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N.Y. Tr. Co. v. Island Oil & Transp. Corp. - 34 F.2d 655 (2d Cir. 1929)

Rule:

The parent's liability to a third person depends on quite different considerations from that to a subsidiary; the second is a question of intent, like that in any other contract. Having for one reason or another adopted the form of independent companies for the conduct of their enterprises, each with a jural personality of its own, the associates could create whatever rights between themselves they wished, provided they gave the necessary expression to their intent. However, the form of utterance chosen is never final; it is always possible to show that the parties did not intend to perform what they said they would.

Facts:

The parent company, Island Oil & Transportation Corporation, not being permitted under the Mexican law to own or operate oil-bearing lands, within 50 kilometers of the coast, resorted to the device of organizing a number of Mexican companies, staffed with Mexican officers. Island held all the shares of stock in these, except such as were necessary to qualify the directors, and conducted the business directly,but the Mexican officers of these companies had no voice whatsoever in its affairs, decided nothing, and were not consulted by parent Island Oil. Nevertheless, separate books of account were kept between the subsidiaries and Island Oil, showing apparent sales and payments, and in general a complete simulacrum of real transactions. The Mexican law required the Mexican companies to keep books of account and records in Spanish, which showed, inter alia, that a claimant a very large indebtedness for oil, which the parent (Island Oil) had not paid. The shares of stock of all these subsidiaries having been pledged under a mortgage of the parent company, they were sold in foreclosure, and the subisdiary, then in new hands, filed a claim against the receivers of the parent for the balance thus shown due. The master had dismissed the claim as being without substance.The district court dismissed the complaint.

Issue:

Can the appellant company validly claim against the receivers of the parent company?

Answer:

No.

Conclusion:

The court affirmed the decree dismissing appellant's claims because the court refused to recognize an obligation where none existed, because by hypothesis both parent and subsidiary, were concerned in a fraud upon a third party. The court found that the subsidiary had not proven that they were owed a legal obligation for utterances that would otherwise have not created them, because they were part of a plan to deceive third persons.

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