Kang Haggerty News
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.
In the November 5, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Pa. Supreme Court to Review Veil-Piercing Appeal Based on Enterprise Theory.”
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.
Piercing the veil of limited liability companies (LLCs) allows a court to disregard the separate corporate personality of the company and its member(s) to reach the assets of the members and hold them liable for all or part of the LLC’s debts under Pennsylvania law.
A recent decision out of the U.S. District Court for the Eastern District of Michigan underscored the RICO “proximate cause” inquiry highlighting yet another, often overlooked, complexity in litigating such cases.
While it is likely that businesses will think to add force majeure clauses to future contracts, there is also reason to believe the specific language of these clauses could be modified. Likewise, there are other changes to be expected in post-pandemic contracts.
When nonresident members of a corporate group, usually the parent company, should expect to be subjected to the jurisdiction of Pennsylvania courts when one of the entities, usually the subsidiary, is based or does business in the state.