Alerts and Updates

Pennsylvania Supreme Court Review in Mortimer Could Significantly Expand Litigants’ Ability to Pierce the Corporate Veil

June 26, 2020

The appeal, which centers on whether the Court should adopt the so-called enterprise or single entity theories of corporate veil piercing, has the potential to dramatically change existing Pennsylvania law.

On June 22, 2020, the Pennsylvania Supreme Court granted allowance of appeal in Mortimer v. McCool, et al.[1] The appeal, which centers on whether the Court should adopt the so-called enterprise or single entity theories of corporate veil piercing, has the potential to dramatically change existing Pennsylvania law, which presumes the legal form of two distinct but affiliated business entities must be preserved. In stark contrast, under the enterprise or single entity theories, a business organization that so much as shares a “common business purpose”[2] with an affiliated business entity could be held liable for damages stemming from the affiliated entity’s actions, essentially negating the limited liability nature of most business organizations. Accordingly, Mortimer has the potential to make it easier for Pennsylvania litigants to pierce the corporate veil of affiliated businesses and expose them to expanded liability if the Court takes the novel step of adopting these doctrines.

The facts in Mortimer stem from a dram shop action: Mortimer was struck by a drunk motorist and left permanently injured.[3] The restaurant that served the motorist was operated by 340 Associates, LLC, a limited liability company with two members—Michael Andrew McCool and Raymond Christian McCool—and was formed for the purposes of purchasing and holding a license to sell and distribute liquor.[4] The McCools were also members of a separate limited liability company, McCool Properties, LLC, which owned the building that housed the restaurant in which the motorist who struck Mortimer was served alcohol prior to the accident.[5] Mortimer sought damages against 340 Associates under a theory of dram shop liability as the operator of the restaurant and prevailed at trial.[6] McCool Properties was not a defendant in the dram shop action.

The case in which the Supreme Court granted review was begun by Mortimer after she prevailed in the dram shop action. Mortimer was unable to recover the full amount of the judgment from 340 Associates and sought to recover the remaining damages from McCool Properties and the McCools personally.[7] Among the theories advanced by Mortimer was that, under the enterprise or the single entity[8] theories, 340 Associates and McCool Properties should be treated as a single enterprise for purposes of liability, thereby allowing her to access McCool Properties’ assets in order to satisfy the judgment against 340 Associates.[9] Mortimer argued that under these theories, McCool Properties’ LLC form should be disregarded because of its “overlapping ownership and management” with 340 Associates.[10]

Both the trial court and the Superior Court rejected Mortimer’s claims based on the enterprise and single entity theories. In affirming the trial court’s judgment, the Superior Court noted that “Pennsylvania carries a strong presumption against piercing the corporate veil,”[11] and rejected Mortimer’s arguments on the basis that “Pennsylvania has repeatedly refused to adopt the ‘enterprise entity’ or ‘single entity’ theory… .”[12]

Mortimer petitioned the Pennsylvania Supreme Court for allowance of appeal on numerous grounds, and on June 22, 2020, the Court granted review of one issue:

Whether, in this matter of first impression, the Supreme Court should adopt the “enterprise theory” or “single entity” theory of piercing the corporate veil to prevent injustice when two or more sister companies operate as a single corporate combine?[13]

If the Court were to answer this question in the affirmative, it would dramatically change existing Pennsylvania law with respect to the circumstances under which a court may disregard the legal form of a business entity. As the Superior Court noted in Mortimer, under existing Pennsylvania law there is a strong presumption against disrupting the form of legally separate business entities, and “[t]he corporate entity should be upheld unless specific, unusual circumstances call for an exception.”[14] Indeed, the Pennsylvania Supreme Court’s most recent opinion on this issue held that the legal form of a business organization was only to be disregarded where “justice or public policy demand, such as when the corporate form has been used to defeat public convenience, justify wrong, protect fraud, or defend crime.”[15]

In stark contrast, in the handful of states where the enterprise or single entity doctrines have been adopted by their supreme courts,[16] the corporate veil can be pierced in circumstances that are much more common. For example, in Louisiana, the theories apply “when corporations integrate their resources in operations to achieve a common business purpose,”[17] which is determined by applying a nondispositive list of 18 factors that are far from exceptional, such as: substantial identity of ownership; common employees; common directors or officers; and common offices.[18] However, adding to the level of uncertainty regarding these doctrines is that they are applied differently by the limited jurisdictions in which they have been adopted.[19] While it is unclear what standard the Pennsylvania Supreme Court intends to review, when rejecting the doctrines[20] in Miners, Inc. v. Alpine Equip. Corp., the Superior Court articulated a standard in which “two or more corporations are treated as one because of identity of ownership, unified administrative control, similar or supplementary business functions, involuntary creditors, and insolvency of the corporation against which the claim lies.”[21]

While the standards for applying the enterprise and single entity doctrines differ among the limited jurisdictions in which they are applied, both theories essentially negate the protections afforded by the most common forms of business associations. It is unsurprising, then, that most states have rejected these theories and only a handful of state supreme courts have adopted them. Indeed, after its court of appeals adopted the “single business enterprise” doctrine,[22] the Supreme Court of Texas later rejected the theory as contravening the basic principles that motivate the creation of a limited liability company, as its fundamental purpose is to protect the assets and liabilities of its members.[23]

Historically, Pennsylvania has repeatedly rejected the enterprise or single entity doctrines,[24] and adopting them now would likely have far-reaching consequences for commerce in the Commonwealth. For example, limited liability companies, such as the respondents in Mortimer, would likely be subject to unforeseen liability for acts not committed by them and from which, under current Pennsylvania law and the law of the majority of jurisdictions, they otherwise would be protected. Further, the inconsistent standards applied by courts that have adopted these doctrines raise important questions such as: whether the doctrines would apply only to business entities formed under Pennsylvania law or also to those formed under the laws of foreign jurisdictions; where suit can be brought if the “enterprise” entities are formed in different jurisdictions; what factors will be considered if the Pennsylvania Supreme Court adopts the “common business purpose” standard; and whether differing business entities, such as corporations, LLCs, LLPs or LPs, will each be treated differently under these doctrines.

