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Colorado Court Holds that a Creditor Can Pierce the Corporate Veil as Against an Insider Who is Not a Shareholder, Officer or Director of the Corporation

In an opinion dated October 29, 2009, the Colorado Court of Appeals affirmed the principle that a creditor of a corporation can “pierce the corporate veil” (ask the court to look behind a corporate entity and take action as though no entity separate from the members itself existed). A unique part of the decision holds that it is not just a shareholder, officer or director against whom the corporate veil can be pierced, but also a corporate insider (such as a manager) who can personally be held liable for a corporate obligation.
Marc Winger managed a Wyoming corporation authorized to do business in Colorado, named Manitoba Investment Advisors, Inc. (Manitoba). His wife was a director and 50% shareholder and president, while his mother was a director, 50% shareholder, vice-president and secretary. Marc Winger routinely used corporate funds to pay his personal expenses, including $95,400 to the State of California in connection with a felony conviction there for failure to pay state taxes.
Manitoba leased property from McCallum Family L.L.C. in Grand Junction for business use. Manitoba failed to pay county taxes for over three years and vacated the property seven months before the expiration of the lease, defaulting on the remaining rent. McCallum obtained judgment against Manitoba for $76,224. Manitoba was administratively dissolved on May 31, 2006.
After first holding that the burden of proof of one seeking to pierce the corporate veil is proof by a “preponderance of the evidence” (a lesser burden) and not proof by “clear and convincing” evidence (a greater burden), the court went on to discuss under what circumstances the corporate veil may be pierced (a subject I will discuss in a later blog).
The court examined the issue of piercing the corporate veil as against one who manages the corporation, but who is not a shareholder, officer or director. The court holds that where the person sought to be held liable for corporate debts exercises sufficient “dominion and control” over the corporation and its assets, that person may be deemed an “equitable owner” and thus an “alter ego” of the corporation. Marc Winger admitted that his wife was a shareholder and director in name only. Neither shareholder exercised any supervisory power over Marc Winger, who “managed the whole affair.” Marc Winger’s activities were directed at defeating McCallum’s claim.
The court then remanded the case to the trial court to determine whether or not equity required piercing of the corporate veil and holding Marc Winger liable for McCallum’s claim.