Whether it’s based upon the advice we all remember receiving from our parents, the moral of the Aesop Fable about The Ass and His Buyer, or the essence of Rocky Balboa’s rambling diatribe to 12-year-old Marie about the perils of hanging out with “yo-yo people” in front of the Atomic Hoagie Shop, everyone knows that “we are known by the company we keep.” While being “known” by the company we keep can be good or bad depending on the company, being “contractually bound” by that company, without independent assent, can almost never be good. But that appears to be exactly what happened in a recent Delaware Court of Chancery decision, Geier v. Mozido, LLC, C.A. No. 10931-VCS, 2016 WL 5462437 (Del Ch. Sept. 29, 2016).

Contrary to popular opinion, it is possible to be contractually bound to an agreement without being a specifically named party to that agreement and without ever having actually signed the agreement on your own behalf. Indeed, it is not uncommon for parent companies to enter into agreements (particularly “releases”), on their own behalf, and on behalf of their “affiliates.” And the affiliates purported to thereby be bound, even though not specifically named (other than as a category), and even though they did not sign on their own behalf, may in fact be bound to the agreement signed by the parent company based on agency principles tied to the parent company’s apparent or actual authority to bind those entities that it controls. The convention of including affiliates in releases stems from the fact that when parties settle claims and execute releases that are intended to resolve all potential matters involving the actual disputants and related persons or entities against whom such claims could be asserted, the parties desire to include those related parties as beneficiaries of the release. And if they are beneficiaries, why should they not also be releasors? It is one thing to extend the benefit of a release to a category of related parties, but it is quite another to purport to bind that category of related parties by a release that is not in fact signed by each of those related parties. This is particularly true where the related parties purported to be so bound are not entities controlled by the parent company, but individual shareholders officers, directors, members or partners of that parent entity.

The distinction between binding related parties to a release and making those related parties the beneficiaries of a release was a primary issue in last year’s Delaware Court of Chancery decision, Carlyle Investment Management L.L.C. v. Moonmouth Co. S.A., C.A. No. 7841-VCP, 2015 WL 5278913 (Del. Ch. Sept. 10, 2015). In Carlyle Investment, the court considered the effect of a broad release of claims contained in a Transfer Agreement. It was apparently clear that the release was intended to, and did release, not only the named parties but a list of related entities and persons too. The question was whether those related entities and persons were also bound by the release in favor of the other named party and their related parties. The court was ultimately unable to decipher what it called a “case study in garbled drafting,” and therefore called for a full trial to determine the named parties’ true intent and the actual or apparent authority of the named parties to bind the other laundry list of persons and entities that were collectively defined as the “Related Parties.” Importantly, however, the court made clear that it was rejecting the argument that those entities and persons included within the laundry list of terms collectively comprising the “Related Parties” could never be bound by the release simply based upon the fact that they had not signed the release on their own behalf or been specifically named a party. The term “Related Parties” was defined in the release to include each of the named parties’ “present and former Affiliates and any agents, representatives, officers, directors, employees, executives, parents, shareholders, partners, members, principals, subsidiaries and controlled companies, heirs, executors, administrators, successors, assigns, sister or related companies and partnerships.”

Now in the Mozido decision, decided on September 29th of this year, the Delaware Court of Chancery granted a motion to dismiss a claim filed by an individual plaintiff, Philip H. Geier, against defendants that were the beneficiaries of a release of claims that had been entered into and signed solely by entities of which the individual plaintiff was an “affiliate,” but not by the individual plaintiff himself. The only named releasing parties in the General Release at issue in the Mozido decision were the Philip H. Geier Jr. Irrevocable Trust and The Geier Group, LLC. And the person signing on behalf of both those entities was a co-trustee of the Geier Trust and a co-manager of the Geier Group named Hope Smith. But, Philip H. Geier, individually, was also a co-trustee of the Geier Trust and the Chairman of the Geier Group. He also apparently controlled both entities, but the court noted that:

Even if Geier did not “control” the Geier Trust or the Geier Group, the only reasonable construction of “affiliate” would still apply to Geier in his individual capacity. Geier indisputably had a “close connection” and “association” with both the Geier Trust as a co-trustee and the Geier Group as Chairman.

The Geier Group and the Geier Trust had made loans to a company that had also purportedly promised some options to Mr. Geier individually. The release had been executed in connection with a settlement agreement related to the repayment of the loans, but it did not limit itself to the repayment of the loans. An early draft of the release had included Mr. Geier, individually, as a party and signatory to the release, as well as including a specific carve-out of Mr. Geier’s individual claims respecting the undelivered options. But the final version of the release neither included Mr. Geier individually as a party, nor contained Mr. Geier’s signature; it similarly did not contain any carve-out respecting Mr. Geier’s individual claims respecting the options.

The release under consideration in Mozido was governed by New York law and stated in relevant part as follows:

Philip H. Geier Jr. Irrevocable Trust and The Geier Group, LLC, as RELEASORS, … release and discharge the RELEASEES and the RELEASEES’ affiliates, subsidiaries, parents, heirs, executors, administrators, successors, predecessors and assigns or anyone acting on behalf of any or all of the foregoing persons, from all actions, causes of action, … covenants, contracts, … claims, and demands whatsoever, known or unknown, in law, admiralty or equity, which against the RELEASEES, the RELEASORS and the RELEASORS’ affiliates, subsidiaries, parents, heirs, executors, administrators, successors, predecessors and assigns ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of this RELEASE.

