Bernardin, Inc. v. Midland Oil Corporation
520 F.2d 771 (1975)
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Rule of Law:
A parent corporation will be held liable for the debts of its subsidiary when the subsidiary is a mere instrumentality of the parent, the parent uses its control to commit a wrong or fraud that causes unjust loss, and equity requires piercing the corporate veil to prevent injustice.
Facts:
- Midland Oil Corporation, an oil and gas company, was the sole owner of all capital stock in its subsidiary, Zestee Foods, Inc., a food processor.
- In May 1969, Zestee entered into a 'min-max order' agreement with Bernardin, Inc. for Bernardin to manufacture and warehouse a large, continuous supply of custom metal jar caps.
- In the fall of 1969, Zestee canceled the order for economic reasons but agreed to use the lithographed metal Bernardin had already prepared.
- By June 1970, Zestee had used very few caps, leaving Bernardin with approximately 600,000 caps that were finished or in process and not suitable for sale to others.
- On July 4, 1970, Zestee's processing plant was destroyed by a fire.
- Following the fire, Midland decided to liquidate Zestee and appointed one of its own vice presidents to oversee the process.
- Midland collected the insurance proceeds and sold off Zestee's remaining assets, using the funds to pay other creditors but leaving a substantial balance owed to Bernardin.
- Midland's actions left Zestee as a non-viable shell corporation with no assets to satisfy its debt to Bernardin.
Procedural Posture:
- Bernardin, Inc. filed a lawsuit against Zestee Foods, Inc. and its parent company, Midland Oil Corporation, in the United States District Court (trial court).
- The complaint sought joint recovery for goods specially manufactured for Zestee.
- Following a bench trial (trial by a judge without a jury), the District Court found Zestee and Midland jointly liable to Bernardin in the amount of $26,181.22 plus interest.
- Midland Oil Corporation, the defendant-appellant, appealed the judgment to the United States Court of Appeals for the Seventh Circuit. Bernardin, Inc. is the plaintiff-appellee.
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Issue:
Does a parent corporation that exercises complete control over its subsidiary, liquidates the subsidiary's assets for its own benefit, and leaves the subsidiary as an insolvent shell, become liable for the subsidiary's contractual debts to a third party?
Opinions:
Majority - East, Senior District Judge
Yes. A parent corporation is liable for its subsidiary's debts when the parent exercises such a degree of control that the subsidiary becomes a mere instrumentality, the parent uses that control to commit a wrong that causes an unjust loss, and piercing the corporate veil is necessary to prevent an inequitable result. The court found that Zestee was a mere instrumentality of Midland, satisfying numerous factors under the controlling test. Midland exercised its control to commit a wrong by liquidating Zestee, collecting all insurance and liquidation proceeds, and leaving Zestee as an insolvent shell unable to pay its creditors, including Bernardin. To permit Midland to escape liability after stripping its subsidiary of all assets would be inequitable and unjust. Therefore, the court pierced the corporate veil and held Midland and Zestee jointly liable for the debt owed to Bernardin.
Analysis:
This case provides a straightforward application of the 'mere instrumentality' test for piercing the corporate veil, reinforcing the precedent set by Steven v. Roscoe Turner Aeronautical Corp. The decision emphasizes that courts will look beyond the formal corporate structure to substance, especially where a parent company dominates a subsidiary to such an extent that they are effectively a single entity. It serves as a clear warning to parent corporations that they cannot use subsidiaries as a shield against liability after draining them of assets to the detriment of creditors. The ruling solidifies the multi-factor analysis used to determine the level of control necessary to justify piercing the veil in the Seventh Circuit.
