By: Harry J. DiDonato & Matthew C. Cooper
On July 21, 2021, the Supreme Court of Pennsylvania opened the door for lower courts to apply the doctrine of “enterprise liability” (also commonly referred to as “horizontal” or “single-entity” liability) allowing plaintiffs to horizontally pierce the corporate veil. Enterprise liability, which is currently recognized in less than a third of state courts, contemplates that “just as a corporation’s owner or owners may be held liable for judgments against the corporation when equity requires (i.e., ‘vertical piercing’), so may affiliates or ‘sister’ corporations–corporations with common ownership, engaged in a unitary commercial endeavor–be held liable for each other’s debts or judgments.”
The case, which began as a dram shop tort action, resulted in the plaintiff, Ryan Mortimer, obtaining a $6.8 million judgment against a group of defendants for injuries sustained when her vehicle was hit by an intoxicated driver. One defendant, 340 Associates, LLC, a company owned by two brothers, had been formed for the sole purpose of acquiring and owning a liquor license. 340 Associates entered into a management agreement with a third party, which operated the restaurant that was found in the tort action to have served the intoxicated individual who later struck the plaintiff’s vehicle.
After being unable to collect on the full amount of the judgment, Mortimer initiated a separate action against 340 Associates and a new defendant, McCool Properties, LLC, a real estate company owned by the same two brothers along with their father, each owning a one third interest. McCool Properties owned the building where the restaurant was a tenant. Mortimer sought to pierce 340 Associates’ corporate veil to hold McCool Properties liable for the unpaid remainder of the judgment owed to Mortimer in the dram shop action. Mortimer argued for the application of enterprise liability, claiming she should be allowed to horizontally pierce through 340 Associates to McCool Properties, given the overlapping ownership and alleging that McCool Properties was, in effect, an alter ego of 340 Associates. The trial court, and, subsequently, the Pennsylvania Superior Court each rejected Mortimer’s claims. Bob Burke, Esquire, chair of MacElree Harvey’s Commercial Litigation Group was retained to successfully defend 340 Associates and McCool Properties in the separate action and appeal.
The Pennsylvania Supreme Court reaffirmed the Superior Court’s decision; however, persuaded by the pillars of justice and equity upholding the necessity for veil piercing under certain circumstances, the Court articulated a two-prong test for enforcing enterprise liability in Pennsylvania:
- There must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and
- Adherence to the corporate fiction under the circumstances would sanction fraud or promote injustice.
Thus, while the Court found that the underlying facts of this case did not satisfy this newly-enumerated two-prong test, it nonetheless opened the door for lower courts in Pennsylvania to apply the enterprise liability theory in the future.
With the Court’s decision in Mortimer, Pennsylvania businesses and business owners should be mindful of the following practical considerations:
1. Diversify Ownership Among Related Entities
a. The Court was persuaded by the fact that Raymond McCool was a one-third owner of McCool Properties, but had no ownership interest in 340 Associates.
2. Keep Business Affairs Separate
a. 340 Associates and McCool Properties filed separate tax returns, maintained separate bank accounts, kept separate books, had separate organizational documents and maintained separate revenue streams.
3. Document Your Business Actions
a. Properly document, by at least annual meetings of directors and shareholders (corporations) or members/managers (LLCs), major business decisions and keep the meeting minutes from each of those meetings.
4. Ensure Adequate Business Capitalization
a. Take careful steps to document the proper capitalization of your business and make sure the capital is designated to the business and not the owners of a “sister” business.
Harry J. DiDonato is an experienced transactional attorney and business advisor who works to guide clients through a myriad of legal and business issues. His practice focuses on counseling individuals, small businesses and middle market companies regarding all aspects of general business and corporate matters, real estate transactions, business sales and succession, and tax planning. His innovative perspective, experience, and aptitude make him a strong business partner and advocate. If you have any corporate or business law needs, please contact Harry J. DiDonato at (610) 840-0237 or [email protected].
Matthew C. Cooper is an attorney in MacElree Harvey’s Business Department specializing in business and corporate law. He counsels businesses of various sizes and industries through all stages of the business life cycle, including representing management and boards of directors by helping them stay compliant with the ever-changing landscape of corporate law. Matthew frequently represents businesses in private financings, and is a trusted adviser to lenders and borrowers in commercial lending transactions. If you have any corporate or business law needs, please contact Matthew C. Cooper at (610) 840-0279 or [email protected].
