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FOURTH DIVISION
September 29, 2005

1-04-0448 and 1-04-0450 (Consolidated)

PRESIDING JUSTICE QUINN delivered the opinion of the court:

Plaintiffs Marguerite Forsythe, individually and as special administrator to the estate of her late husband, Michael F. Forsythe, and Elizabeth M. Szabala, special administrator of the estate of Gary Szabala, appeal from the judgement of the circuit court granting summary judgment to defendant Clark USA, Inc., pursuant to section 2-1005 of the Code of Civil Procedure (735 ILCS 5/2-1005 (West 2002)). On appeal, plaintiffs argue that because defendant owed a duty to the deceased, and because genuine issues exist as to whether defendant breached that duty and proximately caused their deaths, the circuit court erred in granting summary judgment for defendant. For the following reasons, we reverse the judgment of the circuit court and remand this cause for further proceedings.

BACKGROUND

Decedents Michael F. Forsythe and Gary Szabala were employed as maintenance mechanics for Clark Refining & Marketing, Inc. (Clark Refining), which operated an oil refinery in Blue Island, Illinois. On March 13, 1995, the decedents were killed when a fire erupted at the refinery while they were on their lunch break. The fire was apparently caused by other Clark Refining employees who attempted to replace a four-inch valve on an operating unit known as the Isomax without ensuring that flammable materials within the pipe had been depressurized. According to plaintiffs, those employees were not maintenance mechanics and not trained or qualified to work on the Isomax. After Clark Refining paid the estate of each decedent pursuant to the Workers' Compensation Act (820 ILCS 305/1 et seq. (2002)), plaintiffs brought a wrongful death suit against defendant, Clark Refining's sole shareholder.⁽¹⁾

According to their complaints, plaintiffs alleged that defendant had developed an "overall business strategy" for Clark Refining which "focused on minimizing operating costs and limiting capital expenditures" in order to increase revenue for its parent corporation, the Horsham Corporation. Plaintiffs alleged that defendant "had a duty to use reasonable care in imposing its overall business strategy on [Clark Refining] so as not to create an unreasonable risk of harm to others," but breached that duty by (1) "requiring [Clark Refining] to minimize operating costs including costs for training, maintenance, supervision and safety," (2) "requiring [Clark Refining] to limit capital investments to those which would generate cash for the refinery thereby preventing [Clark Refining] from adequately reinforcing the walls of the lunch room or relocating the lunch room to a safe position within the refinery," and (3) "failing to adequately evaluate the safety and training procedures in place at the Blue Island Refinery." As a result of defendant's overall business strategy of capital cutbacks, Clark Refining was required to have unqualified employees act as maintenance mechanics, whose inexperience resulted in the refinery fire which killed the decedents. Thus, plaintiffs alleged that defendant's overall business strategy was a proximate cause of the fire.

Filing a motion for summary judgment, defendant argued that, as a mere holding company whose only connection to Clark Refining was its status as sole shareholder, it owed no duty to either deceased. In support of its motion, defendant submitted numerous depositions and documents showing that its subsidiary Clark Refining owned and operated the refinery, and that it had no control over the day-to-day operations.

Plaintiffs responded that despite defendant's legal status in relation to Clark Refining, defendant was directly responsible for creating conditions in which such a fire could occur. Specifically, plaintiffs alleged that defendant's "overall business strategy" for Clark Refining resulted in a series of cutbacks at the Blue Island refinery that undermined safety, training, and maintenance there and, in turn, created an unreasonable risk of harm to others including the employees of Clark Refining.

To support their arguments, plaintiffs relied on evidence that defendant's directors drew up and approved Clark Refining's budget; the boards of both defendant and Clark Refining often met simultaneously; according to defendant's 1995 strategic business plan, defendant mandated that Clark Refining "position itself as a low cost refiner and marketer"; and defendant strove to "replenish the strategic cash reserve [of defendant] to $200 million" by "decreas[ing] capital spending *** to minimum sustainable levels" and instituting a "survival mode" philosophy to its 1995 business plan.

