Posted on July 21, 2023 by: Dylan G. LaMorte
On June, 23, 2023, in the decision In re First Reserve Management., L.P., No. 22-0227, 2023 WL 4140454 (Tex. June 23, 2023), the Texas Supreme Court analyzed when a corporate parent’s control over its subsidiary’s operations might give rise to the parent’s liability under a “negligent undertaking” theory. The Texas Supreme Court held that, in order to sustain a negligent undertaking theory against a corporate parent for its role in its subsidiary’s operations under Texas law, a plaintiff must have proof that the parent engaged in affirmative, direct control of the aspect of the operations of the subsidiary that gave rise to the alleged injury. It is not enough that the parent appoints directors of the subsidiary, or that it owns a controlling stake in the subsidiary. The decision emphasizes that a corporate parent’s liability for the actions of its subsidiary is the exception, and not the general rule, and it is a plaintiff’s obligation to plead facts in support of any exception to the general rule that it intends to rely upon.
According to the complaint, a series of explosions occurred at the TPC petrochemical processing plant in Port Neches, Texas, resulting in property damage, personal injuries, and the release of toxic chemicals. The incident led to the filing of over 2,000 lawsuits involving more than 7,000 plaintiffs, which were consolidated in the multi-district litigation (“MDL”) court. Id. at 1.
Plaintiffs sued the plant owner, the TPC Group (“TPC”), alleging that the explosions occurred as the result of a pipe rupture caused by buildup of material in the piping. Plaintiffs argued that the buildup could have and should have been eliminated by a turnaround that TPC delayed because of expense.
Plaintiffs also sought to assert claims against TPC’s corporate parents. TCP was owned indirectly by Sawgrass Holdings LP (“Sawgrass H”), which in turn was owned by two private-investor groups, one of which was First Reserve. The general partner of Sawgrass H was Sawgrass Holdings GP LLC (“Sawgrass GP”), which had a five-member Board of Managers. The private-investor groups each appointed two members to the Sawgrass GP Board, and the fifth member was TPC’s CEO. Id. at 2.
In their complaint, Plaintiffs asserted that the two private-investor groups, through their control of the four seats of the GP Board, together with Sawgrass H and Sawgrass GP, were responsible for TPC’s failure to perform the needed turnaround and other maintenance that would have prevented the explosions. Plaintiffs contended that the private-investor groups and Sawgrass H were TPC’s alter ego and liable for its torts by piercing the corporate veil. However, these veil-piercing and alter ego claims were released as part of a separate bankruptcy proceeding involving TPC. Plaintiffs were therefore forced to rely upon their direct tort claims against the private-investor groups for allegedly negligently undertaking to control TPC’s day-to-day activities to ensure plant safety. Id. at 4.
One of the private-investor groups, First Reserve, filed a motion to dismiss the negligent undertaking claims in the MDL court, which was denied. The Texas Court of Appeals denied mandamus review, explaining in a short opinion that Plaintiffs’ allegations gave fair notice of its claims. First Reserve then sought to submit the issue to the Texas Supreme Court pursuant to a Petition for Writ of Mandamus. The Texas Supreme Court therefore considered in its opinion whether Plaintiffs sufficiently pleaded claims of negligent undertaking in the complaint to withstand First Reserve’s motion to dismiss. As described below, the Texas Supreme Court held that Plaintiffs had not done so.
A defendant who undertakes to render services that it knows or should know are necessary for the protection of “the other’s person or things” must exercise reasonable care in performing the undertaking. Id. at 4. The Texas Supreme Court outlined the critical inquiry for determining a negligent undertaking, which is whether a defendant acted in a way that requires “the imposition of a duty where one otherwise would not exist” and is implicated where the undertaking is an affirmative course of action rather than an omission. Id. at 4.
The Texas Supreme Court teased out the often-misunderstood difference between a parent company’s oversight of its various subsidiary corporations from the parent’s direct control over the operation of its subsidiary’s facility, which can lead to liability under a negligent undertaking theory. For example, the Texas Supreme Court explained that even when a parent company appoints a member to the board of a subsidiary, that fact alone may not expose a parent corporation to liability for its subsidiary’s acts. And such activities which are consistent with the parent’s investor status, such as “monitoring of the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions, and articulation of general policies and procedures, should not give rise to direct liability.” Holding strong to corporate principles, the court emphasized that the creation of “affiliated corporations to limit liability while pursing common goals lies firmly within the law and is commonplace.” Id.
With this standard in mind, Plaintiffs were required to plead facts showing that First Reserve undertook in ways to run TPC’s day-to-day operations and specifically to delay the turnaround that could have prevented the explosion. However, after a close review of the complaint, the Texas Supreme Court concluded that Plaintiffs failed to sufficiently plead those facts. The complaint focused on First Reserve’s control “through the board” of Sawgrass H, and Plaintiffs did not state factually how First Reserve itself took and exercised control. For example, Plaintiffs alleged that First Reserve refused to authorize a turnaround to keep TPC’s balance sheet strong for a potential sale, but an undertaking duty cannot be predicated on a parent’s supervision of a subsidiary’s financial and budgetary decision. Id. at 5. While Plaintiffs’ complaint made many “legal accusations,” it did not have the appropriate factual allegations to show a cause of action with a basis in law against First Reserve for TPC’s conduct.
The Texas Supreme Court therefore concluded that the MDL court should have granted First Reserve’s motion to dismiss. However, in an unusual procedural twist, the Texas Supreme Court ultimately declined to direct the MDL court to act, noting that “mandamus is discretionary.” The Texas Supreme Court therefore denied the Petition for Writ of Mandamus. Notwithstanding the court’s ultimate denial of the Petition, the court’s discussion of a plaintiff’s burden in pleading a negligent undertaking claim against a corporate parent provides support for the general rule that a parent is not liable for the acts of its subsidiary.