Minnie B. Berkey v. Third Avenue Railway Company

New York Court of Appeals · Corporations

Corporationsparent corporationsubsidiarycorporate liabilityoperationdominationagencylicense

Facts

The question was whether the Third Avenue Railway Company had dominated the business of the Forty-second Street Railway Company so extensively that the subsidiary's liabilities became the parent's liabilities. The parent had done acts with the concurrence of the subsidiary, and the legal effect of those acts determined liability. The plaintiff argued that the parent was liable apart from any contract or agreement because direction by the parent and submission by the subsidiary effected a change of operation. The court considered this argument against section 54, which prohibits agreements between street railroad corporations for one to use or operate the franchise of another without approval.

Issue

Whether a parent corporation becomes liable for the liabilities of its subsidiary on the theory that it operated the subsidiary's business, even when the alleged operation is based only on direction by the parent and submission by the subsidiary rather than on a more specific legal relation. Also, whether section 54 can be avoided by characterizing the parent's conduct as noncontractual operation.

Rule

A parent corporation that operates, legally or illegally, the business of a subsidiary assumes the subsidiary's liabilities or those growing out of what is done. But operation must mean a specific legal relation, such as operation as a coadventurer, principal, licensee, or possibly trespasser; mere domination, direction, and submission are not enough, especially where extending the concept would conflict with the statutory policy of section 54, which presupposes a contract or agreement and cannot be evaded by informal conduct.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Granite Transit Holdings owns all the shares of Lakefront Street Rail, which runs a trolley line in Cleveland. Granite's officers routinely send operating directives, approve schedules, and require Lakefront's managers to comply, but there is no evidence that Granite undertook to run the line as principal, coadventurer, licensee, or otherwise took over the route in a definite legal capacity.

A pedestrian injured by a Lakefront trolley sues Granite, arguing that Granite's domination and Lakefront's submission made Granite the true operator of the line. Which is the best answer?

Explanation. The majority accepted that a parent that actually operates a subsidiary's business, legally or illegally, assumes liabilities arising from that operation. But it rejected liability based on vague domination alone. Operation must be shown in a specific legal sense, such as coadventurer, principal, licensee, or at times trespasser. Mere direction by the parent and submission by the subsidiary are insufficient.