Taking the Entergy Out of Louisiana's Single Business Enterprise Theory

• Author: James Dunne
• Pages: 691-713

The author would like to thank Professor Glenn G. Morris, Professor Wendell H. Holmes, and Denise C. Redmann for their guidance and assistance throughout the drafting process.

Page 691

I Introduction

Over fifteen years ago in Green v. Champion Insurance Co.,¹the Louisiana's First Circuit Court of Appeal introduced a controversial form of piercing the corporate veil called "single business enterprise" or "SBE" theory. Traditionally, veil-piercing has been used sparingly in Louisiana and only in cases where either fraud or misuse of the corporate form has taken place. In Green, the first circuit employed an un-weighted eighteen factor test that focused primarily on control rather than fraud or misuse of the corporate form to find that a group of affiliated businesses was a single business enterprise. Recently, the second circuit in Town of Haynesville, Inc. v. Entergy Corp.² overturned a trial court decision that used Green's SBE theory in a contract dispute to impute the actions of one electric utility subsidiary onto another. This decision is important for two reasons. First, the second circuit should be praised for refusing to drastically expand veil-piercing jurisprudence through broad application of SBE theory and rejecting its use in the contract interpretation arena. Second, language in the court's opinion could and should be applied more broadly to reject any application of SBE theory where there is no showing of fraud or misuse of the corporate form.

SBE theory, as established by the first circuit in Green, ignores traditional veil-piercing jurisprudence and allows Louisiana courts to disregard corporate separateness based solely on a finding that one company is controlled by another. Application of this theory would allow courts to disregard the corporate entity every time it found a type of relationship exemplified by the classic parent-subsidiary arrangement.³ Furthermore, the eighteen factor test offered by the first circuit for applying SBE theory is not only methodologically unworkable, but also represents an extremely poor policy choice for this state. Lastly, broad application of SBE theory to legitimate multiple-entity business structures could seriously weaken the firmly established practice in Louisiana of Page 692 respecting the separate legal identity of businesses and the legislative grant of limited liability to corporations and limited liability companies. This in turn could have detrimental effects on Louisiana's ability to encourage business development in this state.

In an important opinion, the second circuit in Haynesville⁴recognized these dangers and overturned a trial court decision that applied SBE theory in a contract interpretation setting. More specifically, the second circuit refused to allow the plaintiff to use SBE theory to effectively re-write the contract and impute the actions of one affiliated subsidiary to another in order to trigger a most-favored-nation-clause.⁵ Though the court clearly rejected the use of SBE theory in the arena of contract interpretation, it is arguable that language in the decision went even further and calls into question any use of SBE theory where there is no showing of fraud or misuse of the corporate form. Therefore, the Haynesville decision may represent the beginning of the rejection of SBE theory and its reliance on control alone to disregard corporate form by Louisiana courts. If this is the case, then the second circuit should be praised for interjecting some much needed restraint into SBE jurisprudence.

Part iI of this Case Note briefly explores the origins of SBE theory and the eighteen factor test established by the first circuit in Green v. Champion Insurance Co.,⁶ and then discusses the many criticisms of SBE offered by various commentators. Part III examines the facts and procedural history of the second circuit case Town of Haynesville v. Entergy Corp. ⁷and then argues that the court is not only rejecting the expansion of SBE theory, but calling into question any application of SBE that relies solely on the factor of control to disregard corporate form.

II The Origins of SBE Theory in Louisiana and Its Detrimental Effects on Business Policy

In Green v. Champion Insurance Co. ⁸the first circuit introduced SBE theory, a radical new form of veil-piercing that allows Louisiana courts to disregard certain aspects of corporate identity Page 693 that have traditionally been afforded to affiliated business groups. In its most simple form, traditional veil-piercing is used to disregard the corporate form and impose liability for corporate or LLC obligations vertically onto the assets of an entity's shareholders, be they human or juridical.⁹ The effect of sBe theory, on the other hand, is to pierce the veil of all businesses in an affiliated group-"upstream, downstream, and sideways"¹⁰- effectively removing all corporate distinctions, and to treat the group as one unified entity subject to the debts of any one of the separate affiliates.¹¹

SBE theory and the eighteen factor test established in Green represent a considerable expansion of traditional veil-piercing jurisprudence because it does not require a finding of fraud or misuse of the corporate form to extinguish a business entity's limited liability protection. Despite the Louisiana courts' treatment of traditional veil-piercing as a radical remedy¹² available only under exceptional and limited circumstances,¹³ the first circuit in Green established a rule that would eliminate limited liability between the majority of parent and subsidiary companies based solely on the fact that one company controls the other.¹⁴ This radical new approach to veil-piercing is both a deeply flawed legal framework and a poor policy choice for this state. First, in practical application, the un-weighted eighteen factor test is highly unworkable and allows for widely disparate results. Second, SBE theory poses a significant risk to a core tenet of Louisiana business law: respecting the legal separateness and limited liability protection afforded by the corporate form.

A Green v. Champion Insurance Co. and the Origins of SBE

In Green, the Commissioner of Insurance brought suit against an insolvent insurance company, its parent corporation, and other affiliated entities in its business group. The Commissioner, relying on considerable evidence of fraud and the absence of adherence to Page 694 even basic corporate formalities amongst the business group,¹⁵alleged that the affiliated entities had been operated as a "single business enterprise." The first circuit agreed with the commissioner and applied an un-weighted eighteen factor test to determine that Champion was an SBE. The first circuit then directed the entire group's assets to be pooled and used to satisfy outstanding policy holder claims of Champion.

B Criticism of Single Business Enterprise Theory and the Eighteen Factor Test

SBE theory and the eighteen factor test have received considerable criticism as both a flawed legal framework and a poor policy choice for this state.

1. SBE: A Flawed Legal Framework

In establishing SBE theory, the first circuit reasoned that:

the legal fiction of a distinct corporate entity may be disregarded when a corporation is so organized and controlled as to make it merely an instrumentality or Page 695 adjunct of another corporation. If one corporation is wholly under the control of another, the fact that it is a separate entity does not relieve the latter from liability.¹⁶

The first circuit stated that courts should look to the substance of the corporate structure rather than its form and enumerated eighteen factors to use when determining if a business group is in fact an SBE.¹⁷

Even ignoring the inherent impracticality of consistently applying any un-weighted eighteen factor test, the Green test has received substantial criticism as a flawed legal framework. The two main criticisms of the test are that a large number of the factors are readily found in almost any parent-subsidiary or closely affiliated business relationship¹⁸ and that a number of the listed factors appear to contradict one another.¹⁹

a Factors Present in Nearly All Parent-Subsidiary Structures

If courts follow the test laid out by the first circuit, then most affiliated business entities would be "guilty" of a large number of the factors. The first factor, ownership of stock sufficient to give "working control" over an entity, favors piercing anytime a single Page 696 shareholder holds more than 51% of outstanding stock, a situation found between most parent corporations and wholly owned subsidiaries.²⁰ This is also true of the fifth and seventh factors; most parent corporations cause the incorporation of the subsidiary²¹ and likewise finance them.²² Additionally, many multiple entity businesses, in an effort to either take advantage of economic efficiencies or to...