Tuesday, August 3, 2021

Pennsylvania Supreme Court recognizes "piercing the corporate veil" under "enterprise" liability theory

For the first time, the Supreme Court of Pennsylvania (SCOPA) recognized the "enterprise" theory of liability for "piercing the corporate veil" in Mortimer v. McCool, et al.

The thrust of the doctrine is 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.

This is also sometime referred to as "single-entity," or "horizontal" liability.

The Court eschewed a rigid formalistic test with a bunch of factors. Instead, the Court turned to the two high-level pillars of "piercing the corporate veil analysis."

When to Pierce

[T]hat there be some fraud, wrong or injustice . . . the basic starting point that piercing is an equitable remedy used to prevent injustice.

Against Whom

[T]here must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and second, adherence to the corporate fiction under the circumstances would sanction fraud or promote injustice.
In the context of enterprise piercing, the Court will look for common ownership - in other words, the affiliated corporations must be "siblings-of common parentage." There must be some "administrative nexus" between the siblings. "And the prospect of wrongdoing in that scenario depends upon the actions (or omissions) of the common owner to exploit limited liability while failing to observe the separation between the corporations." 

This may result in a sort of "reverse piercing." In other words, liability may run from one sister corporation up to the common owner, and then back down to another sister corporation. Thus, effectively imposing liability across an enterprise (or "horizontally," from one sister to another, if you draw the org chart like a family tree). 

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