Pennsylvania Supreme Court Extends Potential Liability To Sister Corporations

FLB Law      Oct. 8, 2021

In the recent case of Mortimer v. McCool Properties, the Pennsylvania Supreme Court addressed a doctrine, previously novel to Pennsylvania law, of piercing the corporate veil known as “enterprise” or “single-entity” liability. In a 7-0 decision, the Court ruled for the first time in Pennsylvania that sister corporations with substantially common ownership can be held liable for each other’s debts or judgments. Even though the Court ultimately declined to apply the doctrine in this particular case, the ruling paved a new path for plaintiffs’ recovery of damages against related corporations and their owners moving forward.

The case arose out of injuries sustained by the plaintiff, Mortimer, as a result of an accident with an intoxicated driver. The driver had been served at a nearby restaurant, and the owners of the restaurant had a contractual management agreement with 340 Associates, the owner of the restaurant’s liquor license. At the time of the accident, 340 Associates was solely owned by the two (2) McCool brothers. The building in which the restaurant was located was owned by a separate corporate entity, McCool Properties, which was owned by the McCool brothers and their father. In an underlying Dram Shop action, Mortimer obtained a judgment of $6.8M against 340 Associates and various other defendants. However, 340 Associates’ only significant asset was the liquor license, and it did not carry insurance for such claims as Pennsylvania law did not require it to do so.

In a separate action, Mortimer obtained ownership of the liquor license, which she then sold for $415,000. In seeking to collect on the balance of the judgment, Mortimer focused on reaching McCool Properties, the brothers personally, and the father’s estate, who had died after the accident in question. In attempting to reach McCool Properties, Mortimer argued 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.

In analyzing the theory, the Court described enterprise liability as triangular in that it runs up from the debtor corporation to the common owner(s), and from there down to the targeted sister corporation(s). The Court stated that the enterprise liability inquiry should focus on two (2) dominant paradigms: 1) substantial common ownership such that the separation of corporation and owner(s) no longer exists; and 2) a requirement of wrongdoing or fraud and resulting injustice no less stringent than that which applies in any piercing case.

Ultimately, the Court decided to recognize the enterprise theory of liability for the first time in Pennsylvania, noting that rejecting the same would too tightly constrict its equitable powers. However, the Court declined to extend the theory to the father, brother, or McCool Properties in this particular case. The Court found no basis to support a claim against the father as he had no ownership interest in 340 Associates. The Court also found no wrongdoing or fraud on the brother’s part to support piercing the veil between 340 Associates and the brothers individually. As a result, the Court found no basis to impose liability against McCool Properties by stating: “If they [the brothers] were not individually blameworthy enough to warrant piercing, then the triangle won’t close, and the gap insulates McCool Properties.” Nevertheless, the Court made clear that lower courts in Pennsylvania can start considering enterprise liability arguments, declaring that it is naïve to think that sister corporations could not be abused in the same way that some individuals or corporations abuse the corporate form.

The holding in the Mortimer case is significant and should be considered when structuring businesses and deals moving forward and in litigation where the corporate form is alleged to have been used to perpetrate fraud. If you would like to discuss further how this decision could expose your Pennsylvania business to increased liability or the implications of it on your current or future business plans, our attorney team is here to help. Please get in touch with us at 610-797-9000.

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