In this column, we discuss Mortimer, the enterprise theory of liability generally, and the common sequencing decisions plaintiffs need to make when bringing a veil piercing claim.
In the September 9, 2021 edition of The Legal Intelligencer, Edward T. Kang and Ryan T. Kirk of Kang Haggerty co-authored “Enterprise Liability and When to Seek Piercing the Corporate Veil.“
Piercing the corporate veil, a simultaneously ubiquitous and arcane doctrine, has been the subject of extensive commentary and critique. While the Pennsylvania Supreme Court admitted that this is already “among the most confusing” areas of corporate law, its recent decision Mortimer v. McCool, Nos. 37 MAP 2020, 38 MAP 2020 (Pa. July 21, 2021) adds yet another layer of intricacy to this knotty enigma. With Mortimer, Pennsylvania has joined a growing number of jurisdictions that explicitly allows for the so-called enterprise theory of liability.
Sometimes described as a “single-entity” theory of liability, enterprise theory of liability is conceptualized as a “horizontal” form of veil piercing. This contrasts with the traditional “vertical” form, where a corporation’s owner may be held liable for judgments against it when equity requires. Enterprise liability, as described by the Supreme Court, allows an analogous form of veil piercing for “affiliated or sister corporations—corporations with common ownership, engaged in a unitary commercial endeavor.” In this column, we discuss Mortimer, the enterprise theory of liability generally, and the common sequencing decisions plaintiffs need to make when bringing a veil piercing claim.
Before Mortimer, the most in-depth discussion of enterprise liability in Pennsylvania was Miners v. Alpine Equipment, 722 A.2d 691 (Pa. Super. Ct. 1998). There, the plaintiff obtained a default judgment against a defendant and sought to pierce the corporate veil against a corporation with the same controlling shareholder under an alter ego theory of liability. Importantly, while the two corporations had the same controlling shareholder, they had different minority shareholders. The trial court allowed the corporate veil piercing, and defendants appealed.
On appeal, the Superior Court recognized that the case was not an alter ego case, but the “quite distinct” single entity theory of liability. Noting that the theory had yet to be adopted in Pennsylvania, the court nevertheless enunciated five factors that it considered as threshold requirements before the imposition of liability under this theory. Because the first of these requirements, a total identity of ownership, was not met, the Superior Court rejected plaintiff’s arguments without a further analysis of the remaining factors.
Between Miners and Mortimer, federal courts applying Pennsylvania law were split on whether the enterprise theory was an available remedy in Pennsylvania, and the Supreme Court’s silence was levied in support of both positions. Proponents asserted that because the enterprise theory had not been explicitly foreclosed, the theory was available, while opponents pointed to the absence of express authority to use the doctrine. This was the uncertain and unsettled state of the law that provided the backdrop for Mortimer.
The underlying suit in Mortimer arose when the plaintiff was seriously injured by an intoxicated driver, recently served by the defendant restaurant. The management and ownership structure of the restaurant was an intricate web of related parties and single purpose entities, and a total of ten defendants were named in the original dram shop action. After trial, a jury awarded a $6.8 million verdict against these defendants.
While Mortimer took possession of the defendant’s liquor license, and sold it for $415,000, the bulk of her judgment remained unsatisfied. To remedy this deficiency, Mortimer filed actions seeking to impose liability on the individual owners and their property management company, which she believed could be held liable under an enterprise theory of liability. Both the trial court and Superior Court refused to grant the requested relief, interpreting the Supreme Court’s past silence on the issue as a tacit rejection of its availability.
The Supreme Court on appeal engaged in an extensive analysis of enterprise liability case law in this commonwealth and beyond. After this review, the Supreme Court announced the black letter law on this issue; the enterprise theory of liability is available in Pennsylvania where equity demands. While the Supreme Court refused to adopt the same five-factor analysis outlined in Miners, it seemingly endorsed the identity of ownership prong by stating “enterprise liability requires that the affiliates that the enterprise comprises have common owners and/or an administrative nexus above the sister corporations.” As opposed to Miners’ itemized analysis, the Supreme Court adopted a more flexible standard, as a “rigidly formalistic approach” would only subvert the underlying goal of achieving equity.
Ultimately, while recognizing enterprise liability as a valid remedy in Pennsylvania, the Supreme Court declined to apply it in the case. As a threshold matter, the enterprise theory could not be used because one of the owners of the alleged affiliate entity was completely uninvolved in any wrongful conduct. In rejecting the imposition of liability on this ground, the Supreme Court noted that “piercing may occur only when the rights of innocent parties are not prejudiced thereby.”
