Last Updated: Sep 9, 2020
In a case that could have far-reaching implications for the way that corporate entities are structured, the Pennsylvania Coalition for Civil Justice Reform (PCCJR), of which PAMED is a member, has filed an amicus brief to the Pennsylvania Supreme Court in the case of Mortimer v. McCool.
This case involves the fundamental question of when a plaintiff may “pierce the corporate veil” of a defendant to remove the protections contained in forming a corporation. The fundamental principle of this doctrine is respect for the corporate form: courts presume that separate legal entities should be treated as such and that debts of one entity cannot be transferred to other entities or individuals. Generally, the veil may be pierced only in limited circumstances where public policy demands it (e.g., fraud or abuse of the corporate form), and only to impose liability on the shareholders or members hiding behind the sham corporate entity.
The appeal concerns whether the Court should adopt the “enterprise or single entity theories” of corporate veil piercing, which would change existing Pennsylvania law, which presumes the legal form of two distinct but affiliated business entities must be preserved, except in certain situations.
In contrast, under the enterprise or single entity theories, a business organization that shares a common business purpose with an affiliated business entity could be held liable for damages stemming from the affiliated entity's actions, essentially negating the limited liability nature of most business organizations.
In this case, Mortimer was struck by a drunk motorist and left permanently injured. The restaurant that served the motorist was operated by a limited liability company (LLC) (owned by the McCools) and was formed for the purposes of purchasing and holding a license to sell and distribute liquor.
The McCools were also members of a separate limited liability company, McCool Properties, LLC, which owned the building that housed the restaurant in which the motorist who struck Mortimer was served alcohol prior to the accident.
Mortimer sought damages against the LLC as the operator of the restaurant and prevailed at trial. McCool Properties was not a defendant in that case. Mortimer was unable to recover the full amount of the judgment from the LLC and sought to recover the remaining damages from McCool Properties and the McCools personally.
Mortimer argued in part that the LLC and McCool Properties should be treated as a single enterprise for purposes of liability, thereby allowing Mortimer to access McCool Properties’ assets to satisfy the judgment against the LLC. The Superior Court rejected this argument and upheld Pennsylvania’s longstanding view that corporations should be treated as distinct entities.
The Supreme Court granted review in this case to determine whether Pennsylvania should shift to an enterprise or singled entity theory for corporate cases.
The Potential Impact on Health Care Corporations
PAMED is concerned that if the Supreme Court reverses established law regarding corporations, health care corporations will be at risk.
For example, as articulated in the amicus brief, physician groups may own and operate a medical practice and own their premises or other assets through a separate corporation or LLC. If this Court adopted the plaintiff’s theories, a medical malpractice judgment against one physician in the group could bankrupt the corporations or LLCs that own the real property of the physician group, even where the other members of the group were not liable for malpractice. This could be devastating for the doctors, their staff, and their patients.
As another example, larger health systems could also be adversely affected by a change in the veil-piercing doctrine. Health systems are often comprised of numerous hospitals, medical practices, and outpatient centers. If the plaintiff’s theory were adopted, a judgment against one of the system’s hospitals that renders the hospital insolvent could negatively impact its “sister” hospitals in communities that are hundreds of miles apart, to the detriment of Pennsylvania’s economy and the health of its citizens.
PAMED will continue to monitor this case and provide updates as they occur. View a copy of the amicus brief here.