Props. Dev. Corp. v. Hinds , 2019 COA 102 ( 2019 )

The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
Date July 3, 2019
2019COA102
No. 17CA2102, Sedgwick Props. Dev. Corp. v. Hinds — Business
Organizations — Limited Liability Companies — Piercing the
Corporate Veil
A division of the court of appeals concludes that the district
court erred in finding that a developer services corporation that
contracted with a single-member, single-purpose limited liability
company (LLC) to manage the LLC was the alter ego of the LLC for
purposes of piercing the corporate veil.
The division determines that the veil-piercing analysis
applicable to corporations must be harmonized with statutes
governing LLCs, and that certain aspects of traditional veil-piercing
analysis are not applicable to a single-member, single-purpose LLC
that is managed by another entity under a contract to provide
management services to the LLC. A court undertaking a
veil-piercing analysis as to such an LLC must take into account the
inherent characteristics of such an entity. The district court did not
do so in this case, instead relying on factors that are inapplicable in
the context of such an entity.
Because the evidence presented was insufficient to establish
alter ego status, the division reverses the judgment piercing the
corporate veil to hold Sedgwick Properties Development Corporation
liable for a judgment entered against 1950 Logan, LLC, and
remands the case for entry of judgment in Sedgwick’s favor.
COLORADO COURT OF APPEALS 2019COA102
Court of Appeals No. 17CA2102
City and County of Denver District Court No. 13CV33659
Honorable Ross B. Buchanan, Judge
Sedgwick Properties Development Corporation, as Garnishee of 1950 Logan,
LLC,
Appellant,
v.
Christopher Hinds,
Appellee.
JUDGMENT REVERSED AND CASE
REMANDED WITH DIRECTIONS
Division V
Opinion by JUDGE TERRY
Grove, J. concurs
J. Jones, J., specially concurs
Announced July 3, 2019
Hall Estill, E. Job Seese, Denver, Colorado, for Appellant
Salazar Law, LLC, Joseph A. Salazar, Thornton, Colorado, for Appellee
¶1 This appeal by Sedgwick Properties Development Corporation
(Sedgwick) requires us to harmonize statutory law permitting the
creation of a single-member limited liability company (LLC) with the
judicially created doctrine of piercing the corporate veil.
¶2 In 2013, the Colorado Civil Rights Commission (Commission)
sued 1950 Logan, LLC (1950 Logan), a single-member,
single-purpose LLC, and obtained a default judgment against that
entity. 1950 Logan had been created for the sole purpose of
building the Tower on the Park condominium building and selling
the units in that building.
¶3 The Commission claimed that 1950 Logan had violated the
civil rights of appellee, intervenor Christopher Hinds — a disabled
person who uses a wheelchair and owns a unit in the building — by
selling the building’s handicapped parking spaces to
non-handicapped buyers, years before Hinds bought his condo
unit. Hinds intervened in the suit and got a default judgment
against 1950 Logan. (The Commission does not appear on appeal.)
¶4 By the time Hinds sought to collect on the judgment, the
condo development had long since been completed, management of
the property had been turned over to a homeowners’ association
1
(HOA), and 1950 Logan — its single purpose accomplished — had
wound down operations and no longer had any assets.
¶5 Hinds filed a garnishment proceeding seeking to pierce the
corporate veil of 1950 Logan to recover the judgment from
Sedgwick, which Hinds alleged was the alter ego of 1950 Logan
(even though Sedgwick had no ownership interest in 1950 Logan).
Sedgwick is a developer services company that was hired under a
contract to manage 1950 Logan and to oversee the development and
marketing of the condo project.
¶6 After Sedgwick filed a traverse to the garnishment, the district
court held an evidentiary hearing and pierced the corporate veil to
hold Sedgwick liable to pay Hinds for the judgment against 1950
Logan. Sedgwick appeals the judgment piercing the corporate veil
to reach its assets.
¶7 Because we conclude that Hinds did not present sufficient
evidence to support a finding that Sedgwick was 1950 Logan’s alter
ego, we reverse without addressing the other elements required for
piercing the corporate veil.
¶8 As part of our analysis, we discuss certain factors of the alter
ego rubric on which the district court relied, but which carry little
2
weight in the context of a single-member, single-purpose LLC such
as 1950 Logan that hired a management company to manage its
affairs.
