Parent Corporation Held Liable for the Acts of a Subsidiary Under Missouri Law

 In The Weitz Co. v. MH Washington, 2011 U.S. App. LEXIS 459 (8th Cir. Jan. 7, 2011), the Eighth Circuit Court of Appeals considered whether a parent corporation could be liable for the acts of a subsidiary under Missouri law.  The case arose out of the construction of an 18 unit town home development in Kansas City, Missouri.  MacKenzie House, LLC, a Colorado real estate company, was the developer and managing member of MH Washington, LLC.  The Weitz Company, LLC was the general contractor (until it was terminated in September of 2006).

The project was built pursuant to a “prime contract”, consisting of two contract documents published by the American Institute of Architects.  AIA Document A111 is a standard form agreement between an owner and contractor on large projects requiring a guaranteed maximum price.  Form A111 adopts by reference AIA Document A201, “General Conditions of the Contract for Construction.”  Form A201 sets forth the rights, responsibilities, and relationships of the owner, contractor, and architect.  The A111 contract at issue in this case stated that it was between Weitz and “the Owner” MH Washington, LLC.  It was signed by Don MacKenzie as President of MH Washington, LLC.  However, the A201 “General Conditions” contract (incorporated by reference in the A111) states “THE OWNER” of the project is MacKenzie House, LLC.

Weitz subcontracted most of the work on the project, but MH Washington had final authority over which subcontractors were used.  Ultimately, MH Washington rejected Weitz’s subs because it thought their bids were too high and selected its own.  Weitz objected, but MH Washington insisted on using cheaper subs, some of which could not obtain performance bonds.  Weitz and MH Washington eventually modified the A111 contract by adding a non-standard Article 10.4, whereby “the Owner” agreed to accept all risk for the performance and payment defaults of Weitz’s subs in performance of the work.

After work began, it became apparent the scheduled completion date would be delayed, which was attributed to the shoddy work and lack of personnel by the cheaper subs.  More than once, Weitz was forced to advance the costs of hiring replacement subs to correct and complete the work.  MH Washington defaulted on its payment obligations to Weitz.  Weitz, in turn, was unable to pay its subs, several of whom filed mechanic liens on the property.

Weitz sued MH Washington and MacKenzie House for breach of contract and MH Washington and MacKenzie House filed a counterclaim for failing to keep the project free from liens.  At trial, the jury found that MH Washington first breached the prime contract by failing to pay $701,876 to Weitz.  The jury returned a verdict in favor of Weitz for approximately $1 Million and in favor of MH Washington on its counterclaim for approximately $285,000.  The court held that MH Washington was either in a principal-agent relationship with MacKenzie House or its alter ego, and was therefore jointly liable to Weitz for MH Washington’s breach of contract.  MacKenzie House appealed.

On appeal, the Eighth Circuit found that MacKenzie House was intimately involved in all aspects of the project.  Directions to Weitz were printed on MacKenzie House letterhead and referenced “the original agreement made between MacKenzie House, LLC and the Weitz Company.”  The A201 contract stated that “THE OWNER” of the project was MacKenzie House, LLC.  Routine correspondence about the project was on MacKenzie House letterhead and indicated MacKenzie House as the “Owner.”  MacKenzie House participated in construction meetings as an owner and issued meeting notes on its letterhead.  MacKenzie House was the entity that terminated the contract with Weitz, via letter signed by Don MacKenzie as President and CEO of MacKenzie House.  The termination letter mentioned MacKenzie House’s involvement with the project several times and it was undisputed that MH Washington had no employees of its own and shared the same Colorado office as MacKenzie House.

Ultimately, the Eighth Circuit refused to make a decision on whether to pierce the corporate veil because there was little evidence presented as to when MH Washington was created, the extent of its initial capitalization, or whether it was the title owner of the project property.  Nevertheless, the Court did affirm the district court’s decision under a theory of principal-agent.  The Eighth Circuit agreed that MH Washington was only a business conduit for MacKenzie House, and that control of MH Washington was “actual, participatory and total,” meeting the requirements of Sedalia Mercantile Bank and Trust Co. v. Loges Farms, Inc., 740 S.W. 2d 188 (Mo. App. 1987).

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