidiary was formed for the purpose of perpetrating a fraud, and that domination by the parent corporation over its subsidiary was exercised in such manner as to defraud complainant.
On May 31, 1922, the Cleveland Trust Company, a banking institution in the city of Cleveland, owner of the fee in trust of real estate fronting on Chester avenue, East Thirteenth street and Euclid avenue in Cleveland, Ohio, entered into a 99-year lease with the Crowell & Little Securities Company, a corporation, as lessee, covering said premises.
On June 1, 1922, the Crowell & Little Securities Company subleased to the Higbee Realty Company, a subsidiary of the Higbee Company, for a period of time expiring December 31, 2007 that portion thereof upon which was situated the Higbee Building, so-called, at a rental of $170,000 per year, plus taxes and assessments, with a provision binding the realty company to erect improvements thereon at a cost of $700,000 by July 1, 1923. This lease was duly recorded in the records of Cuyahoga county.
The Higbee Realty Company, in turn, sublet its leased premises to the Higbee Company for a period of 10 years. Three and a half years later, namely, on October 1, 1925, the Crowell & Little Securities Company sold and assigned its lease to the Union Trust Company as trustee, and the latter issued leasehold trust certificates, each representing an interest or proportional ownership in the lease in which the Crowell & Little Securities Company was sublessor. These certificates are held by plaintiffs and others on whose behalf this suit is brought.
Within the time stipulated in the lease, the Higbee Realty Company erected improvements upon the leased premises which far exceeded the $700,000 limit.
Some years later, but prior to the expiration of the 10-year lease mentioned above, the Higbee Company moved to a new location and continued to pay its rent to the realty company until the 10-year lease had expired. Thereafter, the Higbee Realty Company, being unable to procure a new tenant, defaulted in the payment of its rent to the Union Trust Company, trustee, as a result of which the leasehold trust certificate holders were not receiving payments upon their certificates. Meanwhile, the Union Trust Company was taken over by the superintendent of banks for the purpose of liquidation. Though requested by plaintiff, as leasehold certificate holder, to bring suit against the Higbee Realty Company and the Higbee Company for rent and taxes, the superintendent of banks refused, and plaintiff brought what is termed a ‘ class' suit on behalf of herself and other certificate holders, seeking payment of the taxes and rents which the realty company defaulted, and obtained judgment for the sum of $769,598.48, which judgment was affirmed by the Court of Appeals, one judge dissenting. This judgment was rendered, not against the Higbee Realty Company, the lessee, a subsidiary of the Higbee Company, but against the Higbee Company, its parent corporation.
The cause is now in this court on the allowance of a motion to certify the record.
Day & Day, Horwitz, Kiefer & Harmel, and Donald W. Kling, all of Cleveland, for appellees Amanda C. North and Harvey Brobst.
Tolles, Hogsett & Ginn, of Cleveland, for appellant Higbee Co.
McKeehan, Merrick, Arter & Stewart and L. C. Wykoff, all of Cleveland, for appellee A. A. McCaslin, receiver.
L. F. Laylin, of Columbus, for appellees superintendent of banks and Union Trust Co. trustee.
The Higbee Realty Company was organized in 1919 by the Higbee Company which was doing a large mercantile business throughout Northern Ohio. Its purpose in organizing the subsidiary was to sever itself from its realty holdings and to confine itself to the mercantile business.
Plaintiff relies for recovery upon the doctrine of disregarding the separate entities of the parent and subsidiary corporation and of holding the parent liable for the obligations of the subsidiary upon the theory that the latter was controlled by stock ownership in the former. It is not disputed that the stock ownership of the subsidiary was in the parent company, the officers and directors of which were also the directors of the subsidiary. Two of these directors were Asa Shiverick, who was president of both companies, and one Austin V. Cannon, an attorney of Cleveland, who was not only director, but who also acted as legal counsel for both companies.
In the opinion of the trial court, no fraud appeared to have been shown on the part of either subsidiary or parent. The legal proposition involved was stated by that court as follows: ‘ Can the court disregard the fiction of separate corporate entity of the subsidiary corporation when the facts disclose that a wrong and an injustice has been perpetrated upon innocent third persons in the absence of fraud or illegality and hold the parent company liable for the obligations of its subsidiary?’ (Italics ours.)
The trial court frankly stated that counsel on both sides were not in agreement with the law applicable to the case, and stated that many of the cases cited had no application to the facts found by the court. With this we can readily agree. A great many cases have been cited by counsel on both sides, a larger number of which concern, not contracts between private individuals, but contracts entered into by a subsidiary, such as railroads or other public utilities, which seek to evade public policy or statute law, whose tendency results in the creation of a monopoly or the evasion of duties which the corporations owe to the public. Many of them relate to intercorporate contracts by railroads or by public utilities concerning tariffs or rates which the public is required to pay. When we read those decisions in that light, such contracts affecting the public are readily distinguishable from those entered into between individuals or corporations in which the public is not concerned.
In its opinion, the trial court relied upon the Michigan case of People ex rel. Potter, Atty. Genl., v. Michigan Bell Telephone Co., 246 Mich. 198, 224 N.W. 438, the syllabus of which reads: ‘ Where a corporation is so organized and controlled and its affairs so conducted as to make it a mere instrumentality or agent or adjunct of another corporation, its separate existence as a distinct corporate entity will be ignored and the two corporations will be regarded in legal contemplation as one unit.’ That case pertained to telephone rates.
Forty days after the trial court's opinion in the instant case was filed, the Supreme Court of Michigan, in a case argued before the entire bench, where a private contract was involved, one not affecting public interest, decided the case of Gledhill v. Fisher & Co., 272 Mich. 353, 262 N.W. 371, 372, 102 A.L.R. 1042. The Supreme Court of Michigan distinguished the telephone case relied on by the trial court by using the following language: ‘ However, in that case the disregard of the corporate entity was impelled by the finding of the court that the relationship of parent and subsidiary was being used as a device to justify rates which were not based upon the real cost to the public utility of the service for which it charged, the court distinctly stating: ‘ When a corporation exists as a device to evade legal obligations, the courts, without regard to actual fraud, will disregard the entity theory.’ ' We shall later allude to the case of Gledhill v. Fisher & Co., supra.
Powell, in his work on ‘ Parent and Subsidiary Corporations' (1931), states on page 10 the legal proposition as follows:
And again, on page 91, in dealing with the theory of agency existing between parent and subsidiary, and expressing the opinion that the parent is not liable as principal for the acts of its subsidiary unless it expressly authorizes the act, the author states:
‘ A large corporation organizes a small subsidiary to conduct a limited and special branch of its business. The parent corporation owns all its capital stock, furnishes it with its initial working capital and finances it from time to time as occasion requires. The directors and officers of the two corporations are the same, their principal executive offices are in the same suite of rooms, their respective books of accounts are kept by the same employees. The executives devote nintey-nine per cent of their time and attention to the affairs of the parent corporation and one per cent to those of the subsidiary. All the legal requirements of the subsidiary as a separate corporation, however, are scrupulously observed and its business is efficiently managed.
‘ Now the law is clear, as we have shown, that under these circumstances the parent corporation is not liable for the...
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