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
April 16, 2020
2020COA69
No. 18CA1716, Dill v. Rembrandt Group, Inc.— Corporations —
Piercing the Corporate Veil — Horizontal Piercing
As a matter of first impression, a division of the court of
appeals concludes that Colorado corporate law permits horizontal
veil piercing between entities that do not share direct common
ownership, but that share common ownership through another
entity. However, horizontal piercing may only occur if the veil of
each corporate entity and its owners is first pierced. Because that
did not occur here, we reverse the court’s judgment finding that
defendant Rembrandt Group, Inc., and intervenor Pikes Peak
Acquisitions, LLC are alter egos. The division further concludes
that the record does not support the district court’s finding that the
corporate form was used to defeat a rightful claim. Finally, the
division concludes that Pikes Peak Acquisitions and Rembrandt
Group are entitled to reasonable costs and appellate attorney fees
under the “Intercreditor and Subordination Agreement.” Therefore,
the district court’s judgment in favor of the plaintiff is reversed and
the case is remanded for further proceedings.
COLORADO COURT OF APPEALS 2020COA69
Court of Appeals No. 18CA1716
City and County of Denver District Court Nos. 15CV34604 & 16CV30289
Honorable Michael J. Vallejos, Judge
Ernest R. Dill and Julie D. Dill,
Plaintiffs-Appellees,
v.
Rembrandt Group, Inc., a Colorado corporation,
Defendant-Appellant,
and
Pikes Peak Acquisitions, LLC, a Colorado limited liability company, and Suvi
Hejbol Miller, as personal representative of the Estate of Robert D. Arnold,
Intervenors-Appellants.
JUDGMENT REVERSED AND CASE
REMANDED WITH DIRECTIONS
Division VI
Opinion by JUDGE FREYRE
Richman and Grove, JJ., concur
Announced April 16, 2020
Miller & Law, P.C., Curtis R. Henry, Jonathan R. Slie, Littleton, Colorado, for
Plaintiffs-Appellees
Holland & Hart LLP, Sean M. Hanlon, Denver, Colorado, for Defendant-
Appellant
Mulliken Weiner Berg & Jolivet P.C., Murray I. Weiner, Colorado Springs,
Colorado, for Intervenors-Appellants
¶1 This appeal by defendant Rembrandt Group, Inc. (RGI), a
Colorado corporation, and intervenor Pikes Peak Acquisitions, LLC
(PPA), a Colorado single-member limited liability company (LLC),
requires us to determine whether a court may find that two entities
that neither are in a parent-subsidiary relationship nor have any
ownership interest in each other, but share common owners
through another LLC, can be alter egos.
¶2 RGI owes money to PPA, its current senior creditor, and to
plaintiff Ernest R. Dill, a subordinate creditor. PPA is wholly owned
by Intellitec Executives, LLC (Intellitec), which is not a party to this
case. Intellitec, in turn, is owned by five individuals. The same five
individuals also own 81.25 percent of RGI’s stock (the five common
owners). Mr. Dill filed suit against RGI to collect on his subordinate
indebtedness after learning that Rocky Mountain Mezzanine Fund
II, L.P. (RMMF), the original senior creditor, had assigned RGI’s
indebtedness to PPA. Mr. Dill argued that, because RGI and PPA
(indirectly via Intellitec) shared common owners, they are alter egos
of each other. Mr. Dill reasoned that the senior indebtedness was
extinguished when RMMF assigned RGI’s debt to PPA for a
discounted amount, which allowed RGI, through PPA, to effectively
1
acquire a debt payable to itself. Thus, under Mr. Dill’s argument,
he can collect on his subordinated debt. The trial court agreed.
¶3 We conclude that RGI and PPA are not alter egos of each other
because they are separate legal entities that lack common
ownership or control and do not otherwise satisfy the alter ego
factors. Further, because the trial court failed to find that (1) RGI is
the alter ego of five of its twelve owners; (2) Intellitec is the alter ego
of its owners (the same five common owners, who also own 81.25
percent of RGI’s stock); and (3) Intellitec and PPA are alter egos of
each other, it could not use “horizontal” veil piercing to find that
RGI and PPA are alter egos of each other.
