In the June 20, 2019 edition of The Legal Intelligencer, Edward Kang, Managing Member of KHF wrote “Piercing the Corporate Veil Under Pennsylvania Law.”
In its simplest form, the piercing of the corporate veil is an equitable remedy available to the creditors of corporate entities to request the court to hold their owners liable for the corporate debts. The underlying cause of action against the corporate entity could be a contract or tort action, none of which is attributable to its owners. For the creditors, the veil-piercing is desirable as their last resort to recover their damages while for the owners, it is detrimental as it exposes them to the type of liability that they wished to exonerate themselves from by forming a company in the first place. These two competing interests drive the forces behind the state laws on substantive elements and procedural requirements for veil-piercing: the more favorable the state policy is toward preserving limited liability, the harder it is under the state law for the court to disregard corporate entity, and the other way around. Pennsylvania law adopted a “strong presumption” against veil-piercing, see Stephen B. Presser, “Section 2:42.Pennsylvania, in Piercing the Corporate Veil,” (last updated July 2018).
Pennsylvania state and federal courts applying Pennsylvania law has long listed a vast set of factors that the court may consider in its decision to disregard the corporate shield, including, among others, using the corporate form as a sham to pursue fraudulent or illegal activities or to cause injustice, ignoring corporate formalities, undercapitalizing the company and exerting control to influence the corporate decisions and actions for personal interests. A combination of any number of these factors may convince the court that equity requires holding the owner personally liable for corporate debts, see, Good v. Holstein, 787 A.2d 426, 430 (Pa.Super. 2001); E. Minerals & Chemicals v. Mahan, 225 F.3d 330, 336 (3d Cir. 2000).
In its more complicated form, the creditors of a subsidiary in a corporate group may plead veil-piercing to hold the parent company liable for the debts of the subsidiary. This is especially helpful in cases where the subsidiary is undercapitalized while the parent company has sufficient resources to cover the contractual or tortious damages caused by the subsidiary. Many insurance companies have this business model. The Pennsylvania courts have applied the same factors to the corporate groups to determine if a parent company is liable for its subsidiary’s debts under the doctrine of piercing the corporate veil, as in Allegheny Energy Supply v. Wolf Run Minerals, 53 A.3d 53, 59 (Pa. Super. Ct. 2012).
Another use of the doctrine is reverse veil-piercing: the creditors of a shareholder request the court to disregard the separate entity of the corporation to enforce their judgment against the corporate asset. Applying Pennsylvania law, the federal courts have relied on the same factors as the elements of classic veil-piercing to decide whether reverse veil-piercing is warranted to hold that the corporation’s asset is available to its shareholder’s creditors, see In re DiLoreto, 266 F. App’x 140, 145 (3d Cir. 2008); In re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999) (citing In re Mass, 178 B.R. 626, 631 (M.D. Pa. 1995)). Apparently, the state courts have not recognized reverse veil-piercing yet. Susquehanna Trust & Investment v. Ansar Group, Inc., No. 3442 EDA 2012 (Pa. Super. Ct. Nov. 19, 2013).
The procedure to bring, litigate, and decide veil-piercing by the courts is not clearly determined in most jurisdictions, and states vary considerably in their procedural requirements. Sam F. Halabi, “Veil-Piercing’s Procedure,: 67 Rutgers U. L. Rev. 1001,1016-53 (2015). The main procedural issues that arise in a case when a party wishes to request veil-piercing include when and how to plead it, what the applicable law is, and whether the parties are entitled to a jury trial. Under Pennsylvania law, the piercing of the corporate veil is not an independent cause of action, but the plaintiff must plead the factors that she relies on and provide supporting evidence. See, e.g., In re Gigliotti, 507 B.R. 826, 840 (Bankr. E.D. Pa.). As long as the plaintiff pleads the factors and substantive elements of veil-piercing in her request, she does not necessarily identify her request as piercing the corporate veil to succeed, as in Calkins v. Wolk, (Pa. Super. Ct. June 26, 2018).
