Most practitioners are familiar with the concept of piercing the corporate veil, but the nuances of this area of law can still mystify even the most seasoned litigators. Because veil piercing is a highly fact-intensive inquiry, it can be difficult to predict in advance when a court will grant such a remedy. This is because, in addition to the multi-factor analysis that often goes into the decision of whether to pierce, there are also a variety of different forms that veil piercing can take. One form in particular, the enterprise theory of liability, is a relatively recent development to Pennsylvania law in this area. See our recent column on this topic.
The enterprise, or “single entity,” theory of liability is a means of imposing liability on quasi-affiliated companies with common ownership engaged in a shared commercial endeavor. While recognized in many jurisdictions, until Mortimer v. McCool, 255 A.3d 261 (Pa. 2021), it was debated as to whether Pennsylvania recognized this form of veil piercing. And while the Pennsylvania Supreme Court’s decision in Mortimer answered the question of whether this doctrine is available, it left unanswered the specifics of how it would be applied. This column discusses the enterprise theory of liability generally, Mortimer, and a recent federal court decision analyzing its holding.
Mortimer dealt with a dram shop action where the plaintiff was seriously injured by an intoxicated driver that had recently been 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 10 defendants were named in the original action. After trial, a jury awarded a $6.8 million verdict against these defendants. Even after taking possession of the restaurant’s liquor license and auctioning it off, however, the vast majority of the judgment amount remained unsatisfied.
To remedy this deficiency, Ryan 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 and Superior Court refused to grant this relief, principally because the Supreme Court had never endorsed such a theory. The plaintiff appealed, and the Supreme Court granted review solely on whether the enterprise theory of liability is available in Pennsylvania.
On appeal, the Supreme Court stated that its past silence on the issue “did not reflect any discernible disfavor” and that the court simply did not have the opportunity to review the issue until Mortimer. And while the court clarified that the enterprise theory of liability is available in Pennsylvania, it declined to apply it in the case before it. The key fact precluding its application in Mortimer was that the entities did not share substantially the same ownership, and that veil piercing is only available where the rights of innocent parties will not be prejudiced. The court also noted that while the entity holding the liquor license did not carry insurance, it was not required to by law, and that this was a common practice in the restaurant industry.
In addition to declining to pierce the corporate veil in Mortimer, the court also declined to provide a specific framework to determine when such a remedy would be warranted. While it specifically identified commonality of ownership as a key factor in the enterprise theory of liability analysis, it also refused to adopt a “perfect identity of ownership” requirement. The court recognized the ambiguity in its opinion and concluded with “but it remains for the lower courts in future cases to consider [the doctrine’s] application consistently with the approach described above, in harmony with prior case law, mindful of the salutary public benefits of limited liability, and with an eye always toward the interests of justice.”
Mortimer is a momentous, albeit somewhat murky, decision that adds Pennsylvania to a growing list of states that recognize the enterprise theory of liability. This is a welcome development. As business organizations and commercial transactions have grown increasingly complex, the law must adapt as well to impose liability where it is warranted. And while Mortimer left many questions unanswered, U.S. District Judge Stephanie Haines of the Western District of Pennsylvania recently discussed its application at length in Seven Springs Mountain Resort v. HHHess, (W.D. Pa. Apr. 4, 2022).
Seven Springs dealt with a $77 million townhome project in Somerset County and the widespread leakage problems found in many of these units. The homeowners association brought suit against the builder and, after agreeing to arbitration, was ultimately awarded a $14 million judgment. The defendant-builder then refused to satisfy the plaintiff’s judgment and filed for bankruptcy after the plaintiff’s attempts to execute on the judgment. The plaintiff then sought leave of court to file an action in recovery on behalf of the trustee, which was granted.
When it filed its action in the Western District, the plaintiff also included the building company’s owner and two of his other companies unrelated to the original project. The plaintiff claimed that these entities should be liable by virtue of their common ownership and relationship with the judgment debtor. Key factual allegations made by the plaintiff were that all the defendant companies shared owners, office space, equipment, and employees, and that funds were regularly commingled. According to the plaintiff, it could proceed against these entities under the enterprise theory of liability. The defendants moved to dismiss for failure to state a claim.
In their briefing, all parties agreed that Mortimer governed the court’s review, although both sides had a different view of its application in the case at hand. The court began by chiding the defendants for ignoring the procedural posture of Mortimer and other veil-piercing cases, namely, that the vast majority of these cases involved fully developed evidentiary records. Where the plaintiff “has alleged numerous, detailed factual allegations in support of its veil-piercing claims,” a court should allow these allegations to be proven or refuted through the discovery process.
The Seven Springs court next discussed the absence of any definitive test in the Supreme Court’s Mortimer opinion. It noted that the court had “recognized” the five-factor test originally announced in Miners v. Alpine Equipment, 722 A.2d 691 (Pa. Super. 1998), which had been the most in-depth opinion on the enterprise theory of liability before Mortimer. Miners dealt with attempts by a judgment creditor to execute on its judgment against alleged sister corporations, a novel strategy in Pennsylvania at the time. The court, in assessing this “quite distinct” method of piercing the corporate veil, outlined five factors which it considered relevant to the inquiry: identity of ownership, unified administrative control, similar or supplementary business functions, involuntary creditors, and insolvency of the corporation against which the claim lies. The Seven Springs court found that the plaintiff had alleged sufficient facts to meet most of these factors, given the substantially overlapping control and ownership of the defendant companies.
The fourth prong of the Miners test, requiring that the plaintiff be an involuntary creditor, was discussed at length in both Mortimer and Seven Springs. On its face, there appears to be a key distinction between the tort victim in Mortimer and the breach of contract claims at issue in Seven Springs. The Seven Springs defendants argued that to the extent the enterprise theory of liability is available, Mortimer and Miners limit it to involuntary creditors. The Supreme Court in Mortimer was somewhat opaque on this, noting the “theoretical distinction between the two classes of creditors” but stating that “nor is it obvious that only involuntary creditors like tort plaintiffs should have the benefit of the doctrine while voluntary contractual creditors like commercial lenders should not, even if the equities in a given case may vary accordingly.”
Likewise, the Seven Springs court left this theoretical distinction unresolved at the motion to dismiss stage. The court noted not only the absence of any clear guidance on the issue, but also that there was a factual and legal dispute in the case before it as to whether the plaintiff was a voluntary or involuntary creditor. The plaintiff in Seven Springs was at least nominally the assignee of the homeowners’ claims under Pennsylvania’s Unfair Trade Practice and Consumer Protection Law, which it claimed caused it to inherit their involuntary creditor status. Additionally, plaintiff emphasized that it was not able to discover the defendant’s insolvency until after the arbitration and judgment, let alone contract for protective provisions relating to this in the original agreement. In any event, the Seven Springs court declined to rule on this issue at the early stage of the case.
Ultimately, the plaintiff’s claims survived the motion to dismiss in Seven Springs, including its enterprise theory of liability claims. And while the Seven Springs court did not outline a definitive test for when such a remedy is warranted, it is the most in-depth post-Mortimer opinion to date. Savvy practitioners should follow this case closely to remain apprised as this doctrine continues to develop. While Seven Springs may be the first case to analyze Mortimer’s enigmatic holding in detail, it will certainly not be the last.
Edward T. Kang is the managing member of Kang, Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at [email protected]
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 protected]