{"id":4231,"date":"2012-02-19T09:18:05","date_gmt":"2012-02-19T16:18:05","guid":{"rendered":"http:\/\/www.keytlaw.com\/azllclaw\/?p=4231"},"modified":"2019-10-26T15:25:19","modified_gmt":"2019-10-26T22:25:19","slug":"colorado-court-pierces-llc-veil","status":"publish","type":"post","link":"https:\/\/www.keytlaw.com\/azllclaw\/2012\/02\/colorado-court-pierces-llc-veil\/","title":{"rendered":"Colorado Court Pierces LLC Veil & Holds Single Member Liable for LLC’s Debt"},"content":{"rendered":"

When On February 2, 2012, the Colorado Court of Appeals issued its opinion in the case of Martin vs. Freeman<\/a>, a case that is important for all limited liability company owners who want to avoid becoming liable for the debts of their LLC.<\/p>\n

The Facts<\/strong><\/p>\n

Dean C.B. Freeman was the sole member and manager of Tradewinds Group, LLC, a Colorado limited liability company.\u00a0 Tradewinds only asset was an airplane that it owed free and clear with a value of approximately $300,000.\u00a0 Tradewinds hired Robert L. Martin to build an airplane hangar for its airplane. Tradewinds sued Martin in 2006 for breach of the construction\u00a0 contract. In 2007 Tradewinds sold the airplane for $300,000.\u00a0 After making sure that all creditors were paid Freeman caused the LLC to pay him all funds that remained in the LLC’s bank account.\u00a0 Thereafter Freeman paid all of Tradewinds\u2019 litigation expenses from his funds.<\/p>\n

In 2008, the trial court entered a judgment in favor of Tradewinds. Martin appealed and won the appeal. The Colorado Court of Appeals found that Tradewinds\u2019 damages were speculative and sent the case back to the trial court with directions to enter judgment in favor of Martin. The trial court ruled in 2010 that Martin was the prevailing party and awarded him $36,645.40 in costs.<\/p>\n

\u00a0When Martin won the $36,645 judgment against Tradewinds Group, LLC, it did not have any because it had sold its only asset and paid all of the company’s funds to its sole member, Dean Freeman. Martin then sued to pierce the LLC veil and collect Tradewinds’ debt from Freeman, the sole member of the LLC.<\/p>\n

The primary issue before the Colorado Court of Appeals was should the court allow Martin to pierce the LLC’s veil and hold its sole member liable for Martin’s judgment against Tradewinds Group, LLC? The appellate court stated:<\/p>\n

“To pierce the LLC veil, the court must conclude<\/p>\n

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  1. the corporate entity is an alter ego or mere instrumentality;<\/li>\n
  2. the corporate form was used to perpetrate a fraud or defeat a rightful claim; and<\/li>\n
  3. an equitable result would be achieved by disregarding the corporate form.”<\/li>\n<\/ol>\n<\/blockquote>\n

    The Colorado Court of Appeals in a two to one decision ruled that all three criteria existed and that Dean C.B. Freeman was personally obligated to pay the judgment owed to Robert L. Martin.<\/p>\n

    1st Factor:\u00a0 Alter Ego<\/strong><\/p>\n

    The majority’s opinion says that courts consider a variety of factors in determining alter ego status, including whether:<\/p>\n

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    1. “the entity is operated as a distinct business entity;<\/li>\n
    2. funds and assets are commingled;<\/li>\n
    3. adequate corporate records are maintained;<\/li>\n
    4. the nature and form of the entity\u2019s ownership and control facilitate insider misuse;<\/li>\n
    5. the business is thinly capitalized;<\/li>\n
    6. the entity is used as a mere shell;<\/li>\n
    7. legal formalities are disregarded; and<\/li>\n
    8. entity funds or assets are used for non-entity purposes.”<\/li>\n<\/ol>\n<\/blockquote>\n

      The Court does not, however, tell us if alter ego status exists if a majority of the factors exist or if all all of the factors must exist or it is is merely a gut feeling determined by the court that sufficient factors exist to justify a finding that the company was the alter ego of the member.\u00a0 The Court found the following facts that justified its conclusion Tradewinds was Freeman’s alter ego:<\/p>\n

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