There are no procedural rules on when to plead veil-piercing. The case law shows that there are two variations. One option is that the plaintiff requests veil-piercing together with her underlying claims for the liability of the corporation in the same complaint. See, e.g., Triangle Home Invest v. Kaheel, (Pa.Com.Pl. Dec. 16, 2016)). In such a case, the plaintiff must name the shareholders that he wishes the court to hold liable for the corporate debts. The other option is that the plaintiff brings an action against the shareholder(s) who would be individually liable if the court pierces the corporate veil after she already litigated and received a judgment against the corporation in a separate case. See, e.g., Cutrona v. Leaser, (Pa.Com.Pl. Mar. 14, 2019).
Similarly, there is no strict rule on how to plead veil-piercing. The plaintiff may file a “motion for resolution of alter ego claims by the court sitting in equity.” See Advanced Telephone Systems v. Com-Net Professional Mobile Radio, 846 A.2d 1264, 1267 (2004). Alternatively, she might simply list the veil-piercing request among her claims in her complaint as a count, as in Christensen v. Ideal Motorcars, No. 2017-C-3883, (Pa.Com.Pl. Sep. 25, 2018).
Under Pennsylvania law, the law of the state of the place of incorporation is the applicable law regarding the substantive requirements of veil-piercing, as in Commonwealth v. Golden Gate National Senior Care, 158 A.3d 203 (Pa. Commw. Ct. 2017). Notably, the laws on veil-piercing in Pennsylvania, New Jersey, and Delaware are almost the same. The courts do not find it prejudicial to the parties if the court applied Pennsylvania law and the parties did not dispute the court’s application of Pennsylvania law or if the parties relied on Pennsylvania law instead of New Jersey or Delaware to determine the standards of veil-piercing, when the corporation is incorporated in either of these two states, see Pasternack v. Klein, (E.D. Pa. July 24, 2017), aff’d, 751 F. App’x 332 (3d Cir. 2018); Everitt v. Dover Downs Entertainment, (E.D. Pa. June 9, 1999).
There is no right to a jury trial for piercing the corporate veil in the state courts under Pennsylvania law. Similarly, the federal courts in the U.S. Court of Appeals for the Third Circuit sitting in diversity have not recognized the right to a jury trial regarding the request of piercing the corporate veil. In a recent case, the U.S. District Court for the Eastern District of Pennsylvania analyzed the issue stating that “There is no definitive Supreme Court or Third Circuit authority as to whether the question of piercing the corporate veil is one for the court or the finder of fact the jury,” see Clientron v. Devon IT, 154 F. Supp. 3d 132, 140–41 (E.D.Pa. 2015). Recognizing that some courts in the Third Circuit have submitted veil-piercing to the jury, the court held that “there is no Seventh Amendment right to a jury trial on piercing the corporate veil.” The court decided in that case, however, that under Federal Rule of Civil Procedure 39(c), it has “the discretion to try the issue of veil piercing with an advisory jury” and used this option.
The doctrine of the piercing of the corporate veil allows the creditors to request the court to disregard the separation of ownership that the principle of limited liability granted to corporations and their owners. It is only equitable to grant this extraordinary remedy under certain conditions: when there is enough evidence to show that the owners used the corporation as a sham to disguise their intention of furthering their personal agenda in the detriment of others. The presumption in favor of limited liability and the “strong presumption” against veil-piercing under Pennsylvania law render veil-piercing difficult even when the facts warrant veil-piercing. Practitioners should consider veil-piercing from the inception of a case and, if applicable, prepare their case to meet the veil-piercing both substantively and procedurally and develop the evidence to support the case.
Edward T. Kang is the managing member of Kang Haggerty & Fetbroyt. He devotes the majority of his practice to business litigation and other litigation involving business entities.
Reprinted with permission from the June 20, 2019 edition of “The Legal Intelligencer” © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or email@example.com.