w w w. n s a a . o r g  F e b r u a r y | M a r c h 2 0 0 5
N S A A J O U R N A L

In virtually any court case involving a business, trial lawyers will endeavor to go “up the chain” to bring in as many corporate entities as possible, including, but not limited to, the parent company or holding company at the top of the organizational chart. Take, for instance, the case of Anderson v. Snow Valley.

BY PETER W. REITZ

   In Anderson, a catastrophically injured lift maintenance employee managed to circumvent the worker’s compensation bar because the ski area was structured as two corporations; one operating the area and one owning the area. The employee was barred from suing the operational entity. However the corporation that had no operational responsibility, the one that owned the area, was left exposed to a large verdict in the amount of $31 million.
   The Anderson case provides an ideal reason for examining whether your corporation is structured in such a way as to minimize the exposure from the risks of the full panoply of litigation, whether it be real estate, personal injury, property damage, construction defect, trade practices or transactional.
   Within the ski industry, many resorts operate under myriad different guises. Usually those identities take the form of a corporate entity such as: corporations, sub-chapter S corporations, C corporations, partnerships, limited liability companies and in many instances, subsidiaries, affiliates and sister-companies. Some resorts may even operate as sole proprietorships. Whatever the choice of operating entity, chief operating officers, general managers and owners should scrutinize their legal corporate structure(s) with an eye toward potential ramifications.
   Accordingly, it is wise to structure a ski area entity in such a way that it is isolated from other entities within the corporate structure. This means minimizing shared directors and board members, segregating day-to-day operations to this subsidiary, accounting and for that matter, the vast majority of business decision-making.

Piercing the Corporate Veil
   For ski resorts that are part of a conglomerate, another risk is that plaintiff’s attorneys often attempt to pierce the corporate veil, which similarly will allow them to sue entities up the chain and under certain circumstances, to sue individual executives or board members. It is important to pay attention and maintain corporate separateness by setting up legitimate corporations. Resort owners should also be sure that your corporations are adequately funded and are not mere “shell corporations” of the parent company or companies. Just as important, these resorts should follow corporate formalities to include annual board meetings, minutes, and, in the event that the business is public, complying with the SEC rules and regulations and accounting practices in our post-Enron world.

   The author has handled a number of cases wherein plaintiff’s counsel has pursued companies higher up on the organizational chart from the entity that purportedly runs the area. Thus far, we have had them dismissed successfully. However, these claims would be easier to defend, if resorts were more properly observing corporate boundaries.

   While suing “up the chain” may not affect insurance limits in a particular lawsuit, given the fact that most companies name each and every layer or subsidiary on the same policy, it can cause difficulties for the defense from start to finish. Such difficulties run the gamut from opening the door to corporate documents to juror perception in the courtroom. The larger the corporation named, in the eyes of the jury, the less sympathy extended to the company and the more that will flow towards the suing party. The defense is much better served by having an entity that directly operates only the ski resort, hotel or other entity being sued, as opposed to the entire parent company. This is particularly true in mountain jurisdictions where the area is typically a large employer and is most often viewed favorably

Mergers and Acquisitions
    Challenges often arise where a merger or acquisition takes place. For instance, when a company which already owns one or more ski areas acquires a new area and fails to pay attention to the formation of the appropriate entity to acquire the new ski area or other holding. In most circumstances, setting aside tax considerations, there is a bene- fit to forming a corporation in the state where the newly acquired ski area is located.

Jurisdictional Issues
   Other challenges are presented in instances where a plaintiff is trying to sue a company in a foreign jurisdiction or state other than that where the ski area is located. This requires a “minimum contacts” analysis. Minimum contacts are simply “business contacts” in the jurisdiction where the plaintiff is attempting to sue the business. They involve, among other things in that jurisdiction: bank accounts, employees, 800-numbers, local advertising, brochures, ski shows, ad agencies, ticket sales, travel agents/vacation travel packages and any other business contacts that the defendant has in that jurisdiction. Of course, websites can now be accessed virtually anywhere in the world and make the minimum contacts argument that much more complex as compared to the pre-electronic world.
   Let us take a hypothetical conglomerate, call it “Mountain Corporation,” which owns ten areas and has four layers in its corporate organizational chart including a parent company or holding company at the top and two operating corporations. If all ten areas and other resort holdings, golf courses, hotels, can be added to a case as party defendants, it follows that the minimum contacts the four corporations have in the foreign jurisdiction will be expanded exponentially as compared to the entity operating one particular ski area. This makes it much more difficult to get a case filed in a foreign jurisdiction transferred to the typically more favorable state in which the area is physically located. In the case of small or medium areas, the same hypothetical applies, albeit on a smaller scale. Remember that the Anderson case involved a small area with two corporations. Most business people today seem to generally feel that the more corporate layers created, the more protection afforded. This is not necessarily true, unless, of course, they are formed through thorough analysis relative to their organizational structure, their function and that corporate separateness is followed thereafter.

    - Corporations are wonderful entities, if formed properly and operated appropriately with respect to corporate formalities, corporate separateness, capitalization, operations and reporting procedures. -

Formation
   Corporate lawyers must be mindful not only of the tax consequences of the structure of the company but also the effects on potential litigation. Corporations are wonderful entities, if formed properly and operated appropriately with respect to corporate formalities, corporate separateness, capitalization, operations and reporting procedures. Often, the corporate lawyer does his or her job in structuring a company, and then the corporation, with respect to its interface with other corporations or partnerships, and individually operates sloppily. This can lead to big trouble in the litigation setting.

Bear in mind three F’s, which may help in protecting your corporation structure:

- Formation
- Formalities
- Function

Trademarking Exposure
   Another arena where the mingling of a corporate structure may create difficulties in litigation is that of trademarking a name. Problems occur when the ski area fails to scrutinize and/or otherwise protect its trademark or company name. For example, if a concessionaire uses a company name in collateral materials, brochures, or other media vehicles, the potential exists for the ski area to be named in a lawsuit even though the area had no operational responsibility or oversight capability with respect to the concessionaire’s operation.

Economies of Scale
   Many ski areas of all sizes have ownership structures wherein the ownership body is engaged in other businesses. Additionally, economies of scale and sharing of accounting structures, vehicle fleets, purchasing, equipment, marketing and PR, often create environments ripe for a breakdown of the very corporate structure set up for protection. Be mindful, the observation of corporate separateness will make it easier to ask a court to dismiss a non-operating company from a lawsuit. This is not to say one cannot take advantage of economies of scale. However, do so with care and diligence. Make sure your area is mindful of and is running its own shop.
   Following formation, formalities and function will minimize your company’s exposure to piercing the corporate veil, jurisdiction problems, and ending up as a co-defendant with your operational entity.

Peter W. Rietz, of the Rietz Law Firm LLC, Dillon, Colo., is Special Counsel to NSAA.