Pennsylvania Supreme Court Provides Creditors With a New Avenue of Recovery

In Mortimer v. McCool, the Pennsylvania Supreme Court held that the enterprise liability doctrine can be used to pierce the corporate veil. Under this doctrine, also referred to as single-entity or horizontal liability, a plaintiff may not only pursue the corporate debtor or tortfeasor but other affiliated companies. The dispute in Mortimer stemmed from a plaintiff’s attempt to collect from parties that were related to a restaurant that was found liable in a dram shop case. The plaintiff sought to pierce the corporate veil to reach the assets of a holding company, a subsidiary of the holding company, and the restaurant’s owners individually. The restaurant’s owners held a majority of the holding company’s shares and the subsidiary owned several pieces of real estate, including the one in which the restaurant was located. 

In establishing a two-prong test to determine when enterprise liability is applicable, Pennsylvania’s highest court eschewed bright line rules and endorsed a version of enterprise liability with significant ambiguity. The test is as follows: 1) “…[there must be a] unity of interest and ownership [such] that the separate personalities of the corporation and the individual no longer exist” and 2) “…adherence to the corporate fiction under the circumstances would sanction fraud or promote injustice…” 

In discussing the first requirement, the court stated that while ownership of the entities in question had to be substantially similar, they did not have to be identical. The court declined to define with precision the commonality of ownership required to satisfy the first element. In Mortimer, the court concluded that this element was not met as only two-thirds of the holding company’s shares were held by the owners of the restaurant.

The court described the second element as being founded in equity and indicated that each piece of litigation was to be examined on a case-by-case basis. It remains unclear what scenarios or fact patterns would meet the definition of the seemingly key terms of “fraud” and “injustice.” The contours of enterprise liability in Pennsylvania will likely only become apparent as Mortimer is applied by Pennsylvania courts and a body of case law emerges.

Mortimer’s lack of rigid rules means that the degree to which enterprise liability can be used by creditors remains to be seen, but its recognition by the Pennsylvania Supreme Court should expand the number of collectable debts. Mortimer held that “In jurisdictions that embrace enterprise liability, the corporate veil can be pierced to hold one company liable for an affiliated company’s debt.” While the scope of enterprise liability remains murky, debts and judgments that were previously viewed as uncollectable might now have some value. In short, enterprise liability is now a means by which Pennsylvania creditors can collect unpaid debts; however, the utility of this tool remains unclear. 

We are monitoring this case closely and will provide timely updates as it proceeds. In the meantime, if you have questions or want specific insights on this blog’s topic, please contact attorney Andrew Condiles at any time.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.