PA Supreme Court Holds “Enterprise Theory” Can Be Utilized to Pierce Corporate Veil

PA Supreme Court Holds “Enterprise Theory” Can Be Utilized to Pierce Corporate Veil

In Mortimer v McCool, No. 37 MAP 2020, Pennsylvania Supreme Court held the “Enterprise Theory” (otherwise known as the “horizontal liability” theory) can be a valid means of piercing the corporate veil in certain circumstances. The doctrine permits a party to pierce the corporate veil by allowing one entity to be responsible for the liabilities of another, when the business entity is the “alter ego, agent, tool, or instrumentality of the other entity.” Stated otherwise, affiliated or corporations with common ownership, a.k.a. sister corporations, engaged in a unitary commercial endeavor may be held liable for each other’s debts or judgments.

Plaintiff Ryan Mortimer sustained serious and permanent injuries when an intoxicated driver crashed into her car. The intoxicated driver was allegedly served alcohol at a Mexican restaurant while visibly intoxicated at a restaurant owned by McCool Properties, LLC (“McCool Properties”), owned and operated by Raymond McCool and his sons, Chris and Andy McCool. The restaurant had a contractual arrangement with 340 Associates, LLC (“340 Associates”), owned by Chris and Andy McCool, enabling the restaurant to serve alcohol on the premises.

Mortimer filed a negligence lawsuit against the driver, the restaurant, employees of the restaurant and 340 Associates, and obtained a judgment of $6.8 million jointly against the defendants. However, the defendants had no insurance and no significant assets. Therefore, Mortimer filed suit against McCool Properties, Andy McCool, Chris McCool and the estate of Raymond McCool.

The trial court analyzed Mortimer’s claims under the Alter Ego theory and determined the Alter Ego theory applied “only where the individual or corporate owner controls the corporation to be pierced and the controlling owner is to be held liable.” See Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa. Super. 1998). Here, McCool Properties held no ownership interest in 340 Associates, so McCool Properties could not be liable as 340 Associates’ corporate alter ego.

The court also analyzed the Enterprise theory under the five-part Miners test. “Under [the Enterprise] theory, two or more corporations are treated as one because of [1] identity of ownership, [2] unified administrative control, [3] similar or supplementary business functions, [4] involuntary creditors, and [5] insolvency of the corporation against which the claim lies.” Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 695 (Pa. Super. 1998). Ultimately, the court concluded that Mortimer failed to satisfy the standard even if it applied because McCool Properties and 340 Associates did not have identical ownership and each corporation was at all times managed and administered as an independent entity. On appeal, the Superior Court affirmed the trial court’s rulings in all respects. The Superior Court noted that while Mortimer may have presented a meaningful case that 340 Associates and McCool Properties should be treated as one entity, Pennsylvania has repeatedly refused to adopt the ‘single entity’ theory of piercing the corporate veil, and this court declined to be the first Pennsylvania court to do so.”

Mortimer then appealed that decision to the state Supreme Court. In a case of first impression, the Pennsylvania Supreme Court acknowledged the prospect of a viable claim for enterprise liability in cases involving great injustice and inequity. “[E]nterprise liability in any tenable form must run up from the debtor corporation to the common owner, and from there down to the targeted sister corporation(s).” “[I]n this frame, enterprise piercing is aptly described as triangular. But this requires a mechanism by which liability passes through the common owner to the sibling corporation,” which raised the issue of “reverse-piercing,” a circumstance wherein a claimant against the owner of a corporation must establish misuse of the corporate form to protect the owner’s personal assets against some debt.

In an attempt to balance equities, the Court adopted a two-part test to establish enterprise liability. First, “there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist” and, second, “there must be some fraud, wrong, or injustice.” The ‘fraud or injustice’ element tells the court when to pierce, the control element tells it against whom.

Ultimately, the Court held that the Enterprise Theory did not apply to Mortimer’s case. Specifically, the Court determined that Raymond McCool had no ownership in 340 Associates and only a one-third ownership interest in McCool Properties; therefore, if liability was imposed upon McCool Properties for 340 Associates’ debt, Raymond McCool’s estate, an innocent party, would be prejudiced and would suffer an enormous injustice, which the Court found to be contrary to established Pennsylvania law. Moreover, the Court found the brothers McCool had maintained an appropriate separation between their personal interest and 340 Associates’ corporate affairs and coffers. “Because McCool Properties itself had no material ownership interest in, nor exercised any administrative control over, 340 Associates, the only path to its assets runs through the Brothers. If they were not individually blameworthy enough to warrant piercing, then the triangle won’t close, and McCool Properties is insulated by the gap.”

  In Mortimer v McCool, the Pennsylvania Supreme Court held the “Enterprise Theory” (otherwise known as the “horizontal liability” theory) can be a valid means of piercing the corporate veil in certain circumstances. Ty Smith explains.