World Wide Packaging v. Cargo Cosmetics: Must Corporate Parents Pay For The Youthful Indiscretions Of Their Subsidiaries?
You’re so excited. Your company just received a purchase order for 100,000 i-widgets from SuperKoolCo. The next month you receive a PO for 150,000 more i-widgets (demand has spiked during the pandemic, apparently). Ok, so SuperKoolCo still hasn’t paid you for the first shipment, but you know they’re good for it. After all, SuperKoolCo is a subsidiary of MegaEvyl Corp., one of the biggest conglomerates around. Six months later, you’ve shipped enough i-widgets to fill an Olympic-sized swimming pool (trust me, that’s a lot of i-widgets), but SuperKoolCo hasn’t paid you a dime. Do you have a case against SuperKoolCo’s parent, MegaEvyl?
The New York Appellate Division, First Department, recently tackled this question in World Wide Packaging LLC v. Cargo Cosmetics, LLC (April 1, 2021). World Wide is in the business of manufacturing packaging for cosmetic and personal care products. It had steady business relationships with three cosmetics companies that were all owned by parent company TPR Holdings, LLC. From time to time, the three companies would submit purchase orders to World Wide for packaging and other related services. According to World Wide, the three companies failed to pay invoices for goods and services totaling more than $7 million.
In its initial complaint, World Wide only sued the three TPR subsidiaries. Supreme Court (Debra A. James, J.) granted World Wide leave to amend the complaint to add TPR as a defendant, finding that World Wide’s proposed amended complaint adequately stated a cause of action “for breach of contract on the basis of corporate veil piercing” against TPR.
The Appellate Division reversed, however, finding that World Wide had failed to plead facts sufficient to show that TPR was liable for the debts of its subsidiaries. Under New York law, a parent company “generally cannot” be held liable for the debts of its subsidiaries, unless it either manifested an intent to be bound by the contract, or if veil-piercing circumstances exist.
Citing the poetically captioned Horsehead Indus. v. Metallgesellschaft AG, 239 A.D.2d 171, 657 N.Y.S.2d 632 (App. Div. 1st Dept. 1997), the court explained that an intent to be bound can be inferred from the parent’s participation in contract negotiations. While there was no question that the purchase orders at issue came from the subsidiaries, not the parent, World Wide had pleaded facts alleging that TPR employees frequently got involved in the creative aspects of the orders. Nevertheless, the court rejected World Wide’s argument that TPR had exhibited an intent to be bound, because World Wide had failed to allege that “TPR Holdings directly participated [in] or micro-managed each transaction underlying the purchase orders.”
The Appellate Division also rejected World Wide’s argument that TPR was liable under veil-piercing principles. World Wide alleged that TPR “exercise[d] total control” over the “day-to-day operations” of the three subsidiaries, that the parent and subs shared the same president and other officers, that e-mails concerning the transactions at issue came from TPR domains, that TPR “dominat[ed]” its subs, and that each sub was “merely an alter-ego, instrumentality [or] dummy” for TPR. Nevertheless, the court found that World Wide had failed to plead facts sufficient to show that the subsidiaries were not legitimate businesses, that they were created for an improper purpose, or that funds were diverted away from the subs in order to make them judgment proof: “Even if TPR Holdings exercised complete domination of the subsidiary defendants, plaintiff failed to allege that the abuse of the corporate form was for the purpose of defrauding plaintiff and causing it an injury.”
World Wide Packaging neatly summarizes New York law on the liability of parents for the debts of their subsidiaries. If employees of a corporate parent like MegaEvyl are involved in the transactions of its subsidiaries, contractual counterparties of the subsidiary might be tempted to think that MegaEvyl will be on the hook for the debts of its subs. But it’s not nearly that simple. As the Appellate Division acknowledged in an earlier decision that it cited in World Wide Packaging, “[I]t is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners.” Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, 2016 NY Slip Op 06903, 146 A.D.3d 1, 40 N.Y.S.3d 46 (App. Div. 1st Dept.) (citations omitted). A party seeking to pierce the corporate veil bears a “heavy burden” of showing both that the parent totally dominated the subsidiary and that that domination was used to commit a fraud or wrong against the plaintiff. Skanska.