I. The Traverse Hearing Was Sufficient to Protect Sedgwick’s Due
Process Rights
¶9 We begin by addressing Sedgwick’s contention that its
procedural due process rights were violated because it did not
receive adequate notice of the attempt by Hinds to pierce the
corporate veil to reach Sedgwick’s assets. Sedgwick argues that, as
a result, it did not have an adequate opportunity to respond to the
factual allegations of the complaint. Sedgwick’s argument boils
down to this: if an entity might later be garnished in the event of a
judgment against a defendant that has some relation to the entity,
the entity must be served with notice and given an opportunity to
defend the underlying suit. We reject this notion.
¶ 10 Nothing in Colorado law prohibits a judgment creditor from
asserting a claim to pierce the corporate veil in a garnishment
proceeding to collect on the judgment. And we see no due process
violation that would arise from such a procedure. This is so
3
because a garnishment proceeding adequately allows the garnishee
to contest the garnishment.
¶ 11 In its answer under C.R.C.P. 103, section 4, to the writ of
garnishment, Sedgwick asserted that it did not possess or control
any payments, obligations, or assets of 1950 Logan. This assertion
prompted Hinds to file a traverse under C.R.C.P. 103, section 8,
seeking to hold Sedgwick liable by piercing the corporate veil to
reach assets that he contended belonged to 1950 Logan. The
district court held a hearing on the traverse under C.R.C.P. 103,
section 8(b)(2).
¶ 12 These proceedings adequately protected Sedgwick’s due
process rights. See Maddalone v. C.D.C., Inc., 765 P.2d 1047, 1049
(Colo. App. 1988). Maddalone recognized that garnishment
procedures under C.R.C.P. 103 accord with due process and fully
protect a garnishee who denies liability for a debt. Id. The
garnishee is treated no differently than if it had been sued directly
on the debt, and has the right to deny the debt, engage in discovery,
and have an adversary hearing in which the judgment creditor must
prove the allegations against the garnishee by a preponderance of
the evidence. Id.
4
¶ 13 In the traverse hearing, the district court allowed garnishee
Sedgwick to (1) cross-examine the witness called by garnishor
Hinds; (2) challenge the evidence Hinds presented; and (3) present
Sedgwick’s own witness testimony and evidence. These procedures
are consistent with the due process rights of a garnishee. See Gen.
Accident Fire & Assurance Corp. v. Mitchell, 120 Colo. 531, 539, 211
P.2d 551, 555 (1949) (burden of proof is on the garnishor to
establish by a preponderance of the evidence all the facts on which
it relies to charge the garnishee); Anderson Boneless Beef, Inc. v.
Sunshine Health Care Ctr., 852 P.2d 1340, 1343 (Colo. App. 1993)
(same); see also Struble v. Am. Family Ins. Co., 172 P.3d 950, 955
(Colo. App. 2007) (reviewing the record before the district court and
concluding there were no issues of material fact as to issuance of
an insurance policy by the garnishee to the judgment debtor).
¶ 14 We now move to the merits of Sedgwick’s substantive
contentions.
II. Corporate Veil-Piercing of a Single-Member, Single-Purpose
LLC
¶ 15 A duly formed corporation is treated as a separate legal entity,
unique from its officers, directors, and shareholders. In re Phillips,
5
139 P.3d 639, 643 (Colo. 2006). The fiction of the corporate veil
isolates “the actions, profits, and debts of the corporation from the
individuals who invest in and run the entity.” Id. Only
extraordinary circumstances justify disregarding the corporate
entity to impose personal liability. Id. at 644.
¶ 16 Colorado’s appellate courts have not previously addressed
corporate veil-piercing in the context we encounter today: a
single-member, single-purpose LLC that is managed under a
contract by another company (in this case, 1950 Logan, which was
managed by Sedgwick). Cf. Highlands Ranch Univ. Park, LLC v. Uno
of Highlands Ranch, Inc., 129 P.3d 1020, 1022 (Colo. App. 2005)
(noting that an LLC party in that case was “a single-purpose entity
created for the sole purpose of entering into the lease at issue”).
