From The Law Firm of Leisawitz Heller, Kevin A. Moore, Esq. and Paul Troisi, Esq.
Ask any business owner in Pennsylvania why he/she operates his/her business through entities like corporations and limited liability companies, and you will inevitably get an answer something like: “To keep my personal interests separate from my business interests.”
Generally speaking, with only a few exceptions, Pennsylvania law prevents creditors of a business from reaching an owner’s assets in order to pay business debts. One of the exceptions to that general rule is what is known as “piercing the corporate veil.”
In an “alter ego” action to “pierce the corporate veil”, a creditor asks a court to disregard the protections of a corporate entity afforded to a business owner by Pennsylvania law, and impose personal liability upon an owner for the debts of his/her business. There is a strong presumption in Pennsylvania against piercing the corporate veil. [1]When making the determination of whether to pierce the corporate veil, a court “must start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.” [2]Notwithstanding the above, “pierce[ing] the corporate veil” and imposing liability against business owners is a very real tool used by creditors.
Currently before the Supreme Court of Pennsylvania is a question of whether this exception to Pennsylvania’s corporate protection law should be expanded to the benefit of creditors. Specifically, in the case of Mortimer v. McCool (Docket No. 37 MAP 2020), the Supreme Court is being asked to answer the following question:
Whether, in this matter of first impression, the Supreme Court should adopt the “enterprise theory” or “single entity” theory of piercing the corporate veil to prevent injustice when two or more sister companies operate as a single corporate combine? [3]
This case is still being argued before the Court, with an anticipated date for a decision unknown. With that said, business owners should pay attention to this case as it can have a very real impact on their businesses.
Under the ‘enterprise theory’ or ‘single entity’ theory, a creditor can pierce the corporate veil if it is found that “two or more corporations share common ownership and are, in reality, operating as a corporate combine.” [4]Thus, as a result of two businesses essentially operating as one, creditors seek the ability to recover assets from one company, to satisfy the debts of another.
Currently, Pennsylvania law does not recognize the ‘enterprise theory’ or ‘single entity.’ [5]The Supreme Court’s decision in Mortimer v. McCool will either change the state of the law, or uphold it. Significantly, the United States Bankruptcy Court for the Middle District of Pennsylvania, predicted that “[t]he Pennsylvania Supreme Court would likely adopt the ‘single entity theory’ for the same limited purpose it chose to adopt the ‘alter ego theory,’—to prevent fraud or injustice.” [6]
If the Court adopts these theories of liability on sister companies, what does this mean for your businesses? The “lawyer” answer of “It Depends,” may not satisfy your concerns. However, unless and until the Supreme Court changes the law, the business community cannot be certain as to exactly what the change will mean. But, there exists some precedent to make an educated guess as to what courts will look to when determining whether to impose liability against sister-entities.
The Pennsylvania Superior Court has opined that, while the ‘enterprise theory’ or ‘single entity’ theory is not yet the law in Pennsylvania, the theory generally will treat two businesses as one depending upon the following factors [7]:
(a) Unity of Ownership: Do the entities share the same owners?
(b) Unified Administrative Control: Are the entities controlled by the same people?
(c) Similar or Supplementary Business Functions: There is no clear definition of what a court would consider to be a similar or supplementary business function, only that this is an element to be considered. With that said, the fragmentation of one economic enterprise into two business entities to perform the functions previously conducted by one entity appears, on its face, to satisfy the “similar or supplementary business function” element [8].
(d) Involuntary Creditors: Did the creditors involved in the case rely on anything (e.g. a secured interest) when becoming creditors?Voluntary creditors, on the other hand, are generally able to inspect the financial structure of a corporation and discover potential risks of loss before any transaction takes place.
(e) Insolvency of the Corporation Against which the Claim Lies: Is the entity which incurred the underlying debt insolvent?
While we wait for the Supreme Court to render a decision in Mortimer it is important that business owners consider the above factors. If you are an owner in multiple business entities, keeping the entities sufficiently separate may become vital should the Supreme Court adopt the ‘enterprise theory’ or ‘single entity’ of liability.
Proactively seeking out a legal review now to ensure that your interests are sufficiently protected is important. Leisawitz Heller has a team of business and litigation attorneys who can help guide you through the process of maximizing the protections afforded to you and your businesses under Pennsylvania law.
For further information on these and other business topics, contact Kevin A. Moore, Esquire, (kmoore@leisawitzheller.com) or Paul Troisi, Esquire (ptroisi@leisawitzheller.com).
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[1]Miners, Inc. v. Alpine Equip. Corp., 722 A.2d 691, 694–95 (Pa. Super. 1998)
[2]Lumax Industries, Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995) (citing Wedner v. Unemployment Bd., 296 A.2d 792, 794 (Pa. 1972)).
[3]Mortimer v. McCool, 236 A.3d 1043 (Pa. 2020)
[4]Advanced Tel. Sys., Inc. v. Com-Net Prof'l Mobile Radio, LLC, 846 A.2d 1264, 1278 (Pa. Super. 2004) citingMiners, Inc. v. Alpine Equipment Corp., 722 A.2d 691, 695 (Pa.Super. 1998).
[5]Mortimer v. McCool, 3583 EDA 2018, 2019 WL 6769733, at *17 (Pa. Super. Dec. 12, 2019) (Pennsylvania has repeatedly refused to adopt the “enterprise entity” or “single entity” theory of piercing the corporate veil.); citing Advanced Tel. Sys., Inc., supra.
[6]In In re LMcD, LLC, 405 B.R. 555, 565 (Bankr. M.D. Pa. 2009)
[7]In In re LMcD, LLC, 405 B.R. at 555 citingMiners, Inc. v. Alpine Equipment Corp., 722 A.2d 691 (Pa.Super.1998)citing E. Latty, Subsidiaries and Affiliated Corporations§7, at 5–40 (1936)
[8]In re LMcD, LLC, 405 B.R. at 566.
Disclaimer: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information may not constitute the most up-to-date legal or other information. Readers should contact an attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel.