Props. Dev. Corp. v. Hinds

2019 COA 102

• Court: Colorado Court of Appeals
• Decided: July 3, 2019
• Docket: 17CA2102, Sedgwick
• Status: Published

Opinion

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

25 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,

26 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.

27 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.

28 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

29 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.