One year ago this month, the Pennsylvania Supreme Court in Mortimer v. McCool, 255 A.3d 261 (Pa. 2021) adopted the “enterprise theory” of piercing the corporate veil, thereby placing Pennsylvania among the minority of states that have adopted the theory and expanding the scope of veil piercing under Pennsylvania law to “sister” or “affiliated” business entities. Although the court adopted the enterprise theory, it declined to apply the theory to the facts presented in Mortimer and did not adopt a standard for determining when the doctrine should be applied.

Given the lack of guidance provided by the court in Mortimer, there remains a great deal of uncertainty as to how it will be applied in future cases. However, it is notable that although Mortimer marks a clear change in Pennsylvania law, much of the opinion is actually devoted to reaffirming longstanding principles that are intended to preserve the legal form of business entities. In addition, the handful of decisions that have relied on Mortimer are beginning to provide insight into how it may impact the courts’ view of Pennsylvania law with respect to corporate veil piercing.

Historically, Pennsylvania and the vast majority of states have instilled a strong presumption against piercing the corporate veil. At the same time, Pennsylvania courts established a flexible standard for disregarding the limited liability protections of business associations in situations where the form is abused. To determine whether the corporate form has been abused, courts applying Pennsylvania law considered the factors articulated by the Pennsylvania Supreme Court in Lumax Industries v. Aultman, 669 A.2d 893 (Pa. 1995): whether the entity is undercapitalized; adherence to corporate formalities; substantially intermingled corporate and personal affairs; and use of the corporate form to perpetrate a fraud.

While Pennsylvania has long allowed the corporate veil to be pierced when equity requires it, prior to the court’s decision in Mortimer, the scope of Pennsylvania’s corporate veil piercing doctrine had not been extended to allow a court to disregard the legal separateness of two purported “sister” or “affiliated” companies. Under Lumax, courts were to determine whether the business entity whose veil a litigant sought to pierce was essentially a sham for the operations of a sole or dominant shareholder or member. For that reason, the scope for piercing the veil had been limited to assessing liability against a corporation’s shareholders or a limited liability company’s members.

However, this changed when the Pennsylvania Supreme Court adopted the enterprise theory of liability in Mortimer. While the court acknowledged the differing and often confusing standards that are associated with the enterprise liability, it explained, “The thrust of the doctrine is that, just as a corporation’s owner or owners may be held liable for judgments against the corporation when equity requires, so may affiliated or ‘sister’ corporations—corporations with common ownership, engaged in a unitary commercial endeavor—be held liable for each other’s debts or judgments.”

Following a lengthy discussion of the few state courts that have adopted the enterprise theory, the Pennsylvania Supreme Court adopted what it termed a “narrow” version of the doctrine. Specifically, the court emphasized that under its approach, liability must run from a debtor entity up to the common owner of the targeted sister entity, and then from the common owner down to the targeted sister entity. Recognizing this “triangular” approach requires liability to pass through the common owner down to the sister entity, the court also expressly recognized “reverse piercing” for the first time. Accordingly, under the enterprise theory adopted by the court, Pennsylvania law now permits one entity’s liability to be imposed first upon its owners through veil piercing, and then upon a commonly owned entity through reverse piercing.

While the court articulated what it deemed to be a narrow approach to enterprise liability, it declined to provide a clear standard or test to be applied to such claims. Adding to the confusion as to the relevant standard to be applied, the court reviewed and relied on, but expressly declined to adopt, a standard proposed in a prior decision of the Pennsylvania Superior Court, Miners v. Alpine Equipment, 722 A.2d 691 (Pa. Super. 1998). In Miners, the Superior Court articulated (but did not adopt) a five factor test for determining whether to treat sister corporations as an enterprise: identity of ownership, unity of control, similar or supplemental business functions, involuntary creditors and insolvency of the corporation against which the claim lies. Although the Supreme Court expressly stated in Mortimer that it was not adopting the Miners test, it noted with approval that the test was “compatible with a restrained approach” to enterprise liability.

As Mortimer marked the expansion of corporate veil piercing to affiliated corporations, most of the initial commentary surrounding the decision understandably focused on its potential to dramatically change Pennsylvania law. However, a close review of Mortimer reveals that much of the opinion reaffirms longstanding principles of Pennsylvania law that favor litigants seeking to preserve the legal separateness of affiliated entities. Notably:

The court emphasized that the starting point for any veil piercing analysis, including the imposition of enterprise liability, has not changed in so much as there remains a “strong presumption” against piercing the corporate veil under Pennsylvania law.