¶ 17 Single-member LLCs are permitted by statute, § 7-80-
204(1)(g), C.R.S. 2018, and may be formed for any lawful business
purpose, § 7-80-103, C.R.S. 2018.
A. Burden of Proof for Veil-Piercing: Preponderance of Evidence
¶ 18 The burden of proof for establishing a claim to pierce the
corporate veil has been the subject of inconsistent judicial
precedent.
6
¶ 19 In In re Phillips, 139 P.3d at 644, the supreme court said that
the burden of proof is by “clear and convincing” evidence. But the
same court in Griffith v. SSC Pueblo Belmont Operating Co. LLC,
2016 CO 60M, ¶ 12, concluded that this language from Phillips was
mere dictum. The court instead applied section 13-25-127(1),
C.R.S. 2018, which mandates that “[a]ny provision of the law to the
contrary notwithstanding and except as provided in subsection (2)
of this section, the burden of proof in any civil action shall be by a
preponderance of the evidence.”
¶ 20 A year after announcing Griffith, however, the supreme court
decided Stockdale v. Ellsworth, 2017 CO 109, and once again said
that the burden of proof for piercing the corporate veil is “clear and
convincing” evidence. Id. at ¶ 23. But the supreme court was not
called on in Stockdale to decide the burden of proof issue. And it
provided no reasoning as to why a burden of proof contrary to the
one set out in section 13-25-127(1) and endorsed in Griffith should
apply to veil-piercing cases. We therefore conclude that this
language from Stockdale was dictum, and we instead apply Griffith’s
ruling that the burden of proof is by a preponderance of the
evidence, as required by statute.
7
B. Elements of Veil-Piercing
¶ 21 To determine whether it is appropriate to pierce the corporate
veil, a court must conduct a three-part inquiry. First, the court
must determine whether the corporate entity is the alter ego of the
person or entity in issue. Phillips, 139 P.3d at 644. Second, it must
determine whether justice requires recognizing the substance of the
relationship between the person or entity sought to be held liable
and the corporation over the form, because the corporate fiction
was “used to perpetrate a fraud or defeat a rightful claim.” See id.
(citation omitted). Third, the court must consider whether an
equitable result will be achieved by disregarding the corporate form
and holding a shareholder or other insider personally liable for the
acts of the business entity. Id.
¶ 22 We review de novo a trial court’s legal conclusions in finding
alter ego status and examine its related findings of fact for clear
error. Colo. Coffee Bean, LLC v. Peaberry Coffee Inc., 251 P.3d 9, 29
(Colo. App. 2010).
C. 1950 Logan’s Ownership Structure
¶ 23 The ownership information that was presented to the trial
court consists primarily of a signature page for the 1950 Logan
8
condominium declarations and Sedgwick’s answers to
interrogatories.
¶ 24 The condominium declarations signature page shows that
1950 Logan had the following structure: “1950 Logan, LLC, a
Colorado limited liability company[,] By: 1950 Logan II, LLC, a
Colorado limited liability company, its Manager[,] By: 1950 Logan
Management, LLC, a Colorado limited liability company, its
Manager[,] By [signature] Name: F. Martin Paris, Jr.[,] Title:
Manager.” 1950 Logan’s interrogatory response says, “[t]he name of
each owner, general or limited partner, or member owning 5% or
more of [1950 Logan] is 1950 Logan II, LLC . . . .”
¶ 25 There are other references in the record to 1950 Logan III,
LLC, of which Sedgwick’s principal, Paris, was a member, as well as
references to 1950 North Logan III, LLC, of which Paris was also a
member, and both of these entities appear to have had an
ownership interest in 1950 Logan II, LLC. (As discussed below, the
district court referred to these entities as “Roman II and Roman
III.”)
¶ 26 The response to an interrogatory states that, until August
2003, Sedgwick served as the initial corporate manager for 1950
9
Logan, as well as for 1950 Logan II, LLC. And Sedgwick was “paid a
fee in exchange for development services, which include marketing,
general coordination of the construction of the development of 1950
Logan, and lender management.”
¶ 27 Paris testified that the multi-tiered ownership structure of
1950 Logan was adopted to fulfill a requirement of Lehman Bros.,
one of the lenders on the condo development project.
