A recent Massachusetts appellate court ruling has held that a commercial landlord may not hold the parent company of its tenant, a failed subsidiary, liable for the tenant’s unpaid rent despite the court’s acknowledgment of evidence of a confused intermingling of activities between the parent and the subsidiary. The case is entitled OMV Associates, L.P. v. Clearway Acquisition, Inc., 82 Mass. App. Ct. 561 (2012).
In this case, the plaintiff landlord, OMV Associates, L.P. (“OMV”), leased certain commercial office suites to Clearway Technologies, LLC (“Clearway Technologies”), in 1999 and 2000. The parties entered into written leases for the suites. Clearway Technologies was a start-up company engaged in creating software. In late 2000, Mirror Image Internet, Inc. (“Mirror Image”), another software developer, became interested in combining with Clearway Technologies. Clearway Technologies created Clearway Acquisition, Inc. (“Clearway Acquisition”), as a subsidiary and transferred all its assets to that entity. The stock of Clearway Acquisition was then purchased by Mirror Image. Clearway Technologies transferred its leases with OMV to Clearway Acquisition.
Thereafter, Mirror Image and Clearway Acquisition worked to combine their technologies. Some Mirror Image employees began occupying the rented property and a Mirror Image sign was posted near the entry of one of the suites. In addition, Mirror Image and Clearway Acquisition combined their websites. Further, at least one document identified Clearway Acquisition as a division of Mirror Image. Finally, the two companies also shared the same president, chief financial officer, vice-president of engineering and director of human resources.
Ultimately, Mirror Image’s attempt to combine with Clearway Acquisition was not successful and Clearway Acquisition stopped paying rent to OMV after October 2001. OMV sued Mirror Image for the unpaid rent and other charges due from Clearway Acquisition. OMV alleged the theory of corporate disregard to hold Mirror Image liable on Clearway Acquisition’s leases. At trial in the lower court, a jury found for OMV against Mirror Image. However, the lower court judge allowed Mirror Image’s motion for a judgment notwithstanding the verdict.
On appeal, the Massachusetts Appeals Court upheld the lower court’s allowance of Mirror Image’s motion for a judgment notwithstanding the verdict. The Appeals Court held that in order to prevail on its corporate disregard claim, OMV was required to prove that there was active and pervasive control by Mirror Image over Clearway Acquisition with fraudulent or harmful consequences or that there was a confused intermingling of activity between the two entities in relation to OMV that caused injury. The Appeals Court held that OMV had failed to make either showing.
First, the Appeals Court held that, even assuming that Mirror Image exercised pervasive control over Clearway Acquisition, there was no evidence of a causal connection between that control and OMV’s injury. The Court relied on Massachusetts case law holding that courts will not pierce the corporate veil absent a showing that a parent’s pervasive control over a subsidiary was intended to perpetrate a fraud upon the plaintiff. Here, there was no evidence that Mirror Image used its inter-corporate relationship with Clearway Acquisition to perpetrate a fraud on OMV.
In regard to the second method of proving corporate disregard, the Appeals Court held that while there may have been evidence of a confused intermingling of activities between Clearway Acquisition and Mirror Image, there was no evidence that OMV, itself, was confused regarding the entity which was obligated on the leases. Particularly important to the Court was the fact that the relationship between OMV and Clearway Acquisition was established by written lease agreements. The Appeals Court noted that, “We believe a contract-based relationship, where the parties are plainly identified and their rights and obligations are clearly defined, is less likely to present the sort of rare situation that calls for corporate disregard in order to prevent gross inequity.” Further, the Court noted that OMV was “an experienced commercial landlord” which should not have been confused as to the identity of its tenant by the evidence that it claimed established a confused intermingling between Mirror Image and Clearway Acquisition.
Finally, the Appeals Court noted that disregard of corporate entities is reserved for extremely rare situations to prevent “gross inequity.” The Court held that the confused intermingling between Mirror Image and Clearway Acquisition did not result in gross inequity to OMV because, despite OMV’s assertion that it believed that Mirror Image was liable on the leases, OMV took no action to protect itself from the harm that ultimately resulted.
The OMV Associates, L.P. v. Clearway Acquisition, Inc., case is important for several reasons. First, it establishes that a landlord will be unlikely to hold the parent company of a tenant subsidiary liable for the tenant’s unpaid rent unless it can affirmatively establish fraud by the tenant and its parent or that it was reasonably confused, despite being a sophisticated commercial landlord, as to which party was the responsible for payment of rent and other charges under a lease. Further, the case highlights the fact that a landlord must be vigilant when leasing property to a subsidiary or a parent.