Mortimer is a promising and noteworthy decision, as it provides plaintiffs with another avenue of recompense for injuries sustained at the hands of defendants abusing the corporate form. The specific contours of this decision will surely be developed by trial courts across the commonwealth, and savvy practitioners will help shape its further evolution. But the procedural history of Mortimer is also worth discussing, as it demonstrates a typical conundrum faced by plaintiffs in these types of actions: when to bring a veil piercing claim. In Mortimer, the plaintiff brought her veil piercing action after she had already prevailed in the underlying action, as opposed to simultaneously litigating a veil piercing claim in the underlying. When a plaintiff could bring a veil piercing action is not always clear, and courts are split on this issue.
To understand why there is some confusion in this regard, many courts note that piercing the corporate veil is not an independent cause of action, but an equitable remedy used to impose liability when the corporate form has been abused. See Siematic Mobelwerke GmbH & Co. KG v. Siematic, 643 F.Supp.2d 675, 694 (E.D. Pa. 2009). Often, plaintiffs bring veil piercing claims in their complaint concurrent with other causes of actions in the underlying action, and courts review these claims simultaneously. Sometimes, however, plaintiffs could bring such claims after obtaining judgement in the underlying action first, seeking to pierce the corporate veil as part of their post-judgment collection efforts. See Presidential Facility v. Campbell, 2015 WL 1208261 (E.D. Pa. March 16, 2015). Presidential Facility demonstrates the risks plaintiffs face when they bring a piercing claim post-judgment, as the court expressed disapproval with plaintiffs for bringing the veil piercing action two years after judgement, despite continuous efforts by plaintiff during that period to execute on the judgment.
With the widespread adoption of single purpose entities, the corporate form has become increasingly complex. These entities operate as individual components in an overall gestalt that is engaged in commercial activity. This cabining complexity is principally designed to prevent liability. To allow such unchecked sequestration could frustrate the central goal of tort law, making plaintiffs whole. Due to the complex use of the corporate form to shield from corporate liability, attempts to pierce the corporate veil are as popular as ever.
A plaintiff’s decision about when to bring its piercing action involves both economic and strategic considerations. In many cases, it is economically efficient for such matters to be litigated simultaneously with the underlying suit, as similar discovery may be relevant for both issues. Comprehensive discovery can also provide the accurate picture as to whether veil piercing is even warranted. Strategically, plaintiffs should consider bringing the piercing the corporate veil claim in the underlying action when the liability of the owner of the defendant entity is clear—e.g., the owner forms an entity in a jurisdiction to carry out activities that are legal in that jurisdiction but knowingly conducts those activities in another jurisdiction where such conduct is illegal. This is not to say that piercing actions should always be brought simultaneously, as it is possible for post-judgment piercing to be more efficient in some instances.
If the evidence required to prevail on a veil-piercing claim is sufficiently different from the evidence required to prevail in the underlying suit, then it makes economic sense for plaintiffs to wait until a judgment has been rendered before filing a veil piercing action. In such cases, plaintiffs could save the additional cost of litigating the veil piercing issues in the underlying case. Waiting until first obtaining a judgement makes economic sense, especially in a case where obtaining a judgement is far from highly probable. Strategically, plaintiff should consider placing the defendant of notice of its intent to bring a veil piercing action post-judgment against the defendant in a case where the probability of success for veil piercing is high, which should encourage the defendant (and its owner) to settle the case early.
Mortimer’s adoption of the enterprise theory of liability significantly broadens Pennsylvania’s piercing doctrine. In adopting this remedy, yet refusing to apply a rigid standard for when it is available, the Supreme Court has signaled that it favors a broad piercing power where equity requires. This preference for breadth should also be applied to plaintiffs’ decision about when to bring a veil piercing action, as this will further efficiency, strategy, and, most importantly, equity. Practitioners should keep in mind that veil piercing is still a rare exception to the norm. Courts are reluctant in allowing veil piercing in most cases, as they should be. Plaintiffs should avoid bringing a veil piercing claim solely based on the inability to collect from the defendant entity without more facts. With the adoption of the enterprise theory, however, plaintiffs have another tool that can be used to remedy abuses of the corporate form.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at firstname.lastname@example.org.
Ryan T. Kirk is an associate at the firm. He represents clients in a wide range of matters that includes complex commercial litigation, contract disputes, commercial transactions, and class action lawsuits. Contact him at email@example.com.
Reprinted with permission from the September 9, 2021 edition of “The Legal Intelligencer” © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.