¶ 28 In sum, the uncontradicted evidence before the district court
was that 1950 Logan is a single-member LLC whose sole member is
1950 Logan II, LLC.
D. Lack of Ownership by Sedgwick
¶ 29 No evidence was presented that Sedgwick owned 1950 Logan.
Instead, the district court found that Sedgwick managed 1950
Logan. See § 7-80-102(8) & (9), C.R.S. 2018 (distinguishing
members — who have ownership interest in an LLC — from
managers — who do not have ownership interest unless they are
also members); cf. § 7-80-107(1), C.R.S. 2018 (providing that
members of LLCs can be held liable based on piercing the corporate
veil jurisprudence, but not addressing managers); § 7-80-705,
C.R.S. 2018 (members and managers of LLCs are not liable for
10
judgments, debts, or liabilities of those companies); Weinstein v.
Colborne Foodbotics, LLC, 2013 CO 33, ¶ 23 (overruling Sheffield
Services Co. v. Trowbridge, 211 P.3d 714 (Colo. App. 2009), and
holding that the manager of an insolvent LLC does not owe the
LLC’s creditors the same fiduciary duties that an insolvent
corporation’s directors owe to the corporation’s creditors).
¶ 30 One might question whether a court can pierce the corporate
veil to hold liable a non-owner company that merely provided
management services to an LLC. But because no party raised this
issue, we do not decide it.
¶ 31 Instead, we follow the “cardinal principle of judicial restraint
— if it is not necessary to decide more, it is necessary not to decide
more.” Mulberger v. People, 2016 CO 10, ¶ 23 (Gabriel, J.,
concurring in the judgment) (quoting PDK Labs. Inc. v. United States
Drug Enf’t Admin., 362 F.3d 786, 799 (D.C. Cir. 2004) (Roberts, J.,
concurring in part and concurring in the judgment)). Accordingly,
we proceed to address the issues raised by the parties and
considered by the district court in its analysis of the alter ego issue.
11
E. Legal Underpinnings of Alter Ego Analysis
¶ 32 In determining whether a corporate entity is the alter ego of
the person or entity in issue, courts consider a variety of factors,
including whether (1) the corporation is operated as a distinct
business entity; (2) funds and assets are commingled; (3) adequate
corporate records are maintained; (4) the nature and form of the
entity’s ownership and control facilitate misuse by an insider; (5)
the business is thinly capitalized; (6) the corporation is used as a
“mere shell”; (7) legal formalities are disregarded; and (8) corporate
funds or assets are used for noncorporate purposes. Phillips, 139
P.3d at 644; Leonard v. McMorris, 63 P.3d 323, 330 (Colo. 2003).
This inquiry looks to the specific facts of each case, and not all of
the listed factors need to be shown in order to establish alter ego
status. Great Neck Plaza, L.P. v. Le Peep Rests., LLC, 37 P.3d 485,
490 (Colo. App. 2001).
F. Statutory Basis for Different Treatment of Limited Liability
Companies in the Veil-Piercing Context
¶ 33 The district court addressed the various factors generally
pertinent to piercing the corporate veil. Its analysis foundered,
however, on the assumption that a single-member, single-purpose
12
LLC is subject to the same veil-piercing analysis generally applied to
corporations, without taking into account the characteristics of
such LLCs. We acknowledge the difficulty faced by the district
court, given the dearth of precedent addressing those
characteristics.
¶ 34 As relevant here, the Colorado Limited Liability Company Act
provides:
(1) In any case in which a party seeks to hold
the members of a limited liability company
personally responsible for the alleged
improper actions of the limited liability
company, the court shall apply the case law
which interprets the conditions and
circumstances under which the corporate
veil of a corporation may be pierced under
Colorado law.
(2) For purposes of this section, the failure of a
limited liability company to observe the
formalities or requirements relating to the
management of its business and affairs is
not in itself a ground for imposing personal
liability on the members for liabilities of the
limited liability company.
§ 7-80-107(1)-(2) (emphasis added).
¶ 35 Given these statutory provisions, a court determining whether
to pierce the corporate veil of an LLC must tread carefully and must
consider whether traditionally applied veil-piercing factors are
13
applicable in the context of such a company. See 2 Larry E.