¶4 We further conclude that the record does not support the
court’s finding that PPA acquired RGI’s indebtedness for the
purpose of defeating Mr. Dill’s rightful claim. Therefore, the court
erred by holding that RGI and PPA are alter egos and, thus, that the
senior indebtedness was extinguished when PPA acquired it. We
reverse the judgment.
I. Factual Background
¶5 Mr. Dill sold several trade schools to RGI in 2000. RGI
financed the purchase (and acquired working capital) by borrowing
2
$3.69 million from RMMF, as evidenced by a note (RMMF note)
payable to RMMF, and by Mr. Dill’s agreement to carry back $3
million of the purchase price. The RMMF note was and remains
assignable.
¶6 As a condition of providing financing for RGI’s purchase,
RMMF required Mr. Dill to execute an “Intercreditor and
Subordination Agreement” (IC agreement). As relevant here, the IC
agreement designated Mr. Dill the subordinate creditor and his debt
the subordinated indebtedness, and it designated RMMF the senior
creditor and the RMMF note the senior debt. As well, it authorized
RMMF to issue a payment blockage notice to suspend RGI’s
payments to Mr. Dill under any notes payable to him if RGI
defaulted on the senior indebtedness. Such blockage would remain
effective until RGI satisfied the senior indebtedness.
¶7 The IC agreement also expressly precluded Mr. Dill from
commencing any legal action against RGI to collect on any notes
payable to him “unless and until all of the Senior Indebtedness has
been fully paid and satisfied.”
¶8 Importantly, the IC agreement allowed RMMF to assign the
RMMF note to any third party without notice to or consent from Mr.
3
Dill. As pertinent here, the IC agreement provided that “if any third
party satisfies the Senior Indebtedness owing to Senior Lender,
Senior Lender may assign its rights and remedies hereunder to
such third party, and such third party shall be deemed to be Senior
Lender for all purposes of this Agreement.”
¶9 The IC agreement does not define “third party.”
¶ 10 In 2008, RGI defaulted on its obligations to Mr. Dill. As part of
a settlement with Mr. Dill, RGI executed two new promissory notes
payable to Mr. Dill (Dill notes). These notes are secured by a stock
pledge agreement whereby RGI pledged one hundred percent of the
schools’ outstanding stock Mr. Dill had originally sold to RGI. At
that time, Mr. Dill reaffirmed the IC agreement. The Dill notes and
stock pledge agreement are the focus of this litigation.
¶ 11 In 2011, the five common owners (who collectively own 81.25
percent of RGI) formed Intellitec. In 2012, Intellitec’s owners (five
common owners) formed PPA, with Intellitec as its single member.
Using a portion of life insurance proceeds from one of Intellitec’s
deceased members, in April 2012, PPA purchased the RMMF note
(which, at the time, had an unpaid balance of $3 million owed to
4
RMMF) for the discounted price of $1.5 million.1 RMMF assigned
its rights under the RMMF note and the IC agreement to PPA. At
the time of trial, PPA’s assets included the RMMF note, some cash,
and several shares of RGI stock.2 Figure 1 illustrates the corporate
structures and the relationships between Mr. Dill, RGI, and PPA.
1 2 3 4 5
Owners
81.25% of RGI Shares
Intellitec
1 2 3 4 5 6-12 (LLC)
Owners Single
Member
Dill RGI (Corp.) PPA (LLC)
(subordinate creditor) (Debtor) (senior creditor)
IC Agreement
Figure 1
1 PPA eventually assigned twenty percent of the RMMF note to the
personal representative of the deceased member’s estate, Suvi
Hejbol Miller. PPA and Miller are both intervenors in this case. For
simplicity, we refer to them jointly as PPA. Because the trial court
did not rely on this finding, however, we do not further consider it.
2 RGI acknowledges in its brief that PPA owns some shares of RGI
obtained as consideration for giving RGI extensions to make
payments on the RMMF note. Because the trial court did not rely
on this fact, and neither party raised it on appeal, we do not
consider it.
5
¶ 12 After making $274,586 in payments to PPA under the RMMF
note, RGI defaulted on the RMMF note in August 2012. The default
did not initially affect Mr. Dill, as RGI paid him nearly $1.1 million
under the Dill notes through April 2015.