Plaintiffs further relied on evidence that while Clark Refining employees prepared its budget for 1995 expenditures, Paul Melnuk, who was both president of defendant and chief executive officer of Clark Refining, instructed those employees to reduce the budget by 25%. As a result, Clark Refining was forced to cut back on its maintenance department staff and cancel its training program for new operators, causing both a deterioration of the infrastructure at the refinery (as evidenced by a number of citations from the Occupational Safety and Health Administration for rules infractions including several related to the maintenance of the Isomax) and an overload of work on the undermanned maintenance staff.

Without explaining its reasoning, the circuit court granted summary judgment to defendant. Plaintiffs then filed separate notices of appeal, which we consolidated for review.

ANALYSIS

We begin our analysis by noting that summary judgement is appropriate when "the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." 735 ILCS 5/2-1005(c) (West 2002). The purpose of summary judgment is not to try a question of fact, but to determine if one exists (Golden Rule Insurance Co. v. Schwartz, 203 Ill. 2d 456, 462 (2003)), and we review an order granting summary judgment de novo (Morris v. Margulis, 197 Ill. 2d 28, 35 (2001)).

I. PLAINTIFFS' NEGLIGENCE CLAIM

In order to sustain a cause of action for negligence, a plaintiff must show that the defendant owed him a duty of care, breached that duty, and proximately caused his injuries. See Bonner v. City of Chicago, 334 Ill. App. 3d 481 (2002). Unless a plaintiff demonstrates that a duty is owed, there can be no negligence imposed upon the defendant. American National Bank & Trust Co. of Chicago v. National Advertising Co., 149 Ill. 2d 14, 26 (1992). There are four factors courts use to determine whether a duty exists: (1) the reasonable foreseeability of injury, (2) the likelihood of injury, (3) the magnitude of the burden of guarding against the injury, and (4) the consequences of placing the burden upon the defendant. See Sollami v. Eaton, 201 Ill. 2d 1, 17 (2002); Jones v. Chicago HMO Ltd. of Illinois, 191 Ill. 2d 278, 303 (2000). Whether a duty exists is a question of law that may be decided on a motion for summary judgment. See Sandoval v. City of Chicago, 357 Ill. App. 3d 1023, 1027 (2005).

Under Illinois law, a corporation is deemed a distinct legal entity, separate from other corporations with which it may be affiliated. See Daley v. American Drug Stores, Inc., 294 Ill. App. 3d 1024, 1027 (1998). Generally, a corporation as a legal entity exists separately from its shareholders, directors, and officers, who are not ordinarily liable for the corporations's liabilities. Jacobson v. Buffalo Rock Shooters Supply, Inc., 278 Ill. App. 3d 1084, 1088 (1996). Where a corporation is the sole shareholder of another corporation (as defendant was here), the general rule is that the shareholder-corporation is not liable for the conduct of its subsidiary unless the corporate veil can be pierced. See Esmark, Inc. v. National Labor Relations Board, 887 F.2d 739, 753 (7th Cir. 1989) ("[T]he general rule is that a shareholder is not liable for the obligations of a corporation unless the shareholder exercised 'complete domination' over the corporation's decisionmaking, treating the corporation as a 'mere instrumentality' or 'alter ego' to advance the shareholder's personal interests. [Citations]. Thus, in general, a parent corporation may not be held to account for the liabilities of a subsidiary unless the legal separateness of parent and subsidiary has been disregarded in a wide range of corporate matters"); see also Cosgood Distributors, Inc. v. Haff, 343 Ill. App. 3d 426, 428-29 (2003) (discussing the factors courts use to determine whether to pierce the corporate veil).