The release was determined to be a “general release;” i.e., a release that purported to release all claims of any description rather than being limited to a particular matter. As a result, the court began by noting that, under New York law, a “general release” is a type of release that is construed broadly in favor of the beneficiaries of the release and against the releasors. Seizing upon the fact the named releasors had purported to release not only their own claims, but also any claims of any of their “affiliates,” the court then determined that Mr. Geier, as an individual, was an affiliate of the named releasors because he fit into the common definitions of the term “affiliate,” which include “an affiliated person or organization,” “being close in connection, allied, associated, or attached as a member or branch,” or a person or entity “who controls, is controlled by, or under common control with [another person or entity].” Because he was an affiliate of the releasors, then, he was in effect a “releasor” despite the fact that he was not named in or defined as a releasor in the release, and he did not sign the release in any capacity. Wait a minute, did we miss a step?

Unlike the Carlyle Investment decision, there was no discussion of agency principles or how a trust and a company could be the agent of or have apparent authority to bind an individual. Similarly, there was no suggestion that there was a need to develop the facts as to how this authority had been derived or implied. On what basis were these releasing entities agents of Mr. Geier as an individual or otherwise authorized actually or impliedly to bind Mr. Geier?

New York law is actually very clear that an individual should not be easily found to have personally agreed to be obligated on a contract that was otherwise stated to be an entity-level agreement, even when that individual personally signs the contract on behalf of the entity and there is language in the agreement purporting to bind that individual. Indeed, in Salzman Sign Co. v. Beck, 176 N.E.2d 74, 76 (N.Y.1961), the New York Court of Appeals declared that:

In modern times most commercial business is done between corporations, everyone in business knows that an individual stockholder or officer is not liable for his corporation’s engagements unless he signs individually, and where individual responsibility is demanded the nearly universal practice is that the officer signs twice — once as an officer and again as an individual. There is great danger in allowing a single sentence in a long contract to bind individually a person who signs only as a corporate officer. In many situations the signing officer holds little or no stock and if the language of the agreement makes him individually liable his estate may be stuck for a very large obligation which he never dreamed of assuming. We think the better rule is the one used here — that is, that the statement in the contract purporting to bind the signing officer individually is not sufficient for Statute of Frauds purposes without some direct and explicit evidence of actual intent.

In Mozido, Mr. Geier did not sign the release at all, never mind in his individual capacity; instead, Hope Smith did so solely on behalf the Geier Trust and the Geier Group. In Carlyle Investment, in contrast, the court noted that the individual affiliate had at least signed the release in some capacity, but that the facts still needed to be developed to show that the entity on whose behalf the individual signed had apparent or actual authority to bind the individual affiliate. In Mozido, however, Ms. Hope’s signature on behalf of the two named releasor entities, of which Mr. Geier was deemed an affiliate, was apparently enough to make Mr. Geier personally bound by the release as a matter of New York law. Really?

A 2015 New York case, Garriot v. O’Neil Condominium Assoc., 2015 WL 5728245 (N.Y. Sup. Sept. 23, 2015), appears to be contrary to the holding in Mozido, and more consistent with the holding in Carlyle Investment. In O’Neil Condominium, the court was faced with a release that was signed by a condominium association on behalf of itself “and all of its unit holders.” The individual unit holders, however, were not signatories to the release. The court, therefore, noted that there was an obvious distinction to be drawn between the condominium association, which had actually signed the release, and the individual unit holders, who although referred to in the release, did not actually sign the release. Accordingly, the court dismissed the claims brought by the condominium association against the releasees covered by the release, but did not dismiss the claims brought by the individual unit holders against those releasees pending additional development of the facts as to whether the condominium association had the authority to execute the release on behalf of the individual unit holders. After all, said the court, “[g]enerally, ‘questions of agency and of its nature and scope … are questions of fact.’”

In 1897, in an essay published in the Harvard Law Review, Oliver Wendell Holmes, Jr. famously said that “the making of a contract depends not on … the parties’ having meant the same thing but on their having said the same thing.” Fair enough! Holmes’ statement is a short summary of the contractarian approach to the interpretation of written agreements that both Delaware and New York purport to follow. But when the person doing the saying is an entity that qualifies as your affiliate, and that entity party purports to bind all of its affiliates, which includes you, without “you” having actually “said” anything that would constitute personal assent to be so bound, that contractarian doctrine is turned on its head. Part of the contractarian approach also includes the recognition of the distinction between entities and those that control them.

Whether this case is an anomaly or somehow limited to the realm of “general releases” and therefore not applicable to other contracts, draftspersons should be cautious with the use of the term “affiliate” in describing those bound by an otherwise entity-specific contract. This is particularly true in in the private equity space where it is a fundamental tenet of private equity practice to limit those persons potentially liable for the obligations of portfolio companies or acquisition vehicles to those entities only (for a fuller description of that tenet see an early Weil Private Equity Insights blog posting here). Being known by those with whom you associate is potentially bad enough, but mere association with an entity that thereby makes you that entity’s affiliate should not cause you to be contractually bound by that entity’s contract entered into on its own behalf and on behalf of its affiliates.