HARRISBURG – In a case of first impression, the Supreme Court of Pennsylvania has handed down a ruling which may ease plaintiffs’ recovery of damages against the owners of related corporations, and simultaneously, make it more difficult for those same businesses to protect their assets in future litigation.
The state’s high court ruled 7-0 in Mortimer v. McCool Et.Al that the “Enterprise Theory” of piercing the corporate veil could be used statewide for the purpose of establishing liability in some cases.
But it also ruled that the theory would not be applicable to hold the defendants liable for the plaintiff’s injuries in the instant action, thus upholding prior decisions from the trial court and state Superior Court.
Under theory, it would allow a party to pierce the corporate veil by allowing one entity to be responsible for the liabilities of another, when the business entity is the “alter ego, agent, tool, or instrumentality of the other entity.”
History of Mortimer v. McCool Et.Al
On March 15, 2007, plaintiff Ryan Fell Mortimer received permanent injuries when an intoxicated driver crashed into her car.
The intoxicated driver was served by employees of a Coatesville restaurant owned by McCool Properties, LLC – which in turn was owned and operated by brothers Chris and Andy McCool, and their father, Raymond McCool.
Due to the lease of a liquor license from 340 Associates, LLC, a holding corporation formed by the McCools in 2002, the restaurant was legally permitted to serve alcohol on the premises.
In the wake of the accident, Mortimer filed a Dram Shop negligence lawsuit against the driver, the restaurant, employees of the restaurant and 340 Associates, and obtained a judgment of $6.8 million jointly against the defendants.
In pursuit of collecting the balance of the $6.8 million judgment, Mortimer filed further suit versus 340 Associates, McCool Properties, Chris McCool, Andy McCool and the Estate of Raymond McCool, who had passed away in October 2009, after Mortimer’s accident, but prior to the Dram Shop litigation concluding.
As the case went on, 340 Associates transferred the liquor license to a non-related group called 334 Kayla, Inc. in June 2009 for only $75,000, with 334 Kayla also leasing the restaurant location from McCool Properties.
On Aug. 18, 2010, a Chester County jury awarded Mortimer $6.8 million in damages against the defendants, including 340 Associates.
Mortimer later brought another suit under the Pennsylvania Uniform Fraudulent Transfers Act against 340 Associates and 334 Kayla, which she won and thereby gained control of the liquor license.
Mortimer sold it for $415,000, however, this still left her with a remaining balance of $6,385,000 to collect.
At that point, Mortimer filed two additional cases against the defendants in a Chester County court to pursue the obtaining of that outstanding balance, which were later consolidated and comprise the instant action.
The Chester County Court of Common Pleas examined Mortimer’s claims under the Miners test of when to treat sibling corporations as enterprises based on five factors: (1) Identity of ownership, (2) Unity of control, (3) Similar or supplemental business functions, (4) Involuntary creditors, and (5) Insolvency of the corporation against which the claim lies.
According to the trial court, there was no commingling of corporate and personal affairs between the McCool Brothers and 340 Associates, and the use of a corporation was not used to commit fraud.
Mortimer appealed that decision to the Superior Court, however, the intermediate appellate court fully upheld the trial court’s conclusions in December 2019, and pointed out that Pennsylvania has time and time again refused to consider the “Enterprise Theory” for piercing the corporate veil.
Mortimer then appealed that decision to the state Supreme Court.
State Supreme Court Rejects Enterprise Theory in This Case, But Not Entirely
Justice David N. Wecht authored the Court’s majority opinion.
“While we conclude that a narrow form of what we will refer to as ‘enterprise liability’ may be available under certain circumstances, it cannot apply under the facts of this case,” Wecht stated.
Justice Christine Donohue filed a separate, concurring opinion, which was joined by Chief Justice Max Baer.
“From my perspective, in a case involving an involuntary creditor, the interplay between undercapitalization for piercing purposes, The Pennsylvania Liquor Code and an uninsured limited liability company as the holder of a license to sell liquor whose sole purpose is to hold the license for investment purposes is a subject ripe for consideration by this Court. Given the scope of the grant of allowance of appeal, that consideration must await another case,” Donohue said.
In concurring with other state courts, the Supreme Court’s justices said that since there was no evidence of comingling of assets, administrative control over 340 Associates, common ownership or any indication of fraud in forming and operating the limited liability companies, liability could not be imposed on the defendants.
“That [enterprise theory] doctrine does not apply. But it remains for the lower courts in future cases to consider its 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,” Wecht said.
Attorney Robert Burke of MacElree Harvey, who represented the McCool defendants, expressed satisfaction with the decision on his clients’ behalf in an issued statement.
“My clients are extremely pleased with the Court’s decision. We remained confident throughout the trial and the appeals that there was no justification for holding the McCools responsible for the plaintiff’s judgment,” Burke said.
“The Court’s expansion of veil piercing to the Enterprise Theory will likely have significant ramifications going forward, as it relates to the formation of entities and the protection of owners’ assets.”
Burke stated the future implications of the state Supreme Court’s decision to invite lower courts to consider the “Enterprise Theory” could be “far-reaching.”
“Number one, what we’re going to see is a number of plaintiffs who are going to try to use this to expand a number of defendants that they can sue in order to try to find more pockets to pay a judgment, and try to apply pressure to more parties,” Burke said.
“The Court, perhaps, did not give enough clear direction as to how this theory is going to be applied in Pennsylvania. The Court out-and-out invited lower courts to try to apply a loose set of standards to various facts of the case, and the Court intentionally did not want to put down a hard-and-fast list of elements that must be met in order for there to be this enterprise liability. So, it will be very, very interesting to see how this is applied by lower courts in the future.”
Supreme Court of Pennsylvania cases 37 MAP 2020 & 38 MAP 2020
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com