Ribstein & Robert R. Keatinge, Ribstein and Keatinge on Limited
Liability Companies § 15:3, Westlaw (database updated June 2019)
(collecting cases discussing application of traditional veil-piercing
factors to LLCs).
¶ 36 The court should tread even more carefully where the
company in question is a single-member LLC. For example, a
traditional veil-piercing analysis focuses, in part, on whether a
corporation observes corporate formalities, such as holding board of
directors meetings and keeping minutes of such meetings. See
Phillips, 139 P.3d at 646. But, as we discuss below, some of those
factors simply do not apply in the context of single-member LLCs.
¶ 37 And where, as here, management of the LLC is provided under
contract by a management company, traditional veil-piercing
factors may be even harder to apply.
G. Alter Ego Findings Relied on by the District Court to Pierce the
Veil
¶ 38 We conclude that the record, considered as a whole, does not
support an alter ego finding that would permit piercing 1950
Logan’s corporate veil.
14
¶ 39 As discussed above, it is uncontested that 1950 Logan was a
single-member LLC, whose sole member was 1950 Logan II, LLC,
and that Sedgwick merely managed 1950 Logan’s affairs under a
management contract. Sedgwick’s principal, Paris, testified that
there were numerous real estate projects for which Sedgwick has
provided the same types of development services it provided under
its contract with 1950 Logan.
¶ 40 Though the district court framed the first issue before it as
“whether . . . the LLC is the alter ego of its manager” (emphasis
added) — apparently referencing Sedgwick — it is unclear whether
the court recognized that Sedgwick was the manager under a
management contract and was not an owner-manager of the entity.
¶ 41 In any event, several of the district court’s findings of fact
relating to the alter ego determination do not necessarily show a
disregard of the corporate form. Though the court found them
indicative of alter ego status, they are also consistent with 1950
Logan’s operation as a single-member LLC, as well as with
Sedgwick’s role as manager of the entity through a contract to
provide such services. See § 7-80-102(8) (defining “manager” of
limited liability company); § 7-80-402, C.R.S. 2018 (addressing
15
designation of manager of limited liability company); § 7-80-404,
C.R.S. 2018 (specifying duties of managers). We next address the
veil-piercing factors that the district court deemed pertinent here.
1. Ownership, Control, and Unity of Interest
¶ 42 As to the ownership element, the court noted Paris’s testimony
that “Sedgwick actually had no interest in 1950 Logan.”
Nevertheless, the court found that Sedgwick controlled the entity,
finding specifically that
• Sedgwick completely dominated 1950 Logan;
• Sedgwick made all decisions for 1950 Logan;
• Sedgwick wrote all of the checks on 1950 Logan’s bank
account;
• 1950 Logan had no employees;
• 1950 Logan had no board of directors or other LLC members;
• Sedgwick was “entirely in charge of whatever movement there
was” of assets; and
• Sedgwick was the one that made applications for 1950 Logan
to be paid by the title company for items related to
development of the condo building.
16
¶ 43 The court made further findings relating to Paris. As noted
above, he was the principal of Sedgwick, which was hired under a
contract to provide management services to 1950 Logan, as
permitted by section 7-80-402.
¶ 44 Although the court found that Paris was the only class A
shareholder of 1950 Logan, the record does not support that
finding. Instead, the record shows that he was a class A
shareholder of 1950 Logan III, LLC — a separate entity from 1950
Logan. (Other evidence showed that Paris was a shareholder of
1950 North Logan III, LLC.)
¶ 45 Be that as it may, it is unclear how this finding about Paris
could support the conclusion that Sedgwick was the alter ego of
1950 Logan. The court did not find that Sedgwick and Paris were
the alter egos of each other, and it seems to have conflated the two
in concluding that Sedgwick’s assets are available to satisfy the
judgment against 1950 Logan — even though it found that
Sedgwick had no interest in 1950 Logan.
¶ 46 The same conflation seems to affect the following findings that
the district court made about Paris:
17
• “1950 Logan had no other class A shareholders to restrict
Paris (president of Sedgwick and manager of 1950 Logan) in
his decision-making”;
• Paris, on behalf of 1950 Logan, signed a 2009 settlement
agreement, settling a construction defect lawsuit brought by
the HOA against 1950 Logan; and
• 1950 Logan was “dominated in a very dramatic sense by
Sedgwick and Marty Paris, its [principal].”
