New Theory of Direct Participant Liability

In a case of first impression that provides an alternative to attempting to pierce the veil of a corporate defendant, the Supreme Court of Illinois has held that "direct participant liability" is a valid theory of recovery against a parent corporation. In Forsyth v. Clark USA, Inc., 864 N.E.2d 227 (2007), a personal injury case stemming from a fire that killed two employees of Clark Refinery, the plaintiff-estates alleged that Clark USA, the parent corporation and sole shareholder, controlled its subsidiary's budget in a way that led to the workplace accident by cutting funds for items such as maintenance and safety training. The court ruled that the parent corporation could be held liable if the facts were to show that it (1) specifically directed the activity which resulted in the occurrence at issue, and (2) the resulting injury was foreseeable. The evidentiary focus would be on whether the parent corporation "mandated an overall business and budgetary strategy and carried that strategy out by its own specific direction or authorization, surpassing the control exercised as a normal incident of ownership in disregard of the interests of the subsidiary."

The court emphasized that allegations of mere budgetary mismanagement, without more, do not give rise to the application of "direct participant liability." However, it noted that in this case, the same individual was both the President of Clark USA and the CEO of Clark Refining, and also that the boards of directors of the two companies met simultaneously. The court ruled that the evidence in the case raised genuine issues of fact which precluded the summary judgment which had been entered in favor of Clark USA, and the case was remanded for trial.

In deciding the case, the Supreme Court cited decisions from other states and from federal courts which had previously recognized this theory of liability. The court also recognized and discussed analogous cases applying the long-standing doctrine that corporate officers, although typically shielded from liability for corporate liabilities and debts, may nonetheless be held personally liable for torts in which they actively participated, such as fraud or tortious interference with contract. See, e.g., Madigan v. Tang, 805 N.E.2d 243 (2004); National Acceptance Co. of America v. Pintura Corp., 418 N.E.2d 1114 (1981).

Given that this new theory of liability could potentially be extended beyond the personal injury context, such as in cases involving contract liability, it is important that corporate formalities always be carefully observed by subsidiaries, as well as by their parents and by affiliated companies.