Similarly, the court reaffirmed that irrespective of the factors considered by a court when deciding whether to impose enterprise liability, “great injustice and inequity must remain the lodestar of piercing jurisprudence.”

Recognizing the importance limited liability, the court reiterated that simply because related businesses are distributed across multiple entities for the purpose of securing liability protection and legal advantage, this practice by itself is not cause for imposing enterprise liability.

In keeping with prior case law on piercing the corporate veil, the court also held that enterprise liability cannot be imposed where piercing the corporate veil would prejudice the rights of innocent parties.

Importantly for limited liability companies, the court expressly acknowledged the differing statutory schemes in Pennsylvania for corporations and limited liability companies, emphasizing that under Pennsylvania law a limited liability company’s failure to observe formalities is not a ground for imposing liability on a partner, member or manager of the limited liability company for a debt or other liability of the company.

In the year since Mortimer was decided, it has only been cited by a handful of state and federal courts. However, these early decisions are beginning to provide some insight into Mortimer’s impact on the courts’ view of corporate veil piercing.

For example, while the Superior Court has not engaged in a lengthy analysis of enterprise liability, it has relied on Mortimer in two separate but related cases—Smith v. A.O. Smith, 270 A.3d 1185 (Pa. Super. Ct. 2022) and Rosenkeimer v. A.O. Smith, 272 A.3d 501 (Pa. Super. Ct. 2022). In both cases, the court affirmed the trial court’s grant of summary judgment in favor of a corporate defendant who plaintiffs claimed was the successor in liability to a group of affiliated companies that plaintiffs claimed operated as a “single business enterprise.” In so doing, the court, citing Mortimer, emphasized that there remains a “strong presumption” against disrupting the form of legally separate business entities, and that simply distributing the assets of related businesses across multiple business entities in order to secure “liability protection and legal advantage” is not, standing alone, a basis for piercing the corporate veil. In both cases, the court also found that although the record contained evidence that the affiliated companies disregarded corporate formalities and shared overlapping officers and 401(k) plans, plaintiffs had failed to establish the “truly egregious conduct” and “unity of interest and ownership” required to pierce the corporate veil and establish that the affiliated companies operated as an enterprise. Thus, even though the court relied on Mortimer, it rejected plaintiffs’ claims based on longstanding principles of Pennsylvania law that are intended to preserve the corporate form.

The enterprise theory as set forth in Mortimer was also addressed in Seven Springs Mountain Resort v. Hess, Civil Action No. 3:21-cv-6, 2022 U.S. Dist. (W.D. Pa. Apr. 4, 2022). In Seven Springs, the plaintiff sought to hold two alleged individual shareholders of a bankrupt corporation and limited liability corporations they purportedly controlled liable for the debt of the corporation through both the alter ego and enterprise theories of corporate veil piercing. The defendants moved to dismiss plaintiffs’ claims, including failure to plead sufficient facts to support its enterprise theory of liability. In denying the plaintiff’s motion to dismiss with respect to enterprise liability, the court cited the factors set forth in Miners while at the same time acknowledging that, under Mortimer, the court was not bound by that test. Ultimately, the court emphasized the preliminary nature of the proceedings and its finding that the plaintiff had sufficiently pled facts that would support triangular and reverse piercing, thereby pleading sufficient facts to support enterprise liability under Mortimer.

Although there is uncertainty as to how courts will apply Mortimer in the future, the Superior Court cases discussed above demonstrate that litigants seeking to maintain the legal separateness of affiliated business entities can use Mortimer’s reaffirmation of longstanding principles of Pennsylvania law in support of their defenses. At the same time, the willingness of the federal district court in Seven Springs to allow claims of enterprise liability to proceed in the face of a motion to dismiss may be an early indicator that while claimants will still face a high bar when seeking to establish enterprise liability during the merits phase of a case, sister or affiliated entities may be less successful, post-Mortimer, in obtaining early dismissal of the claims against them.

Jessica Priselac is special counsel in the Pittsburgh and Philadelphia offices of Duane Morris specializing in complex commercial litigation. She can be reached at jpriselac@duanemorris.com.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.