Defendant rests its "no duty owed" argument solely upon its status "as [Clark Refining's] sole shareholder, or on its status as intermediate holding company between [Clark Refining] and the ultimate parent Horsham." Citing the rule that corporations are distinct legal entities, and extolling the fact that plaintiffs have foresworn any attempt to pierce the veil between it and Clark Refining, defendant contends that it owed no duty to either decedent.

There is, however, a well-established though seldom employed exception to "the general rule that the corporate veil will not be pierced in the absence of large-scale disregard of the separate existence of a subsidiary corporation"; that exception being "direct participant" liability. See Esmark, 887 F.2d at 755. "Although not often employed to hold parent corporations liable for the acts of subsidiaries in the absence of other hallmarks of overall integration of the two operations, it has long been acknowledged that parents may be 'directly' liable for their subsidiaries' actions when the 'alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management,' and the parent has interfered with the subsidiary's operations in a way that surpasses the control exercised by a parent as an incident of ownership." Pearson v. Component Technology Corp., 247 F.3d 471, 486-87 (3rd Cir. 2001), quoting United States v. Bestfoods, 524 U.S. 51, 64, 141 L. Ed. 2d 43, 58, 118 S. Ct. 1876, 1886 (1998), quoting W. Douglas & C. Shanks, Insulation From Liability Through Subsidiary Corporations, 39 Yale L.J. 193, 207 (1929); see also Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 524, 85 L. Ed. 982, 992-93, 61 S. Ct. 675, 684 (1941) ("[I]t is well settled that where a holding company directly intervenes in the management of its subsidiaries so as to treat them as mere departments of its own enterprise, it is responsible for the obligations of those subsidiaries incurred or arising during its management. [Citations.] *** A holding company which assumes to treat the properties of its subsidiaries as its own cannot take the benefits of direct management without the burdens").

Though we could not find, nor did the parties cite, any Illinois court addressing this exception, there is strong support for recognizing such liability. In Esmark, where the National Labor Relations Board found a parent corporation liable for the unfair labor practices of its subsidiaries, not on the basis of the "alter ego" or "corporate veil piercing" doctrines, but instead as a " 'direct participant' " in those practices, the Seventh Circuit provided an extensive discussion of this exception. See Esmark, 887 F.2d at 755.

Quoting an article co-written by former United States Supreme Court Justice (but then-Professor) William O. Douglas, Justice Cudahy noted that such "direct liability" was possible even where veil piercing was not:

"Writing in 1929, then-Professor William O. Douglas counseled that four actions would generally insure that a parent corporation would not be held liable for its subsidiaries' wrongdoing:

'(1) A separate financial unit should be set up and maintained. That unit should be sufficiently financed so as to carry the normal strains upon it. *** (2) The day to day business of the two units should be kept separate. *** (3) The formal barriers between the two management structures should be maintained. The ritual of separate meetings should be religiously observed. *** (4) The two units should not be represented as being one unit.'

Douglas and Shanks, Insulation from Liability through Subsidiary Corporations, 39 Yale L.J. 193, 196-97 (1929). So far as appears from the record here, Esmark followed the four steps recommended by Justice Douglas to avoid liability for its subsidiaries' obligations. However, Douglas also noted that '[t]here is a group of cases where liability is imposed upon the parent for torts of the subsidiary, even though the four standards of organization and operation which have been discussed above are *** met.' Id.at 205. As an example, Justice Douglas noted that liabilty has been imposed in instances where the parent is directly a participant in the wrong complained of. The parent has been held liable in a tort action for inducing the subsidiary by means of its stock ownership to breach a contract with the plaintiff. Stock ownership was not enough. But the use of the latent power incident to stock ownership to accomplish a specific result made the parent a participator in or doer of the act. Again, there was interference in the internal management of the subsidiary; an overriding of the discretion of the managers of the subsidiary.'

Id. at 208-09 (footnote omitted)(emphasis added)." Esmark, 887 F.2d at 755.

