A recent Third Circuit decision joined the long and growing list of cases supporting the Single Business Enterprise Theory exception to the long standing principle that corporations are separate and distinct legal entities apart from their shareholders and affiliated companies.
Under this long standing principle, shareholders are not liable for the corporation’s debts and the corporation itself is not liable for the debts of its owners or the debts of other corporations that it owns or that its shareholders own. Unfortunately, more and more this principle known as Limited Liability is being placed in a coffin and being nailed shut. For all businesses, be they large international conglomerates or small mom and pops, the Single Business Enterprise Theory should cause grave concern.
In the case of Dishon v Ponthie, Third Circuit, No. 05-659 (12/30/05), the court found that an enterprising individual (Ponthie) owned and operated two companies as a single business enterprise and therefore one company (Rentals) owned entirely by Ponthie and his wife was liable for the debts of another company (Development) owned entirely by Ponthie and his wife. Rentals bought land and entered into leases with the US Postal Service under which Rentals had to finance and construct the building and other improvements to be used by the USPS. Developments’ sole function was to build the buildings pursuant to an oral contract with Rentals under which Rentals paid Development a set price which did not yield Development a profit. Instead, in some cases, Development’s costs exceeded the set price. Development was sued because it failed to pay one of its subcontractors. When it became clear that Development had no money because it never made a profit, the plaintiff had to find deeper pockets. Following the holdings of Green v. Champion Insurance Co., 577 So. 2d 249 (La. App. 1 Cir.), writ denied, 580 So. 2d 668 (La. 1991), and its progeny, the appellate court found that because (a) Ponthie owned and operated both companies, (b) Development performed no work for any other company, (c) Development earned no other funds and made no profit, and (d) Ponthie operated both companies out of the same office and used the same phone numbers, the two companies should be treated as a single business enterprise even though Ponthie complied with corporate formalities and kept separate books for the companies, and as such, Rentals was found liable for the obligation of Development to the subcontractor even though Rentals never agreed to pay the subcontractor. In the long line of Single Business Enterprise Theory cases, one often fatal failure is for a company’s sole “customer” to be an affiliate. In those cases, it is much more likely for a single business enterprise to be found.