Parent-Subsidiary relationship advances for electric power and other operating expenses and were required
Berkey vs Third Ave, Ry. Co. (1926) by the parent company to be paid back gradually by the subsidiary — this
Cardozo
a passenger was injured because of the negligent motorman of 42nd street company whose
stocks were substantially all owned by 3rd ave company. Considering this, a claim arose
that 3rd ave actually operated 42nd street company, using another company’s franchise in
violation of the law therefore subjecting it to the liability for the tort committed. Evidence
showed, however, that 42nd operated and existed separately from 3rd ave, using its own
resources to fund its operations. The court refused to see them both as one entity in line
with the evidence.
DOCTRINE
stock ownership alone is insufficient to charge the dominant company with liability for the
torts of the subsidiary
the law only prohibits the use by the parent company of another’s franchise without the
consent of the appropriate commission, not stock ownership
this repayment (of loans from the parent for expenses of the subsidiary) is inconsistent with
the notion that the parent was operating the cars on its own account
FACTS
1. Berkey boarded a street car and was later hurt in getting out of the car through the
negligence of the motorman.
2. the franchise to operate a street car railroad belonged to forty-second street,
Manhattanville and Saint Nicholas Avenue Railway Company. Note that substantially
all the stock of that company is owned by the 3rd avenue railway company (R) which
has its own franchise along other streets
ISSUE with HOLDING
1. w/n Third Ave actually operates the entire system of connected roads and is thus liable
— NO
a. 42nd street company deposits its fares in its own bank account. it pays out of
that account alone the wages of its motormen and conductors. it wasn’t
organised by 3rd ave as a decoy and no evidence shows that they had a hand
in its organization at all, nor that 3rd ave had any interest in it as shareholders
or otherwise at the time of the formation of 4nd street company so all
indications show that it has a separate life and operation
2. maybe other circumstances show that it isn’t a separate entity?
a. stock ownership alone is insufficient to charge the dominant company
with liability for the torts of the subsidiary so other ties must be shown:
b. the members of the 2 BODs were nearly the same. each road had the same
executive officers (president, treasurer, general manager, paymaster and
counsel)
c. the parent (3rd ave) has made loans to the subsidiary from time to time for
construction and operating expenses but there’s nothing to show that the
money was for the original construction. these were made as temporary
advances for electric power. these loans, however, were made as temporary
repayment is inconsistent with the notion that the parent was operating
the cars on its own account
i. the subsidiary pays with its own money. basically, it covered its
own expenses
3. another point of contention: 3rd ave was the dominant stockholder not only in this
subsidiary but also in many others. the cars of those routes were all marked “Third
Avenue System” but their transfer slips bore the names of each company that issued
them. These cars, when new ones become necessary, are bought by 3rd ave and then
leased to subsidiaries including 42nd street company who pay daily rentals and only
use the cars within their own routes — does this mean that 3rd ave. operated other
railroads in violation fo the law?
a. if a contract exists permitting 3rd ave to use other companies’ cars and
franchises as their own, this would be in violation of the Public Service
Commissions Law prohibiting the transfer, assignment, lease of any lease.
violation of this law subjects the company to fines and the officers to
prosecution for a misdemeanour
b. here, no such agreement can be inferred from the circumstances — the
community of interest should be between the subsidiary and the parent who
would be prompted to make advances for operating expenses of the
subsidiary but here they were required to be repaid
c. the law only prohibits the use by the parent company of another’s
franchise without the consent of the appropriate commission, not stock
ownership — this protects the creditors and stockholders of the parent
company from an increase of liabilities and an impairment of assets by
an extension of corporate activities not approved by the Public Service
Commission
d. it also protects the public who is entitled to cheap, continuous and efficient
operation
e. basically, a parent is not liable when the subsidiary has clearly maintained a
separate organization and separate existence. “we thwart the public policy
of the State instead of defending or upholding it, when we ignore the
separation between subsidiary and parent, and treat the two as one”
DIGESTER: Anton Mendoza.
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