On March 25, 2009, the Ohio Supreme Court held that a plaintiff cannot pierce the corporate veil of one corporation to reach another corporation, where both corporations have common shareholders but do not have any ownership interest in each other. See Minno v. Pro-Fab, Slip Opinion No. 2009-Ohio-1247.
Background
While on the job as an ironworker, Plaintiff Minno fell and suffered serious injuries. Minno alleged that his injuries occurred while in the scope of his employment, and were the result of his employer's failure to provide a safe working environment. Minno asserted claims against both See-Ann, his employer, and Pro-Fab, the subcontractor that was in control of his worksite. See-Ann carried no general liability insurance. As such, Minno alleged that Pro-Fab and See-Ann were sister companies, that Pro-Fab was the alter ego of See-Ann, and thus Pro-Fab was liable for his injuries. Minno did not allege any individual claims against the shareholders of either Pro-Fab or See-Ann.
Pro-Fab and See-Ann defended that though they had common owners and officers, engaged in a similar line of business, and had the same business address, they were separate legal entities, as evidenced by different incorporation dates and the fact that neither corporation has an ownership interest in the other.
Both Pro-Fab and See-Ann filed motions for summary judgment. See-Ann's motion was denied on the ground that a material issue of fact existed regarding whether See-Ann committed an intentional tort against Minno. Pro-Fab's motion was granted because the trial court concluded that Pro-Fab had no dominion or control over Minno in the performance of his duties while working for See-Ann.
Eleventh District Court of Appeals
The Eleventh District Court of Appeals reversed. It concluded that Minno had presented sufficient evidence to demonstrate a genuine issue of material fact regarding whether Pro-Fab was fundamentally indistinguishable from See-Ann and whether Minno could pierce the corporate veil of See-Ann to reach Pro-Fab's assets pursuant to the test set forth by the Supreme Court in Belvedere Condominium Unit Owners' Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 617 N.E.2d 1075, paragraph three of the syllabus.
The Belvedere test provides that, under Ohio law, "the corporate form may be disregarded and individual shareholders held liable for wrongs committed by the corporation when:
- 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;
- 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
- injury or unjust loss resulted to the plaintiff from such control and wrong."
Belvedere, 67 Ohio St.3d 274, 617 N.E.2d 1075, at paragraph three of the syllabus, and as modified (bracketed language) by the syllabus in Dombroski, 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d 538.
The Eleventh District Court noted that evidence of shared management and personnel does not, in and of itself, satisfy the first prong of the Belvedere test, but other evidence showing "unity of interest and ownership" does. Relying on a Sixth Circuit case, the court noted that evidence of shared management, identical business locations, identical industries, and use of the same phone lines and equipment is sufficient to establish that two corporations do not have separate personalities. Pro-Fab and See-Ann had common employees, were engaged in a similar line of business, and often combined equipment and training services. Thus, the court refused to hold as a matter of law that the entities were separate, even though they were legally organized as two distinct corporations.
The court also rejected Pro-Fab's argument that Minno could not satisfy the second prong of the Belvedere test because Pro-Fab had no ownership interest in See-Ann. With no ownership interest in See-Ann, Pro-Fab argued there was no way for it exercise control over See-Ann. The court of appeals held Pro-Fab's argument was without merit because the "question of control is not dependent upon ownership." It is enough to simply establish that the corporation is the alter ego or business conduit of the shareholder in control.
Finally, the court of appeals held Minno had satisfied the third prong of the test by demonstrating that Pro-Fab intentionally awarded its subcontract work to See-Ann because it knew See-Ann had no general liability insurance. There was a causal connection between Pro-Fab's control and its award of the job to See-Ann, which ultimately resulted in Minno's injury and additional losses which arose from See-Ann's failure to carry general insurance liability.
Ohio Supreme Court
The Ohio Supreme Court reversed the Eleventh District and reinstated the trial court's dismissal, holding that a plaintiff cannot pierce the corporate veil of one corporation to reach its sister corporation when neither corporation owns an interest in the other. Significantly, the Court also reaffirmed the three-pronged test set forth in Belvedere, as later modified by Dombroski v. Wellpoint, 119 Ohio St.3d 506, 2008-Ohio-4827, 895 N.E.2d 538.
Looking to Section 3, Article XIII of the Ohio Constitution, the Supreme Court noted that "the corporate form is used primarily because it creates a division between shareholders and their business concerns." This corporate form can be disregarded, however, if a plaintiff proves the three elements set forth in Belvedere. A plaintiff can use Belvedere to hold: (1) an individual shareholder liable for a corporation's wrongdoing; or (2) a parent corporation liable for the wrongdoings of its subsidiary corporation.
The same is not true, however, for an attempt to hold a sister corporation liable. Majority shareholders and parent companies hold a controlling interest in the companies or subsidiaries for which they are held liable. This "controlling interest" element, however, is not found in the case of sister companies who hold no ownership interests in each other. Even though they share common shareholders, the sister corporations are still separate corporate entities and cannot exercise control over each other they way a parent or majority shareholder can.
For example, in Minno, although Pro-Fab and See-Ann were "sister companies" controlled by the same owners, their common shareholder ownership did not provide one of them with the inherent ability to exercise control over the other. A wrongful act committed by one corporation might have been instigated by its sister corporation's owners, but could not have been instigated by the corporation's sister.
The Court held, then, that a plaintiff cannot pierce the corporate veil of one corporation to reach its sister corporation when the two corporations have common shareholders but neither has any ownership interest in the other. It is this lack of ability of one corporation to control the conduct of its sister corporation that precludes application of the piercing-the-corporate-veil doctrine. Because Pro-Fab and See-Ann were sister corporations without no ownership interests in each other, the doctrine of piercing the corporate veil is inapplicable. Thus, the Court reversed the Eleventh District and held that Pro-Fab was entitled to summary judgment on Plaintiff's claims.
Conclusion
The Court's decision marks a departure from the approach many appellate courts have taken regarding corporate veil piercing of sister corporations. Like the Eleventh District, other appellate courts around the country have previously held that a plaintiff can pierce the corporate veil to hold one corporation liable for the acts of another. In some cases, all the Plaintiffs seemingly have to do is establish that the two sister corporations are indistinguishable from each other. It appears Plaintiffs can easily do this by demonstrating that the corporations have similar names, business locations, purposes, and owners. This has created some legal uncertainty as to the purpose of separately incorporating similar businesses owned by common shareholders.
The Ohio Supreme Court, however, has made clear its rejection of this approach and appears to be the first state supreme court in the country to have done so. It has identified when it is appropriate to apply corporate veil piercing principles under Belvedere. Further, it has provided clear guidance concerning when sister corporations should be held liable for each other's misdeeds, and when their separate corporate forms should be respected under the law.
