The Minnesota Court of Appeals recently ruled that a nonresident parent company may be subject to suit in Minnesota for damages claims against its insolvent Minnesota subsidiary company. The decision would appear to defeat a primary reason for forming a separate subsidiary business entity: the protection of related entities and their assets from potential liability arising from the business operations of the subsidiary. The facts concerning the relationship between the parent and its subsidiary in this recent decision show, however, that the court was sending a message that unless the subsidiary is a bona fide business entity and not merely the alter ego of a nonresident parent company, the parent may well be haled into a Minnesota court to answer for claims against the subsidiary. Read on to discover the factors about the relationship between a Wisconsin parent company and its Minnesota subsidiary company that led the court to conclude that the parent could be sued in a Minnesota court for debts owed by its wholly-owned subsidiary that was doing business in Minnesota.
In JL Schweiters Construction, Inc. v. Goldridge Construction, Inc., et al., Goldridge Group, a Wisconsin real estate holding company, formed a limited liability company ("White Pines LLC") that purchased land in Minnesota and developed it into a senior center. White Pines became insolvent and could not pay its subcontractors, which sued Goldridge in Minnesota state district court. The legal concept of personal jurisdiction determines whether it is fair to force a company from outside a state to defend against claims arising in that state. It is often said that for personal jurisdiction to exist, the nonresident must have had sufficient contacts with the state to ensure that forcing the party into a Minnesota court "does not offend traditional notions of fair play and substantial justice." In Goldridge, the court of appeals concluded that it was fair to force Goldridge to answer in Minnesota for the subcontractors' claims against White Pines because the facts showed that White Pines had no independence from Goldridge and served as an alter ego to Goldridge.
The factors that led the court of appeals to conclude that Goldridge was subject to suit in Minnesota are the following:
- Goldridge was the sole owner of White Pines.
- Goldridge completely controlled White Pines for its own purposes.
- Goldridge and White Pines shared a single business address.
- Goldridge guaranteed White Pines's debt that was secured by a $9.6 million mortgage.
- Goldridge used White Pines as a conduit for Goldridge's own business.
- White Pines had no directors, issued no financial statements and shared officers with Goldridge. The court of appeals said that White Pines's "complete lack of any officers, directors, or financial statements more strongly suggests that White Pines LLC is merely Goldridge Group's alter ego than would shared officers, directors, and financial statements."
The lesson of Goldridge is that the more a nonresident parent company treats a subsidiary as an alter ego of the parent, the greater the likelihood that the parent company will be subject to the jurisdiction of Minnesota courts. Because this issue has never before been addressed by Minnesota courts, it is likely that further review will be requested from the Minnesota Supreme Court and that the court will decide to hear the case.
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