¶ 47 To the extent these findings are supported by the record, they
do not tend to show ownership of 1950 Logan by Sedgwick or unity
of interest between those entities. And, as noted above, Sedgwick
was hired under a contract to manage 1950 Logan, which itself had
no employees. The court’s findings do not show control by
Sedgwick beyond what would be expected under the contractual
role of manager of the LLC.
¶ 48 The court’s ruling appears to ignore — without explaining why
— other evidence that would tend to show that Sedgwick did not
exercise control over 1950 Logan beyond what would be expected
under its contractual management agreement:
18
• Paris testified that Sedgwick had no ownership interest in, and
never made a profit from, the Tower on the Park project.
• When asked whether Sedgwick ever had possession or control
of any assets of any of the 1950 Logan, LLC, entities, Paris
responded, “No, just a contractual relationship to manage
them.” He explained that “[p]art of the services agreement that
Sedgwick signed for 1950 Logan, LLC, was to manage the
business affairs of the LLC.”
• About $30 million was borrowed from institutional investors to
build the building. The funds went into a construction escrow
account and were never deposited in Sedgwick’s own account.
Sedgwick would forward requests to pay subcontractors and
vendors to the lending bank and title company for
disbursements. The fees that Sedgwick earned for its own
work in managing the project were paid through the
construction escrow to Sedgwick’s account.
• Paris testified that Sedgwick provided the following
management services to the project: “Sedgwick’s knowledge
and expertise is in the process of managing the real estate
development. So they manage the capital sources, the equity,
19
the debt, insurance, the general contractor, the permitting
process, the architect, the buyer selection process, the
wholesales and marketing process. [There are] probably 30
items in our services agreement that Sedgwick is responsible
[for] managing as part of their contractual relationship with
the single purpose [limited liability company, referencing 1950
Logan].” He said that Sedgwick was a “cradle to grave service
provider for the ownership entity.” According to Paris,
Sedgwick has provided the same services with respect to other
real estate development projects and is “fully indemnified by
the [project’s] ownership for [those] services.”
• Sedgwick’s attorney testified that Sedgwick has its own assets
and bank accounts and does not commingle them with those
of the entities it manages. Paris testified, “Sedgwick’s money
was Sedgwick’s money and . . . 1950 Logan’s money was 1950
Logan’s money. They are separate businesses, separate
business structures, only connected by a service agreement [—
a] contract for services.”
20
• Sedgwick’s attorney testified that, on the date of the
garnishment, Sedgwick did not have possession or control of
assets of 1950 Logan.
¶ 49 The record simply does not support the court’s finding that
Sedgwick had the type of ownership and control over 1950 Logan
necessary to establish alter ego status.
2. Failure to Observe Corporate Formalities
¶ 50 The district court also based its alter ego finding on what it
saw as Sedgwick’s failure to observe the usual corporate formalities.
The court found the following:
• “[T]here was no board of directors, . . . no one for Mr. Paris to
answer to directly,” and, relatedly, that “there was no evidence
that there was any board of director approval of anything or
any activity or steps that Mr. Paris took[.]”
• “[T]here were no . . . minutes of meetings of any board of
directors in . . . 1950 Logan.”
¶ 51 But in the context of a single-member LLC — and particularly
one that is run under contract with a management company — we
conclude that these factors do not weigh in favor of finding alter ego
status. See § 7-80-107(2).
21
¶ 52 “LLCs are often operated with less formality [than traditional
corporations] and may not have regular meetings of members or
managers, or observe other procedures that are required for
corporations.” 1 Stephen A. Hess, Colorado Practice Series: Methods
of Practice § 5:9, Westlaw (8th ed. database updated May 2019).
“As an example, the Colorado Business Corporation Act requires
corporations to hold annual meetings of shareholders under section
7-107-101[, C.R.S. 2018]. There is no similar requirement for
annual meetings of the members of an LLC under the LLC Act.” Id.
at n.10; cf. id. at § 5:9 (“The provision in the LLC Act that the failure
to observe formalities is not itself a ground to impose liability . . .
may actually remove a procedural protection for LLCs otherwise
available to Colorado corporations. However, to avoid that result,
one might argue that, although the failure to follow corporate
formalities may not alone cause the LLC ‘veil’ to be pierced, the fact
that the LLC has followed formalities can still be a positive factor to
maintain the LLC ‘veil.’”).