Quoting the same article, the Seventh Circuit recounted Douglas' acknowledgment that such "direct participation" liability arises from the "'[d]irect intervention or intermeddling by the parent in the affairs of the subsidiary and more particularly in the transaction involved, to the disregard of the normal and orderly procedure of corporate control carried out through the election of the desired directors and officers of the subsidiary and the handling by them of the direction of its affairs.'" Esmark, 887 F.2d at 755, quoting 39 Yale L.J. at 218.

The Seventh Circuit went on to cite Judge Learned Hand, who

"similarly recognized that a parent corporation could be held liable for the actions of its subsidiaries where the parent directly supervised the conduct of a specific transaction[:]

'Control through the ownership of shares does not fuse the corporations, even when the directors are common to each. One corporation may, however, become an actor in a given transaction, or in part of a business, or in a whole business, and, when it has, will be legally responsible. To become so it must take immediate direction of the transaction through its officers, by whom alone it can act at all. *** [L]iability ordinarily must depend upon the parent's direct intervention in the transaction, ignoring the subsidiary's paraphernalia of incorporation, directors and officers. The test is therefore rather in the form than in the substance of the control; in whether it is exercised immediately, or by means of a board of directors and officers, left to their own initiative and responsibility in respect of each transaction as it arises.'" Esmark, 887 F.2d at 755-56, quoting Kingston Dry Dock Co. Lake Champlain Transportation Co., 31 F.2d 265, 267 (2d Cir. 1929).

Thus, the Seventh Circuit found that "[u]nder this 'transaction- specific' theory of direct participation," a "parent corporation may be held liable for the wrongdoing of a subsidiary where the parent directly participated in the subsidiary's unlawful actions." Esmark, 887 F.2d at 756.

In Bestfoods, the United States Supreme Court also recognized this notion of "direct participant" liability:

"As Justice (then-Professor) Douglas noted almost 70 years ago, derivative liability cases [i.e., corporate veil piercing cases] are to be distinguished from those in which 'the alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management' and 'the parent is directly a participant in the wrong complained of.' Douglas 207, 208. In such instances, the parent is directly liable for its own actions. See H. Henn & J. Alexander, Laws of Corporations 347 (3d ed. 1983) *** ('Apart from corporation law principles, a shareholder, whether a natural person or a corporation, may be liable on the ground that such shareholder's activity resulted in the liability')." Bestfoods, 524 U.S. 51, 64-65, 141 L. Ed. 2d 43, 58, 118 S. Ct. 1876, 1886,(1998).

Plaintiffs here alleged that defendant was a proximate cause of the decedent's deaths via its own direct conduct, i.e., by mandating that Clark Refinery operate the refinery at "survival mode" and by reducing the capital expenditures to the "minimum sustainable level," defendant created conditions within the refinery which posed an unreasonable risk of harm to refinery employees like the decedents. In other words, by mandating how Clark Refining was to operate the Blue Island refinery (at a 25% cost reduction), plaintiffs allege that defendant "interposed a guiding hand" in Clark Refining's management of the refinery, leaving Clark Refining "no choice but to obey." SeeEsmark, 887 F.2d at 756-57 ("A parent corporation, by virtue of its ownership interest, may direct a subsidiary's actions, and the subsidiary will have no choice but to obey. A parent corporation may disregard the subsidiary's independence at its whim"). Because plaintiffs' theory of negligence does not rest upon defendant's legal status in relation to Clark Refinery, but instead on defendant's own conduct, we find that plaintiffs have invoked the "direct participation" exception, and the duty owed and (allegedly) breached by defendant is that owed by each individual to another " 'to exercise ordinary care to guard against injury which naturally flows as a reasonably probable and foreseeable consequence of his act.'" Zakoff v. Chicago Transit Authority, 336 Ill. App. 3d 415, 421 (2002), quoting Nelson v. Union Wire Rope Corp., 31 Ill. 2d 69, 86 (1964).⁽²⁾