Recent Developments in Federal Court Regarding Ascending Liability

A federal appeals court has provided a useful list of factors to consider in determining whether or not a “parent” corporation is legally responsible for the liabilities and obligations of a “subsidiary” or affiliate.

Church Law and Tax1998-01-01

Ascending Liability

Key point. Denominational agencies and churches are not automatically responsible for the acts and obligations of “subsidiary” or affiliated organizations. There must be a legal basis for imputing liability to the “parent” organization, and this is a very difficult task.

A federal appeals court has provided a useful list of factors to consider in determining whether or not a “parent” corporation is legally responsible for the liabilities and obligations of a “subsidiary” or affiliate. While this case involved a parent and subsidiary business corporations, the court’s conclusion will be directly relevant to churches and denominational agencies that are sued as a result of liabilities of subsidiary or affiliated corporations. Here is the list of 12 factors to be considered:

(1) the parent corporation owns all or a majority of the stock of the subsidiary;

(2) the corporations have common directors or officers;

(3) the parent and the subsidiary have common business departments;

(4) the parent and the subsidiary file consolidated financial statements and tax returns;

(5) the parent corporation finances the subsidiary;

(6) the parent corporation caused the incorporation of the subsidiary;

(7) the subsidiary has grossly inadequate capital;

(8) the parent corporation pays the salaries or expenses or losses of the subsidiary;

(9) the subsidiary has substantially no business except with the parent corporation;

(10) the parent uses the subsidiary’s property as its own;

(11) The daily operations of the two corporations are not kept separate;

(12) the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings.

Application. Churches and denominational agencies are routinely sued as a result of the actions or obligations of affiliated organizations. For example, a denomination is sued as a result of the misconduct of an employee of an affiliated church. Or, a church is sued as a result of the actions of a teacher employed by an affiliated school. It is important to recognize that “ascending liability” in such cases is not automatic. The person bringing the lawsuit must establish a legal basis for imposing liability on the “parent” organization. The 12 factors mentioned in this case demonstrate that finding a “parent” organization legally responsible for the acts or liabilities of a “subsidiary” can be very difficult. This will be a useful precedent for denominational agencies and churches to cite when they are sued as a result of the liabilities of an affiliated organization. Gundle Lining Construction Corp. v. Adams County Asphalt, Inc., 85 F.3d 201 (5th Cir. 1996). [ Denominational Liability]

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