2012 COA 21
Colo. Ct. App.2012Background
- Freeman, as sole manager, ran Tradewinds Group, LLC, which contracted with Martin for a hangar construction.
- Tradewinds’ lawsuit against Martin occurred in 2006; in 2007 Tradewinds sold its only substantial asset, an airplane, and diverted the proceeds to Freeman to pay litigation costs.
- A 2008 judgment favored Tradewinds, but on appeal the damage award was deemed speculative and Martin was favored on remand; costs were awarded to Martin.
- By 2010 Tradewinds had essentially no assets due to the airplane sale and distributions to Freeman.
- Martin filed a veil-piercing action seeking to hold Freeman personally liable for Tradewinds’ obligations; a bench trial pierced the LLC veil.
- The court entered judgment against Freeman personally, and the appeal followed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the LLC veil was properly pierced | Martin argues Tradewinds was Freeman's alter ego and the sale proceeds defeated a rightful claim. | Freeman contends the first two veil-piercing prongs were not satisfied given proper LLC operation and lack of misuse. | The court affirmed piercing the veil. |
| Second prong—defeat of a rightful claim | Martin contends the asset sale and transfer to Freeman defeated a potential creditor's claims. | Freeman argues the sale was lawful and did not misuse the corporate form to defeat a claim. | Wrongful conduct need not be shown; defeating a potential claim suffices. |
| Waiver of costs | Martin did not waive rights by not contesting the cost bond. | Tradewinds’ cost bond and Martin’s lack of contestation implied waiver. | Waiver not established; appeal costs denied. |
Key Cases Cited
- McCallum Family L.L.C. v. Winger, 221 P.3d 69 (Colo. App. 2009) (alter ego factors and piercing standard for LLCs; EMphasis on misused corporate form)
- Sheffield Services Co. v. Trowbridge, 211 P.3d 714 (Colo. App. 2009) (veil piercing extends to LLCs and factors applied)
- In re Phillips, 139 P.3d 639 (Colo. 2006) (corporate form used to shield a dominant shareholder’s improprieties)
- Lavach v. Lavach, 165 Colo. 433, 439 P.2d 359 (Colo. 1968) (wrongful conduct required for piercing; corporate form misuse)
- Rosebud Corp. v. Boggio, 39 Colo. App. 84, 561 P.2d 367 (Colo. App. 1977) (misuse of corporate funds to avoid paying a lender or judgment)