As this potential transformation in law could expose businesses in Pennsylvania to increased liability, the Commonwealth risks incentivizing existing businesses to relocate outside of its borders and deterring new businesses from organizing or locating in Pennsylvania. These concerns are likely why Pennsylvania, along with the majority of states, has repeatedly rejected the enterprise and single entity doctrines in favor of “the general rule that the corporate entity should be recognized and upheld.”[25] If Pennsylvania were to join the minority of jurisdictions that have adopted these theories, it would become an outlier among the bulk of jurisdictions that have rejected the doctrines as “fundamentally inconsistent” with laws establishing limited liability business organizations.[26]

For More Information

If you have any questions about this Alert, please contact Robert L. Byer, Thomas R. Schmuhl, Jessica Priselac, Jonathan Aronchick, any member of the Trial Practice Group, any member of the Corporate Practice Group or the attorney in the firm with whom you are regularly in contact.

Notes

[1] Mortimer v. McCool et al., Nos. 19 MAL 2020, 20 MAL 2020, M.D. Appeal Dkt. 37-2020, 28-2020 (Pa. June 22, 2020).

[2] Brown v. ANA Ins. Grp., 994 So. 2d 1265, 1266 n.2 (La. 2008).

[3] Mortimer v. McCool et al., Nos. 3583 EDA 2018, 3585 EDA 2018, Dkt. No. J-A24043-19, at 3 (Pa. Super. Ct. 2019).

[4] Id. at 2-3.

[5] Id. at 3.

[6] Id. at 3-4.

[7] Id. at 5.

[8] In its opinion, the Superior Court uses the terms “enterprise entity theory,” “enterprise theory,” and “single entity theory” interchangeably.

[9] Id. at 37.

[10] Id. at 38 n. 22.

[11] Id. at 11.

[12] Id. at 37-38.

[13] Mortimer v. McCool et al., Nos. 19 MAL 2020, 20 MAL 2020, M.D. Appeal Dkt. 37-2020, 28-2020 (Pa. June 22, 2020).

[14] Mortimer v. McCool et al., Nos. 3583 EDA 2018, 3585 EDA 2018, Dkt. No. J-A24043-19, at 11 (Pa. Super. Ct. 2019).

[15] Commonwealth by Shapiro v. Golden Gate Nat’l Senior Care LLC, 194 A.3d 1010, 1035 (Pa. 2018) (quotations omitted).

[16] These courts refer to the doctrines as the “single business enterprise” theory, which is substantially similar to what Pennsylvania refers to as the “enterprise entity” or “single entity” theories of liability. See Hill v. Fairfield Nursing and Rehab. Ctr., LLC, 134 So. 3d 396 (Ala. 2013); Angelo Tomasso, Inc. v. Armor Constr. & Paving, Inc., 447 A.2d 406 (Conn. 1982); Reed v. Reid, 980 N.E.2d 277 (Ind. 2012); Brown v. ANA Ins. Grp., 994 So. 2d 1265 (La. 2008); Glenn v. Wagner, 329 S.E.2d 326 (N.C. 1985); Pertuis v. Front Roe Rests., Inc., 817 S.E.2d 273 (S.C. 2018); Dailey v. Ayers Land Dev., LLC, 241 W.Va. 404 (W.Va. 2019) (referring to the doctrine as a “joint venture” theory of liability).

[17] Brown, 994 So. 2d at 1266 n.2.

[18] Green v. Champion Ins. Co., 577 So. 2d 249, 257-258 (La. Ct. App. 1991).

[19] See, e.g., Pertuis, 817 S.E.2d at 280 (holding that “[t]here must also be evidence of abuse, or ... injustice and inequity,” or claims of “fraud, evasion of existing obligations, circumvention of statutes, monopolization, criminal conduct, and the like,” in which such “abuse is necessary before disregarding the existence of a corporation as a separate entity”) (quotation omitted).

[20] Pennsylvania courts consider these two doctrines as interchangeable. See Advanced Tel. Sys., Inc. v. Com-Net Prof’l Mobile Radio, LLC, 846 A.2d 1264, 1278 (Pa. Super. Ct. 2004); Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa. Super. Ct. 1998).

[21] Miners, 722 A.2d at 695.

[22] SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 450 (Tex. 2008) (citing Paramount Petroleum Corp. v. Taylor Rental Ctr., 712 S.W.2d 534 (Tex. Ct. App. 1986).

[23] Id. at 455-56.

[24] See Advanced Tel. Sys., 846 A.2d 1264; Miners, 722 A.2d 691.

[25] Miners, 722 A.2d at 694.

[26] See, e.g., SSP Partners, 275 S.W.3d at 455-56 (rejecting the enterprise entity doctrine as against “the policies supporting the principles of limited liability” and “fundamentally inconsistent with the approach taken by the [Texas] Legislature” in its Business Corporation Act).

 

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