The Colorado Court of Appeals issued its opinion in Martin v. Freeman on February 2, 2012.

Limited Liability Company—Veil Piercing

In this limited liability company (LLC) veil-piercing case, defendants Dean C.B. Freeman and Tradewinds Group, LLC appealed the trial court’s judgment in favor of plaintiff Robert C. Martin. The judgment was affirmed.

Freeman managed Tradewinds Group, LLC as a single-member LLC. Tradewinds contracted to have Martin construct an airplane hangar. In 2006, Tradewinds sued Martin for breaching the construction agreement. In 2007, while the litigation was pending, Tradewinds sold its only meaningful asset, an airplane, for $300,000 and the proceeds were diverted to Freeman, who paid Tradewinds’ litigation expenses. In 2008, a judgment was entered in favor of Tradewinds. Martin appealed. Another division of the Court of Appeals found that Tradewinds’ damages were speculative, and remanded the case with directions to enter judgment in Martin’s favor. On remand, Martin was awarded $36,645.60 in costs. The LLC had no assets and Martin instituted this action to pierce the LLC veil. Following a bench trial in 2010, the court pierced the veil and found Freeman personally liable for the cost award against Tradewinds. Tradewinds appealed, arguing it was error to pierce the LLC veil. The Court of Appeals disagreed and affirmed the judgment.

To pierce the LLC veil, the court must conclude (1) the corporate entity is an alter ego or mere instrumentality; (2) the corporate form was used to perpetrate a fraud or defeat a rightful claim; and (3) an equitable result would be achieved by disregarding the corporate form. Tradewinds challenged whether the first and second prongs were met.

As to the alter ego prong, the trial court found that: assets were commingled; negligible corporate records were kept; the records concerning substantive transactions were inadequate; there was a single-member/manager-facilitated misuse; the entity was thinly capitalized; undocumented infusions of cash were required to pay all operating expenses; Tradewinds was never operated as an active business; corporate formalities were disregarded; Freeman paid its debts without characterizing the transactions; assets were used for non-entity purposes; and Tradewinds was operated as a mere assetless shell. The Court held that these findings fully supported a conclusion that Tradewinds was Freeman’s alter ego.

Tradewinds argued that the second prong was not met because the trial court did not find wrongful intent or bad faith. The Court found no case, and defendant cited none, requiring a showing of wrongful intent. Therefore, it concluded that a showing that the corporate form was used to defeat a creditor’s rightful claim is sufficient. Here, Tradewinds sold its only asset and diverted the proceeds to Martin during the litigation. Transferring all of the assets to defeat a rightful creditor’s potential claim is sufficient to support piercing the corporate veil.

Tradewinds also argued that Martin waived the ability to collect litigation costs by not contesting the amount of the cost bond filed. The Court disagreed, concluding that Martin’s failure to contest the cost bond did not constitute an unequivocal act manifesting intent to relinquish the right to collect costs. The judgment was affirmed.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on February 2, 2012, can be found here.