Why Corporate Parents Can't Sue for Subsidiary's Breach of Contract Under NY Law

Let's cut right to the chase:

“New York law bars parent corporations from bringing direct suits aimed at vindicating injuries suffered by their subsidiaries.” Id.,citing NAF Holdings, LLC v. Li & Fung (Trading) Ltd., No. 10 Civ. 5762(PAE), 2013 WL 489020, at *7 (S.D.N.Y. Feb.8, 2013). As noted by the Federal Appeals Court for New York (the Second Circuit), a corporate subsidiary is a “separate corporation,” and the parent company thus does not have any inherent “standing to assert [the subsidiary's] legal rights.” Hudson Optical Corp. v. Cabot Safety Corp., No. 97–9046, 1998 WL 642471, at *3 (2d Cir. Mar.25, 1998) (summary order).

Why a Parent Company Can't Sue on Behalf of its Subsidiary Under NY Law

As a New York court recently noted, if the law were different, the following general rule would be eviscerated:

"[C]orporations have an existence separate and distinct from that of their shareholders, and an individual shareholder cannot secure a personal recovery for an alleged wrong done to a corporation. The fact that an individual closely affiliated with a corporation (for example, a principal shareholder, or even a sole shareholder), is incidentally injured by an injury to the corporation does not confer on the injured individual standing to sue on the basis of either that indirect injury or the direct injury to the corporation."

New Castle Siding Co., Inc. v. Wolfson, 97 A.D.2d 501, 502, 468 N.Y.S.2d 20, 21 (2d Dep't 1983)(internal citations omitted) aff'd, 63 N.Y.2d 782, 481 N.Y.S.2d 70, 470 N.E.2d 868 (1984); see also In re Beck Indus., Inc., 479 F.2d 410, 418 (2d Cir.1973) (“Where a parent corporation desires the legal benefits to be derived from organization of a subsidiary that will function separately and autonomously in the conduct of its own distinct business, the parent must accept the legal consequences, including its inability later to treat the subsidiary as its alter ego because of certain advantages that might thereby be gained. In short the parent cannot ‘have it both ways.’ ”); Clarex Ltd. v. Natixis Sec. Am. LLC, No. 12 Civ. 0722(PAE), 2012 WL 4849146, at *6 (S.D.N.Y. Oct.12, 2012) (“It is black-letter law that one corporation cannot assert an affiliate's legal rights.”)

The Takeaway

If you plan to sue on behalf of a corporation, make sure you are suing in the correct corporation's name; otherwise you claim is susceptible to being dismissed.

by Jonathan Cooper [email protected]

Non-Compete, Trade Secret and School Negligence Lawyer