Key Points

  • The Third Circuit panel forecast that Pennsylvania courts would require clear and convincing evidence to pierce the corporate veil, a question Pennsylvania's appellate courts have not addressed.
  • The panel relied on the Pennsylvania Supreme Court's strong presumption against veil-piercing and on the state's requirement that fraud be proven by clear and convincing evidence.
  • PMAI failed to show undercapitalization, abuse of corporate formalities, substantial intermingling, or use of the corporate form to commit fraud, so Eshai's shareholders are not personally liable for the $8.6 million judgment.
  • The panel said PMAI would have lost even under the preponderance-of-the-evidence standard.
  • PMAI's unjust-enrichment restitution theory was forfeited because it was raised for the first time on appeal; the opinion is nonprecedential.

A federal appeals panel ruled Oct. 8 that an insurer cannot hold the family that owned Eshai Corp. personally liable for the company's $8.6 million debt to the insurer. The panel also forecast that Pennsylvania's courts would require clear and convincing evidence before piercing the corporate veil.

Judge Krause wrote for the three-judge panel of the U.S. Court of Appeals for the Third Circuit, which also included Judges Freeman and Roth. The panel affirmed Judge Gerald A. McHugh of the U.S. District Court for the Eastern District of Pennsylvania, who had granted summary judgment to Pennsylvania Manufacturers' Association Insurance Co., known as PMAI, and PMA Management Corp. That judgment ordered PMAI's former insured, Eshai Corp., to pay more than $8.6 million in damages for breach of contract.

When Eshai could not pay, PMAI asked Judge McHugh to extend liability to the company's shareholders, members of the Eshai family, under the alter ego theory. Judge McHugh refused after a two-day evidentiary hearing. The opinion is nonprecedential and, under the Third Circuit's internal operating procedures, is not binding precedent.

PMAI's lead argument on appeal concerned the burden of proof. The insurer contended that Judge McHugh erred by requiring clear and convincing evidence. The case reached federal court through diversity jurisdiction, so the panel applied Pennsylvania law, "forecast[ing] the position the [Pennsylvania Supreme Court] would take" on unsettled questions.

Judge Krause wrote that the Pennsylvania Supreme Court and the state's intermediate appellate courts have not addressed the evidentiary standard for veil-piercing claims. The opinion pointed instead to the state high court's emphasis, in its 1995 decision in Lumax Industries v. Aultman, on the "strong presumption . . . against piercing the corporate veil," and to its 2021 statement in Mortimer v. McCool that the corporate entity should be upheld "unless specific, unusual circumstances call for an exception." "As the District Court reasoned, this suggests the Pennsylvania courts would endorse a clear-and-convincing-evidence standard in the veil-piercing context," Judge Krause wrote.

The panel added a second ground. A party seeking to pierce the veil need not prove fraud in its narrow sense, but it must show that respecting the corporate form would promote "fraud or injustice," and Pennsylvania law requires proof of fraud by clear and convincing evidence. The panel noted that the Third Circuit already applies that standard to the federal alter ego doctrine, which it called "substantially similar" to Pennsylvania's, because that doctrine has "elements of fraud theory."

In a footnote, the panel set aside a 2006 Lehigh County trial court decision that had applied the lower standard. "One state trial court summarily stated that the standard is preponderance of the evidence, but it did so without analysis and based entirely on a federal district court opinion rather than state-court authority," Judge Krause wrote. Another footnote said the choice did not decide the case. "Even applying the more favorable preponderance-of-the-evidence standard, PMAI failed to establish a likelihood that it would have prevailed," the panel wrote.

On the merits, the panel walked through the factors Pennsylvania courts weigh: undercapitalization, failure to observe corporate formalities, "substantial intermingling of corporate and personal affairs," and use of the corporate form "to perpetrate a fraud." The panel cited a 2026 Pennsylvania Supreme Court decision observing that those factors remain relevant under the two-part test the state high court set out in Mortimer.

On capitalization, Judge McHugh had found that rapid growth from 2015 to 2020 caused Eshai "persistent cash flow issues due to increased payroll costs, vehicle expenses, and high interest loan repayments," and that the company wound down after unexpectedly losing its sole client, Amazon. PMAI did not challenge those findings. The panel saw "no error in the District Court's conclusion that Eshai's insufficient capital evinced a risky business strategy, not wrongdoing."

The panel also rejected PMAI's argument that $2.1 million in shareholder disbursements in 2019 diverted money from creditors. Those payments followed Eshai's sale of a separate corporate entity that generated $3.8 million in capital gains, the opinion said. They came in a year when Eshai was flush with cash, including $6 million in capital gains and book income, and after three years of relatively modest disbursements.

Eshai lacked many corporate formalities, the panel acknowledged. But it said that gap matters only when "associated with abuse of the corporate form," and it endorsed the District Court's reasoning that in a closely held corporation like Eshai the missing formalities were "relatively inconsequential." PMAI also pointed to luxury cars bought for personal use, salaries paid to family members who did not work for the company, and personal expenses. The panel agreed with Judge McHugh that "the money spent on luxury cars was a relatively insignificant sum when compared to Eshai's revenue and profit."

PMAI's fraud theory rested on $3.6 million in alleged distributions to shareholders in 2020, some after Eshai lost the Amazon contract. PMAI's own expert conceded on cross-examination that the figure could have included other transactions that benefited Eshai. The panel also upheld Judge McHugh's finding that Eshai's decision, made by December 2019, to "slow pay" an outstanding premium invoice was "driven not by fraud but prudence," because the company had limited capital and needed to pay a significant deposit to secure new coverage.

"In short, Eshai arguably made several risky and imprudent business decisions, but for the reasons ably explained by the District Court, those decisions do not clear the high bar necessary to pierce the corporate veil under Pennsylvania law," Judge Krause wrote.

The panel affirmed Judge McHugh's judgment. It declined to consider PMAI's request for restitution under the doctrine of unjust enrichment, which the insurer raised for the first time on appeal. Because PMAI had not pleaded that claim in its complaint, the panel held the argument forfeited.