Michigan generally respects the shield or veil of liability and asset protection afforded by incorporation. Likewise, Michigan courts usually recognize and enforce the distinction between separate corporate entities.¹ These protections may extend to a corporate entity, corporate officers, and shareholders. However, where use of the corporate form furthers an injustice, a number of legal and equitable doctrines are available which may allow the corporation, shareholder, and/or officer to be held accountable for tortious conduct. This article aims to provide an overview of these principles.

AGENCY PRINCIPLES

Whether in tort or contract actions, agency principles are available as an important legal tool to hold an entity or individual vicariously liable for the acts of another. The litmus test of whether an actual agency exists is whether the principal has a right to control the actions of the agent.² Importantly, the test is not dependent on whether actual control is or was exerted, but rather it is “the right to interfere that makes the difference between an independent contractor and a servant or agent.”³ As explained by the Court of Appeals, while “it is the power or ability of the principal to control the agent that justifies the imposition of vicarious liability ... the control must relate to the method of the work being done.”⁴

Determining whether an individual is an agent of another must be based on the particular facts of each case.⁵ Where there is a factual dispute, the Michigan Supreme Court has instructed that the determination is one for the factfinder: “[W]here there is a disputed question of agency, if there is any testimony, either direct or inferential, tending to establish it, it becomes an issue of fact.”⁶ A principal may be vicariously liable to a third party for harms inflicted by an agent even though the principal did not participate by act or omission in the agent’s tort.⁷

Michigan law has long recognized a subset of agency relationship which is alternately called apparent agency, agency by estoppel, or ostensible agency.⁸ This doctrine holds a principal liable for the acts of another (such as an independent contractor) where the principal holds out the negligent actor as acting on its behalf even if the actor does not qualify as an actual agent:

Not only may a principal be estopped in some circumstances from disputing the scope of the authority of one who admittedly is his agent, but it is also established that, in a proper case, one person may be estopped from denying that another is his agent. Thus, an agency by estoppel is established where it is shown that the principal held the agent out as being authorized, and a third person, relying thereon, acted in good faith upon such representation.⁹

Apparent agency is often alleged in medical malpractice cases, with the seminal case being Grewe v. Mt Clemens General Hospital.¹⁰ The Grewe Court acknowledged that in general, a hospital is not vicariously liable for the negligence of a physician who is an independent contractor and merely used the hospital facilities to render treatment to his or her own patients. However, “if the individual looked to the hospital to provide him with medical treatment and there has been a representation by the hospital that medical treatment would be afforded by physicians working therein, an agency by estoppel can be found.”¹¹ This is because the Court found “the relationship between a physician and a hospital may well be that of an independent contractor ... not subject to the direct control of the hospital. However, that is not of critical importance to the patient who is the ultimate victim of the physician’s malpractice.”¹²

To establish a claim of ostensible agency under Grewe, a plaintiff must show:

1. The person dealing with the agent must do so with belief in the agent’s authority and this belief must be a reasonable one;

2. This belief must be generated by some act or neglect of the principal sought to be charged; and

3. The third person relying on the agent’s apparent authority must not be guilty of negligence.¹³

Reaffirming Grewe and overruling a number of conflicting Court of Appeals decisions, the Michigan Supreme Court recently held in Markel v. William Beaumont Hospital that “when a patient presents from treatment at a hospital emergency room and is treated during their hospital stay by a doctor with whom they have no prior relationship, a belief that the doctor is the hospital’s agent is reasonable unless the hospital does something to dispel that belief.”¹⁴ The Markel Court also affirmed that whom a deceased patient was looking to for treatment and the reasonableness of belief could be based on circumstantial evidence.¹⁵

JOINT VENTURE LIABILITY

In addition to vicarious liability under agency law, separate or distinct corporate entities may be held liable under a joint venture theory. A joint venture is ordinarily an association to carry out a single business enterprise for a profit.¹⁶ Notably, in evaluating profit, the Court of Appeals has held that a “strictly financial profit is not always necessary” for a joint venture.¹⁷ A joint venture can be found in noncommercial endeavors where the profit is a joint benefit or a furtherance of mission.¹⁸ The existence of a joint venture may be implied or inferred from the conduct of the parties or from acts and circumstances that make it appear that they are participants in a joint venture.¹⁹

INVOKING THE COURT’S EQUITABLE POWER TO PIERCE THE CORPORATE VEIL

In addition to the legal doctrines available through agency law, equitable doctrines can be used to prevent injustice or abuse of the corporate form. As the Michigan Supreme Court explained, the corporate veil may be equitably pierced where an otherwise separate corporate existence has been used to “subvert justice or cause a result that [is] contrary to some other clearly overriding public policy.”²⁰ “When this [corporate] fiction is invoked to subvert justice, it is ignored by the courts.”²¹ A breach of contract constitutes a fraud or wrong that justifies piercing the corporate veil under Michigan law.²² Michigan courts have further explained that piercing the corporate veil to prevent injustice is an equitable remedy, but such a remedy should be used sparingly and is not a separate cause of action.²³

While there is no bright-line rule for determining when the corporate veil should be equitably pierced, Michigan courts have developed a three-pronged test to analyze these cases:

1. The corporate entity to be pierced must have been used as a mere instrumentality of another individual or entity;

2. The corporate entity must have been used to commit a wrong or fraud;

3. The plaintiff has suffered an unjust injury or loss.²⁴

The first prong regarding mere instrumentality is often the key and focuses on the extent to which a corporate entity is controlled by its owner or a separate body. As the Michigan Supreme Court held almost a century ago, “[w]here a corporation is so organized and controlled, and its affairs so conducted, as to make it a mere instrumentality or agent or adjunct of another corporation, its separate existence as a distinct corporate entity will be ignored.”²⁵

Michigan courts have also recognized that piercing the corporate veil may be equitable where there is a controlling parent-subsidiary relationship between corporations.²⁶ As with agency, this equitable principle is often founded on the right of control. In a parent-subsidiary relationship, “the parent, as owner of all or most of the subsidiary’s stock, is able to exert control over the subsidiary.”²⁷ In the context of tort liability, relevant factors in showing that a subsidiary is a mere instrumentality of its parent corporation might be that “the parent and subsidiary shared principal offices, or had interlocking boards of directors or frequent interchanges of employees, that the subsidiary is the parent’s exclusive distributing arm, or the parent’s revenues are entirely derived from sales by the subsidiary.”²8

Where applicable, Michigan courts may also consider the so-called Glenn factors in assessing whether to impose liability.²⁹ These factors include undercapitalization of the company, maintenance of separate books, separation of corporate and individual finances, use of the corporation to support fraud or illegality, honoring of corporate formalities, and whether the company is a mere shell.³⁰ Notably, a plaintiff does not need to pierce the corporate veil to hold corporate officials liable for their own tortious conduct.³¹

CONCLUSION

While not applicable in every case, where the facts and law justify these legal and equitable principles can be important tools for establishing corporate or shareholder liability. A solid understanding of these principles can assist litigators prosecuting or defending claims in litigation and help transactional lawyers advising clients in the conduct of their business operations.