In June, the Pennsylvania Supreme Court granted an appeal that could radically alter existing state law on corporate liability based on the veil-piercing theory. The case, arising from a dram shop tort action, is poised to test Pennsylvania law’s “strong presumption” against piercing the corporate veil. Hoping to recover damages from an affiliated corporation that was not a defendant at trial, the plaintiff in Mortimer v. McCool, was granted an appeal on the basis of the so-called “single business enterprise” or “single entity” theory. See Mortimer v. McCool, Nos. 20 MAL 2020, (Pa. June 22, 2020). Not currently adopted in Pennsylvania, the theory may be applied to allow a plaintiff to reach the assets of one or more affiliated corporations of the debtor when those “corporations share common ownership and are, in reality, operating as a corporate combine.” See Miners v. Alpine Equipment, 722 A.2d 691,695 (Pa. Super. 1998). Courts discussing or adopting the enterprise theory have found its rightful target to be corporate entities that have integrated business ownership and assets to achieve a common business purpose. Thus, in an important sense, by operating what is essentially a “single business enterprise” split into multiple affiliated entities (often purely for the sake of avoiding liability), owners of such enterprises open the door for the courts to impose shared liability. In the past, I have written about veil-piercing in Pennsylvania generally, as well as in specific regard to LLCs and the “alter ego” theory. This column addresses the implications of the Mortimer appeal and the “enterprise” theory for Pennsylvania corporate liability law.
Corporate forms offer crucial protections for shareholders (partners, members, etc.), limiting their liability exposure to creditors of corporate entities. Insulation from liability promotes investment in new business enterprises and fuels positive risk-taking and innovation. In short, the “veil” that the law places between a corporate form and its owners serves a vital purpose in the market economy. Nevertheless, Pennsylvania state and federal courts have long considered several factors that may compel them to pierce the corporate veil. Among those factors are using the corporate form to perpetrate fraud or illegal activity, ignoring corporate formalities, undercapitalizing the entity, and controlling or dominating the entity for personal interests. See Lumax Industries v. Aultman, 669 A.2d 893,895 (Pa. 1995). While no one factor is decisive, Pennsylvania courts appear most willing to pierce the veil in situations in which shareholders operating a sham corporation deprive an innocent creditor of the right to collect damages.
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