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Posts Tagged ‘corporation’

Georgia Court of Appeals Concludes the Term “Affiliate” is Ambiguous

Posted on: February 4th, 2019

By: Jake Carroll

In Salinas v. Atlanta Gas Light Company,[1] the Georgia Court of Appeals’ recently examined whether Georgia Natural Gas (“GNG”) and Atlanta Gas Light Company (“AGLC”) were “affiliates.” Both AGLC and GNG were owned and controlled, either directly or through an intermediary, by a company named AGL Resources, Inc.

In Salinas, AGLC sought to dismiss Plaintiff’s claims and compel arbitration. In support of its argument, AGLC relied on a term in GNG’s service agreement that required the Plaintiff to arbitrate any disputes with GNG’s “affiliates.” However, since the term “affiliate” was not defined in GNG’s agreement, the Court of Appeals looked at how the term “affiliate” is defined in the Georgia Code, Black’s Law Dictionary, and other jurisdictions, and ultimately determined that the term is ambiguous. The Court of Appeals construed the agreement against GNG—the drafter of the contract—and as a result, AGLC could not demand arbitration of Plaintiff’s dispute.

While the Court of Appeals did not set-out a specific definition for “affiliate,” the Court’s analysis provides a couple of practice tips to anyone involved in drafting, reviewing, or enforcing contracts, including commercial agreements, government contracts, or insurance policies.

  1. Define Your Terms: The Salinas Court may not have had to address the meaning of “affiliates” if the Agreement had defined the term. But, since the term was not defined, the Court looked elsewhere, including other jurisdictions, the Georgia Code, and the dictionary to determine its meaning. Including a definitions section is an easy way to set out the agreed-upon meaning of a term throughout a contract, and should not be overlooked.
  2. Be Explicit: If there is a certain sibling or parent corporation that should be a beneficiary of a contract, consider listing the specific “affiliates” to which the contract or agreement should apply.
  3. Check Your State’s Code: The Court noted that the term “affiliate” is defined over 20 times in the Georgia Code, and the definitions vary. For example, in the context of financial institutions, an affiliate is an entity that controls the election of a majority of directors, trustees of a financial institution, or an entity that owns or controls 50 percent or more of the financial institution. O.C.G.A. § 7-1-4 (1). In Georgia’s Corporations Act, the definition of affiliate is broader: “a person that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a specified person.” O.C.G.A. § 14-2-1110 (1).[2] Depending on the type of corporate entity, “affiliate” may not include every entity in a corporate structure, and certain rules regarding ownership and control may be relevant.

If you need help with this issue, or any other commercial law questions, Jake Carroll practices construction and commercial law, is licensed to practice in Georgia and Florida, and is a member of Freeman Mathis & Gary’s Construction Law and Tort and Catastrophic Loss practice groups. He represents corporations and manufacturers in a wide range of litigation and corporate matters involving breach of contract, business torts, and products liability claims. He can be reached at [email protected].

[1] 347 Ga. App. 480; 819 S.E.2d 903 (2018).
[2] See also O.C.G.A. § 18-2-71 (1) (B) (“Affiliate” has multiple definitions, including “[a] corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote by the debtor or a person who directly or indirectly owns, controls, or holds with power to vote 20 percent or more of the outstanding voting securities of the debtor[.] …”).

Flip It and Reverse It: The Outside Reverse Veil Piercing Theory Gains Ground in California

Posted on: November 28th, 2017

By: Kristin A. Ingulsrud

California’s Fourth Appellate District has determined that “outside reverse veil piercing” may be a means of reaching a Limited Liability Company’s assets. In Curci Investments, LLC v. Baldwin (2017) 14 Cal.App.5th 214, the court held that a Delaware LLC could be liable for a judgment against the 99% owner of the LLC.

A corporation or LLC is considered a separate legal entity, distinct from its officers, directors, stockholders, or members. A fundamental benefit to forming a corporation or LLC is shielding the personal assets of the individuals from liability for the debts or actions of the company.  However, where the corporate form is misused, a court may “pierce the corporate veil” and hold the individual liable for the actions of the company.

Conversely, reverse veil piercing occurs when a business entity is held liable for the debt of an individual. Outside reverse veil piercing refers to a request from an outside third party to satisfy the debt of an individual through the assets of a business entity of which the individual is an insider.

California courts apply two general requirements when deciding whether to disregard a corporate entity: “(1) that there be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 300.

Up until now, California courts have not been receptive to outside reverse veil piercing. In Postal Instant Press, Inc. v. Kaswa Corp. (2008) 162 Cal.App.4th 1510, the court held that a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability.

Postal Instant Press remained the reigning authority on outside reverse veil piercing in California until the issue was revisited in Curci Investments, LLC v. Baldwin.  Curci obtained a $7.2 million judgment against Baldwin personally.  Curci motioned the court to add one of Baldwin’s investment LLCs, “JPBI”, as a judgment debtor, as he had been unsuccessful in collecting on the judgment against Baldwin.  Curci argued that Baldwin held virtually all the interest in JPBI, controlled all of its actions, and used it as a personal bank account.  The Fourth District Court of Appeal concluded that reverse veil piercing may be available under these circumstances and remanded the matter for the trial court to engage in the required factual analysis.

Curci is groundbreaking because it limits Postal Instant Press’s holding to corporations and opens the door for application of outside reverse veil piercing to LLCs.  The Curci court held that the same factors used in evaluating traditional veil piercing cases should be applied to reverse veil piercing and concluded that “the key is whether the ends of justice require disregarding the separate nature of JPBI under the circumstances.”  In so holding, Curci opens the door to further expansion of reverse corporate veil piercing in California.

A properly-formed and maintained business entity can prevent veil piercing.

If you have any questions or would like more information, please contact Kristin Ingulsrud at [email protected].