3. Whether the Entity’s Form Facilitates Misuse by an Insider
¶ 53 The district court found that 1950 Logan and what it referred
to as “Roman II and Roman III” were “all rolled into one for
22
purposes of operations and for purposes of [filing] their single tax
return.” Cf. § 7-80-107(3) (“A limited liability company’s status for
federal tax purposes does not affect its status as a distinct entity
organized and existing under this article.”).
¶ 54 Assuming, without deciding, that the record supports that
finding, those circumstances do nothing to establish Sedgwick as
an alter ego of 1950 Logan, even given the court’s finding that “Mr.
Paris managed that whole structure.” Thus, the court’s finding that
“the nature and form of ownership and control does facilitate
misuse by an insider” cannot support piercing the veil to get to
Sedgwick’s assets.
4. Mere Shell
¶ 55 As the district court found, 1950 Logan did not constitute a
“mere shell.” See Phillips, 139 P.3d at 644 (listing whether
corporation is operated as a “mere shell” as one factor in
determining alter ego status).
5. Capitalization
¶ 56 Undercapitalization of the subject entity is one indicator that
may support piercing of the corporate veil, see, e.g., McCallum
Family, L.L.C. v. Winger, 221 P.3d 69, 76 (Colo. App. 2009), and the
23
court relied heavily on this factor in deciding to pierce the veil to
reach Sedgwick’s assets. After reviewing the uncontroverted
evidence, however, we cannot agree with the district court that
1950 Logan was thinly capitalized.
¶ 57 The court recognized that 1950 Logan owned the land on
which the condo development was built, but found that “the land
itself only acquired value as the project proceeded and approached
completion.”
¶ 58 It is very apparent from the record that the land had intrinsic
value for its development potential. Based in no small part on its
ownership of that land, 1950 Logan raised more than $1 million
from “friends and family” types of investors, was able to obtain
funding from major institutional lenders to build the building, sold
all the units in the building, and paid off more than $30 million in
loans. These facts necessarily show that the entity was not “thinly
capitalized.” Cf. McCormick v. City of Dillingham, 16 P.3d 735, 744
(Alaska 2001) (undercapitalization proved where corporate entity
could not procure a loan); 66, Inc. v. Crestwood Commons
Redevelopment Corp., 998 S.W.2d 32, 40 (Mo. 1999) (finding
undercapitalization when corporate entity “never had any assets,
24
net worth, [or] bank accounts”); S. Lumber & Coal Co. v. M.P. Olson
Real Estate & Constr. Co., 426 N.W.2d 504, 509 (Neb. 1988) (citing
Brown v. Alron, Inc., 388 N.W.2d 67, 71-72 (Neb. 1986), and noting
that corporation in that case was undercapitalized with “a mere
$100”); Baatz v. Arrow Bar, 452 N.W.2d 138, 142 (S.D. 1990)
(refusing to find inadequate capitalization where corporation was
started with only $5000, but the plaintiff had not carried burden to
show why $5000 was inadequate); Agway, Inc. v. Brooks, 790 A.2d
438, 441 (Vt. 2001) (finding undercapitalization where corporate
entity had “nothing of value”); 1 Fletcher Cyclopedia of the Law of
Corporations § 41.33, Westlaw (database updated Sept. 2018) (a
finding of inadequate capitalization is appropriate where the capital
is “illusory or trifling” compared with the business to be done and
the risks of loss).
¶ 59 In the context of undercapitalization, it is anomalous that the
district court would have relied in part on the multi-tiered
ownership structure of 1950 Logan in deciding to pierce the
corporate veil. As noted above, one of 1950 Logan’s major
institutional lenders insisted on this ownership structure.
Certainly the lender would not have done so if it believed that the
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structure would result in undercapitalization and the inability of
1950 Logan to pay creditors — including that lender — during the
useful life of the LLC. And there was no evidence that 1950 Logan
failed to pay its known creditors before winding down its operations.
