Mortimer v. McCool’s Impact on the Corporate Veil

By: Ryan Newell, Class of 2024

Piercing the corporate veil, according to the Pennsylvania Supreme Court, is “like lightning… rare, severe, and unprincipled.”[i] However, the court’s recent decision in Mortimer v. McCool, to adopt the enterprise liability theory, may increase the frequency of which lightning strikes.

To understand the implications of the court’s decision in Mortimer, it is important to understand what it means to “pierce the corporate veil.” When a court pierces the corporate veil, they disregard the corporate form of the defendant and allow the plaintiff to recover directly from the corporation’s shareholders.[ii] It is plain to see why courts tend to “tread lightly” when invoking this doctrine, as corporations and limited liability companies (“LLCs”) are structured to provide shareholders a way to limit their own personal liability.[iii] The Pennsylvania Supreme Court reiterates this later in the decision, stating that “limiting liability through incorporation is not a bug of corporate law but its defining feature.”[iv] In some ways, piercing the corporate veil goes against this fundamental principle.

Although the doctrine has its detractors, piercing the corporate veil has long since been deemed a legitimate practice in Pennsylvania. The novelty of Mortimer, then, is its decision to adopt the enterprise liability theory, which allows plaintiffs to pierce the corporate veil of affiliated, or “sister,” entities of a defendant corporation. In its reasoning for adopting a form of enterprise liability theory, the court states: “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.”[v]

To successfully invoke the enterprise liability theory, a plaintiff must first find an initial corporation, referred to as the debtor corporation, liable for some injury. If the debtor corporation is unable to pay the judgment, the plaintiff would then find a sister corporation and attempt to pierce its corporate veil to recover. To do this, the plaintiff must show common ownership between the debtor corporation and the sister corporation. If successful, liability will run from the debtor corporation, up to the common owner, then down to the sister corporation. This is referred to as “triangular piercing.”[vi] However, if the court finds that the common owner is not sufficiently blameworthy in the injury to permit piercing, the triangle will not “close” and enterprise liability will fail.[vii]

In Mortimer, an intoxicated driver who had recently left defendant’s bar, Famous Mexican Restaurant, seriously injured the plaintiff in an automobile accident. Plaintiff sued 340 Associates, LLC, the holder of the restaurant’s liquor license and contractual manager. The sole owners of 340 Associates, LLC, were the McCool brothers, who also owned McCool Properties. McCool Properties had a third owner: the McCool brothers’ father.

Plaintiff went on to win a $6.8 million dollar judgment against 340 Associates, LLC. However, because 340 Associates, LLC’s only asset was the restaurant’s liquor license, plaintiff was unable to collect anywhere close to the full value of the judgment.[viii] Plaintiff then attempted to invoke the enterprise liability theory to recover the remainder of the judgment from McCool Properties, and, in turn, pierce their corporate veil and recover directly from the McCools.[ix]

Although the court adopted the enterprise liability theory, they did not apply it to this case. Plaintiff was unable to “close the triangle” and recover against the McCools because the McCools has not committed any wrongful or fraudulent acts to justify piercing the corporate veil, nor were the owners of both “sister” corporations exactly common, as McCool’s father had a share in McCool Properties but not in 340 Associates, LLC.[x]

So, what does this decision mean for the future of the corporate veil in Pennsylvania? It may be too early to say. The opinion was only published in July of 2021, and, since then, has only been cited in two subsequent Pennsylvania cases. However, in both cases, Mortimer was invoked to deny piercing the corporate veil, which may reveal a continued reluctance by Pennsylvania courts to utilize this method of recovery.[xi]

Similarly, a close reading of Mortimer itself points to a future of limited piercings, especially when it comes to enterprise liability. Cautious shareholders may find comfort in the rigorous requirements plaintiffs must meet to successfully “close the triangle.” In affirming the decision of the lower court denying to pierce the corporate veil of the sister entity, the Supreme Court wrote: “Plaintiff has failed to produce the evidence to overcome the ‘strong presumption in Pennsylvania against piercing the corporate veil.’”[xii] Short of some egregious act, it seems shareholders in Pennsylvania will still be able to rely on the personal protection the corporate veil provides.

[i] Mortimer v. McCool, 255 A.3d 261, 268 (Pa. 2021). [ii] Id. at 267. [iii] Id. at 278. [iv] Id. at 277. [v] Id. at 266. [vi] Id. at 285. [vii] Id. at 287. [viii] Id. at 267. [ix] Id. at 268. [x] Id. at 287. [xi] See Smith v. A.O. Smith Corporation, 2022 WL 221559 (Pa. Super 2022); see also Rosenkeimer v. A.O. Smith Corporation, 2022 WL 223585 (Pa. Super 2022) (stating that plaintiffs did not provide sufficient evidence of fraud or misconduct to warrant piercing). [xii] Mortimer, 255 A.3d at 268.