Craig v. Lake Asbestos of Quebec, Ltd.
843 F.2d 145, 1988 WL 26517 (1988)
Rule of Law:
Under New Jersey law, piercing the corporate veil to hold a parent corporation liable for its subsidiary's tort obligations requires a showing that the parent so completely dominated the subsidiary that it had no separate existence and was merely a conduit, in addition to abusing the privilege of incorporation through fraud or injustice.
Facts:
- Clarence Craig suffered personal injuries from exposure to asbestos fibers while employed at the Owens-Corning plant in Berlin, New Jersey.
- Cape Industries (Cape), a publicly owned holding company incorporated in the United Kingdom, operated until 1979 in asbestos mining and distribution through its subsidiaries, including North American Asbestos Corporation (NAAC), which sold asbestos in the United States from 1953 to 1978.
- Charter Consolidated (Charter), a publicly held investment holding and finance company also incorporated in the United Kingdom, gradually acquired a 67.3% ownership stake in Cape's outstanding shares by 1978.
- From 1965 to 1978, Charter nominated and maintained three directors on Cape's Board of Directors, which typically consisted of between ten and fourteen directors.
- In 1973, Cape and NAAC were named defendants in asbestos injury suits in Texas, which they ultimately settled for $5.2 million.
- Following these settlements, Cape declined to defend other asbestos litigation in the United States, allowing default judgments totaling $78 million to be entered against it.
- NAAC was dissolved in 1978, and Continental Products Corporation (CPC) was formed by NAAC's former president, Charles G. Morgan, with 'termination compensation' from Cape, to continue distributing asbestos from Cape to former NAAC customers in the United States.
- In 1979, Cape sold its asbestos mining and marketing subsidiaries, agreeing to indemnify the buyer for U.S. asbestos-injury judgments only if the buyer continued Cape's policy of defaulting on judgments.
Procedural Posture:
- Clarence and Duveen Craig filed a personal injury lawsuit against asbestos suppliers, including Lake Asbestos of Quebec, Ltd. (LAQ) and North American Asbestos Corporation (NAAC), in a Pennsylvania state court.
- The action was removed to a federal district court on the basis of diversity jurisdiction.
- Defendant LAQ impleaded Charter Consolidated P.L.C. (Charter) and its subsidiaries as third-party defendants, alleging they were 'alter ego entities' of Cape Industries and its subsidiaries, and thus liable for contribution or indemnity.
- All original defendants, including LAQ, settled with the plaintiffs, with LAQ settling conditionally to maintain its third-party action against Charter.
- LAQ and Charter stipulated to a bench trial on the sole issue of whether Charter was responsible for Cape’s liability share as if Cape had been found liable to Craig.
- The federal district court, applying New Jersey law, found Charter liable for Cape’s tort obligations under an 'alter ego' or 'piercing the corporate veil' theory, concluding that Charter's control over Cape was 'actual, participatory and pervasive' and Cape functioned 'as an operational division of Charter.'
- Charter Consolidated appealed the district court's judgment.
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Issue:
Does a parent corporation's majority stock ownership, placement of directors on the subsidiary's board, and involvement in major financial and management decisions constitute sufficient domination under New Jersey law to pierce the corporate veil and hold the parent liable for the subsidiary's tort obligations, even when the subsidiary maintained separate corporate formalities?
Opinions:
Majority - Sloviter, Circuit Judge
No, a parent corporation's majority stock ownership, placement of directors on the subsidiary's board, and involvement in major financial and management decisions do not constitute sufficient domination under New Jersey law to pierce the corporate veil where the subsidiary maintains separate corporate formalities. The Third Circuit, applying New Jersey law as established by State, Dep’t of Environ. Protection v. Ventron Corp., acknowledged the district court's finding of 'fraud or injustice' in Cape's scheme to avoid asbestos liability. However, it concluded that the evidence of Charter's control over Cape did not meet New Jersey's stringent standard for 'domination.' The court emphasized that piercing the corporate veil requires 'complete domination,' meaning the subsidiary has 'no separate mind, will or existence of its own,' and is merely a conduit for the parent. In Ventron, even 'constant' and 'day-to-day' involvement by a parent in a wholly-owned subsidiary's operations was deemed insufficient to establish the requisite dominance. Here, while Charter held a majority of Cape's stock, had board representation, and was involved in major financial and management decisions, Cape maintained separate books, records, bank accounts, offices, and staff. The court found this level of involvement to be less extensive than, or at least comparable to, the insufficient control in Ventron, thus failing to meet the high threshold for piercing the corporate veil.
Analysis:
This case significantly reinforces the high legal bar for piercing the corporate veil under New Jersey law, particularly regarding the 'domination' element. It clarifies that even substantial parental involvement, including majority ownership, board representation, and influence over major corporate decisions, is insufficient if the subsidiary maintains distinct corporate formalities and operational independence. The ruling underscores the strong presumption against disregarding corporate separateness, buttressing the foundational principle of limited liability, and making it more challenging for plaintiffs to hold parent companies directly responsible for the tort liabilities of their subsidiaries in New Jersey.