¶ 60 In its findings, the district court also referred to the lack of
funds available for 1950 Logan to pay the judgment entered for
Hinds. But the record shows that by the time that judgment had
been entered, 1950 Logan had long before (indeed, years before)
satisfied its single purpose — to develop the property and sell the
units in the building — and had long since wound down operations.
Undercapitalization is not determined by whether a single-purpose
LLC might be able to pay liabilities that are incurred only after the
LLC has reached the end of its useful life and has ceased operating.
6. Commingling of Assets, and Use of Corporate Funds for
Noncorporate Purposes
¶ 61 The district court found that there was commingling of assets
between Sedgwick and 1950 Logan and that corporate funds were
used for noncorporate purposes. The only evidence the court relied
on for this finding was the settlement of the HOA’s construction
defect lawsuit. The settlement was entered into jointly by Sedgwick,
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1950 Logan, what the court called “Roman II and Roman III,” and
1950 Logan Development. Though the court recognized that the
joint settlement was, “to a certain extent[,] a drafting convenience,”
it said that the “funds actually came out of the only bank account
which was in the name of 1950 Logan, LLC. And so at least some of
those funds were paid to extinguish the liability, if any, of Sedgwick,
among the other defendants.” The court concluded, “1950
Logan’s . . . funds [were] available to [Sedgwick] to settle its liability,
if any,” in the suit.
¶ 62 To the extent the court relied on this joint settlement, we have
found no legal authority that would support a conclusion that such
a joint settlement of potential liabilities is an indicator of alter ego
status, and the parties have cited none. On the contrary, it is
common knowledge among lawyers and judges that joint
settlements that benefit unrelated parties often take place,
especially where cross-claims among the settling entities may be
anticipated.
¶ 63 The record does not support piercing 1950 Logan’s corporate
veil based on commingling of assets or the use of corporate funds
for noncorporate purposes.
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H. The Undisputed Evidence Fails to Establish Alter Ego Status and
Therefore Precludes Veil-Piercing to Reach Assets of Sedgwick
¶ 64 We conclude that the evidence presented to the district court
is insufficient to establish, even by a preponderance of the evidence,
that 1950 Logan is the alter ego of Sedgwick. Therefore, the
elements necessary for piercing the corporate veil cannot be met.
III. Conclusion
¶ 65 The district court’s judgment against Sedgwick is reversed.
We remand the case to the district court for entry of judgment for
Sedgwick.
JUDGE GROVE concurs.
JUDGE J. JONES specially concurs.
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J. JONES, J., specially concurring.
¶ 66 I agree with the majority’s analysis of the alter ego question,
and its result. But I write separately because I believe the district
court’s findings should lead to the conclusion that Mr. Hinds also
failed to prove the second requirement for piercing the corporate veil
— that the corporate form was “used to perpetrate a fraud or defeat
a rightful claim.” In re Phillips, 139 P.3d 639, 644 (Colo. 2006)
(quoting Contractors Heating & Supply Co. v. Scherb, 163 Colo. 584,
588, 432 P.2d 237, 239 (1967)).
¶ 67 In Martin v. Freeman, 2012 COA 21, ¶ 21, a majority of a
division of this court held that this requirement can be shown even
if there was no wrongful conduct in the use of the corporate form. I
dissented from that holding, and I continue to believe that the
majority’s holding is contrary to Colorado Supreme Court
precedent. In my view, that precedent requires a showing that the
corporate form was used “in a manner that, if not criminal, was at
least unlawful or intended to defeat a claim.” Id. at ¶ 33 (J. Jones,
J., dissenting).
¶ 68 In this case, the district court found that “there was no
evidence of fraud” and there was “no specific evidence of a wrongful
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motive or intent.” Absent any such evidence, there is no basis to
conclude that 1950 Logan’s corporate form was used to perpetrate a
fraud or defeat a rightful claim. See In re Phillips, 139 P.3d at 644
(“Only when the corporate form was used to shield a dominant
shareholder’s improprieties may the veil be pierced.”). So on this
basis as well, the district court’s judgment cannot stand.1
1Obviously, I do not fault the district court for relying on the
majority’s decision in Martin.
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