When is a Subsidiary not a Subsidiary?

03/19/2009

 

Subsidiary “corporation” does not include subsidiary “limited liability company” according to Louisiana law*.

A federal appellate court has interpreted an agreement to define the term “subsidiary corporation” as excluding a “subsidiary limited liability company”.  In American Electric Power Company v. Affiliated FM Insurance Company (File No. 07-31061, January 21, 2009),  the Court of Appeals for the Fifth Circuit, applying Louisiana’s law with regard to rules of contract interpretation, held that the language of the agreement was unambiguous and not suitable for reformation.

In this case, the contract was an insurance policy that expressly covered the parent company and “any subsidiary corporation now existing or hereinafter acquired”.  Naturally, after the policy was in place, the parent company acquired an LLC subsidiary and sustained a loss.  The insurer denied the claim on the basis that only subsidiary corporations and not subsidiary LLCs were covered.  The parent company argued that it was absurd to exclude an LLC subsidiary, but the court held the term “corporation” was “clear and explicit and led to no absurd consequences” in the context of the policy.   The court also held that the insurance contract should not have been reformed because the parent company failed to prove either a mutual mistake of fact  (the mistake was one-sided, which is insufficient to void or reform a contract), or that the mistake was due to a mere clerical error.

The message for businesses is that it’s important to review all contracts to ensure they meet your needs.  And, in the case of insurance contracts, updating the named insured endorsement following an acquisition might have led to a different result.

For a copy of the case, click here.

*(While I generally view cases that are based on Louisiana law with caution, in this case, Louisiana’s contract interpretation law was comparable to that of many states.)