Pennsylvania Supreme Court Continues Its Assault on Businesses With Adoption of Enterprise Liability

Schnader Harrison Segal & Lewis LLP

Schnader Harrison Segal & Lewis LLP

Our Spring 2021 edition of Aviation Happenings reported on the expansion of Pennsylvania’s consumer protection law in Gregg v. Ameriprise Financial, Inc. The Pennsylvania Supreme Court recently continued its assault on business entities in Mortimer v. McCool by adopting “enterprise liability” or “reverse-piercing,” a doctrine that allows corporations with common ownership to be liable for each other’s debts or judgments.

The Mortimer plaintiff was injured by an automobile operated by an intoxicated driver. The restaurant that served the intoxicated driver leased its liquor license from 340 Associates, LLC, which was owned by brothers Michael Andrew McCool and Raymond Christian McCool. The restaurant operated on real estate that it leased from McCool Properties, which was owned by the McCool brothers and their father, Raymond McCool.

Plaintiff obtained a $6.8 million personal injury judgment against several defendants, including 340 Associates. Defendant driver was underinsured, the restaurant that served the driver was uninsured, and 340 Associates’ sole asset was the liquor license, which was worth $415,000. Mortimer therefore sought to hold the McCool brothers personally liable as the owners of 340 Associates and to reach the assets of McCool Properties to satisfy the balance of the judgment.

Generally, the owners of a corporation are not liable for the company’s debts. Under certain limited circumstances, however, the corporate veil may be “pierced” to reach the owners’ assets. Those circumstances include where the company is inadequately capitalized or insured, the owners comingled business and personal affairs, and where the company is used to perpetrate fraud. Pennsylvania has long allowed the corporate veil to be pierced when equity requires it. Fewer than one-third of all state courts, including Pennsylvania, have allowed piercing the veil of one corporation to reach the assets of a separate but related company. Until now.

The Supreme Court in Mortimer engaged in a lengthy and convoluted survey of enterprise liability in other jurisdictions, as well as academic commentary and legal treatises. It also examined a prior decision of the Pennsylvania Superior Court, Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691 (Pa. Super. 1998), wherein the state’s intermediate appellate court apparently considered enterprise liability and articulated the elements thereof as: (1) identity of ownership, (2) unified administrative control, (3) similar or supplementary business functions, (4) involuntary creditors, and (5) insolvency of the corporation against which the claim lies.

The Supreme Court announced, “[T]here is no clear reason to preclude per se the application of enterprise liability in the narrow form described herein.” However, the Court interpreted the “identity of ownership” element to require “substantially common ownership.” Because 340 Associates was owned by the McCool brothers, but McCool Properties was owned by the brothers and their father, the Court found that the identity of ownership element was not established, and therefore, did not apply enterprise liability to allow plaintiff to reach McCool Properties’ assets.

The Court’s adoption of enterprise liability in a case without a factual record to support it is particularly problematic, because it provides little guidance to lower courts for future cases and invites speculation in the application of the doctrine. Indeed, the five elements of enterprise liability apparently adopted by the Pennsylvania Supreme Court speak nothing of culpability or misconduct, and there are few facts from which analogies can be drawn for future applications of the doctrine.

Flight schools, fixed-base operators, and charter operators often have common or unified ownership, unified administrative control, and similar or supplementary business functions but are incorporated as separate entities. Financial realities can leave each corporation thinly capitalized, while market realities sometimes afford only modest liability coverage to them. A judgement against one of them could render it insolvent. In the wake of Mortimer, trial courts are now likely to allow plaintiffs to attempt to reach the assets of related general aviation entities when they can spin equitable arguments for doing so. Mortimer v. McCool, 2021 Pa. LEXIS 3088 (Pa. July 21, 2021).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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