New Tool: Piercing the Corporate Veil to Establish ‘Enterprise’ Liability
March 30, 2022
Reprinted with permission from the March 24, 2022 edition of The Legal Intelligencer © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
By Carol Steinour Young, Elizabeth Smith and Salvatore Sciacca
Plaintiffs seeking to recover damages against corporations and their owners now have a new tool in their toolbox—piercing the corporate veil between sister entities to establish “horizontal” or “enterprise” liability. The Pennsylvania Supreme Court made clear, however, that despite its willingness to consider this theory, piercing the corporate veil is still limited to the most egregious of circumstances. Thus, it remains unknown exactly how this tool will be used in the future.
In Mortimer v. McCool, 225 A.3d 261 (Pa. 2021), the court examined the equitable doctrine of corporate piercing (describing the area as “among the most confusing in corporate law”). Justice David Wecht’s unanimous opinion recognized that while there is a strong presumption in favor of preserving the corporation form, such must be disregarded “whenever 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.” Indeed, “when the shareholder derives improper personal gain or advantage by misusing the corporate form, the court may reach through the veil already torn by the owner’s abuses.”
The case stemmed from a dramshop action in which the plaintiff suffered severe and permanent injuries after being hit by a drunk driver. The driver had been overserved alcohol while at Famous Mexican Restaurant. The plaintiff was awarded a $6.8 million judgment against 340 Associates, the holder of the liquor license. Following the judgment, however, it became clear that 340 Associates had only one valuable asset, the liquor license itself, worth $300,000 at the time of the accident.
Upon further investigation, the plaintiff discovered that the 340 Associates had a contractual management agreement with the restaurant, and that the restaurant was located in a building owned by McCool Properties. Ultimately, it became clear that the entities involved were owned, at least in part, by brothers—Andy and Chris McCool. Their father, Raymond McCool, also had an ownership interest in McCool Properties. Raymond did not have any ownership interest in 340 Associates.
The plaintiff sought to collect the remainder of its judgment though an enterprise liability theory which—until now—had not been adopted by Pennsylvania courts. Both the trial court and the Superior Court rejected the plaintiff’s attempts to prove enterprise liability. The court granted the plaintiff’s petition for allowance of appeal on one issue, whether the court “should adopt the ‘enterprise theory’ or ‘single entity’ theory of piercing the corporate veil …”
Enterprise theory allows for liability between sister companies with “common parentage.” Citing in particular to the Colorado Court of Appeals decision in Dill v. Rembrandt Group, 474 P.3d 176 (Colo. Ct. App. 2020), the court made clear that any finding of liability under the enterprise theory will require a “triangular” relationship between the different corporate identities involved. This means that the liability of one entity will “run up” to the parent company and then down to the related sister entity. Each of the affiliates in the enterprise must have common ownership and a common administrative nexus at the parent level—the “apex” of the triangle. The court found this to be complementary to Pennsylvania’s restrained approach to corporate veil piercing, and the court made clear that veil piercing in any form should only be applied where justice requires, to prevent the exploitation of corporate protection by those who would simultaneously ignore the formalities of corporate law.
Piercing doctrines exist in the first place because of the practical reality that individuals or larger corporations may abuse the corporate form either by unjustly shielding funds from liability or by treating the corporate entity as a personal piggy bank. While veil piercing is typically thought of as a straight line running from the bottom to the top of the corporate structure, the court stated that it would be “naïve” to think that sister corporations could not be used in the same way. Enterprise liability prevents the ability to “silo” or isolate the liabilities of the enterprise into one sister entity in order to artificially shield the enterprise and affiliates from risk, while simultaneously ignoring corporate formalities and other restrictions.
The court noted that relief is rarely granted in enterprise liability cases because those very few and far between” cases “typically involve truly egregious misconduct.” Such misconduct was not explicitly found in Mortimer. Critically, the court found insufficient identity of ownership to justify applying the theory because Raymond McCool held a full one-third interest in McCool Properties but had no ownership interest or meaningful role in the other entities involved.
While the court elected to not apply the theories to the specific facts in Mortimer, it was clear that the application of the enterprise theory of liability against a sister entity may be applicable in other circumstances. In that regard, the court noted that 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 unitary commercial endeavor-be held liable for each other’s debts and judgments.
The court went on to clarify, however, that the enterprise liability doctrine, while similar to alter ego theory, only requires “substantially common ownership,” as opposed to ownership that is exactly the same.
The court ended its analysis with the following invitation:
It remains for the lower courts in future cases to consider its application consistently with the approach described above, in harmony with prior case law, mindful of the salutary public benefits of limited liability, and with an eye always toward the interests of justice.
Carol Steinour Young, a member with McNees, Wallace & Nurick, represents and advises clients in complex litigation matters, including intellectual property, business, class action and other commercial disputes. Elizabeth Smith is an associate with the firm. She focuses her practice on litigation. Salvatore Sciacca is an associate in the firm’s litigation practice group.