¶ 13 In May 2015, RGI exercised its right to defer payment under
the Dill notes for twelve months due to its “verifiable financial
difficulties.”3 In August 2015, PPA and RGI entered into a
forbearance agreement under which PPA agreed to “forbear and
forgo interest and principal payments” so that RGI could sell some
of its trade schools to reduce its total indebtedness. Then, on
October 1, 2015, pursuant to the IC agreement, PPA issued a
payment blockage notice to Mr. Dill prohibiting him, as the
subordinate creditor, from receiving further payments on the Dill
notes until the senior debt has been fully satisfied.
II. Procedural Background
¶ 14 On December 30, 2015, Mr. Dill sued RGI for breach of the
Dill notes, breach of the stock pledge agreement, unjust
enrichment, breach of a lease agreement, and attorney fees. His
3Mr. Dill disputed at trial that RGI properly invoked this provision.
Because the trial court did not address this issue, neither do we.
6
complaint alleged that RMMF’s assignment of the RMMF note to
PPA in 2012 extinguished the senior debt because the members of
PPA’s owner (Intellitec) own 81.25 percent of RGI. Thus, he
reasoned, PPA and RGI are alter egos and RGI had essentially
purchased its own debt through PPA.
¶ 15 On February 29, 2016, PPA filed a complaint for injunctive
relief in a separate proceeding, arguing that RMMF’s assignment of
the RMMF note to PPA was valid. PPA sought a preliminary
injunction barring Mr. Dill from prosecuting his case against RGI
because the IC agreement precludes it. Mr. Dill countered that,
because RGI and PPA are alter egos, they “basically owe[d] money to
themselves.” The court consolidated the two cases and set a
hearing on PPA’s motion for preliminary injunction.
¶ 16 After the hearing, the court denied PPA’s motion for a
preliminary injunction, ruling that it was unclear “whether PPA has
a reasonable probability of success on the merits.” The trial court
found that success on the merits would depend in part on whether
RGI and PPA are alter egos.
¶ 17 After a bench trial a year later, RGI and PPA moved to dismiss
Mr. Dill’s claims under C.R.C.P. 41(b). The trial court dismissed the
7
breach of lease and unjust enrichment claims. On November 3,
2017, the trial court issued a detailed written order setting forth the
pertinent issue:
There is no dispute that RGI has not made
payment and is in “default” of the RMM[F] note
and of the two [Dill notes]. There is no doubt
that the Dills4 were junior lenders to [RMMF].
Also, there is no dispute that the RMM[F] note
was assigned to PPA. Again, the question at
issue has been whether there was a valid
assignment or, instead, whether there was
actually a satisfaction of the debt. If PPA is
simply an alter ego of RGI who is trying to
avoid their obligations under the note, then the
assignment was not valid, and the Dills may
enforce their rights under the agreements. If
PPA is not an alter ego of RGI, and the
assignment was valid, then, PPA, by
assignment, became the senior lender, and the
Dills, pursuant to the [IC agreement], may not
bring a lawsuit to enforce their rights.
¶ 18 Applying the three-part test for veil piercing set forth in
McCallum Family L.L.C. v. Winger, 221 P.3d 69 (Colo. App. 2009),
the court first found that RGI and PPA are alter egos. In reaching
4Mr. Dill’s complaint also listed his wife, Julie D. Dill, as a plaintiff,
although she was not a party to the Dill notes or the stock pledge
agreement. Although RGI argues that the judgment in favor of Mrs.
Dill should be vacated because she was not a party to the Dill notes
or the stock pledge agreement, we need not address this issue
because we reverse on other grounds.
8
this conclusion, the court found that (1) PPA is a single-purpose
LLC that operates as a distinct business entity; (2) PPA’s assets
consist of the RMMF note, cash, and several shares of RGI stock; (3)
PPA and RGI do not commingle funds; (4) PPA maintains adequate
business records; (5) no evidence of misuse of the corporate form
existed; (6) PPA followed all legal formalities; (7) PPA was formed for
the sole purpose of acquiring the RMMF note; and (8) five of RGI’s
shareholders formed Intellitec, which, in turn, formed PPA.
¶ 19 Next, the court found no evidence of fraud, relying on the
undisputed evidence that RGI made regular payments to Mr. Dill
even after defaulting on the RMMF note in 2012. Instead, it found
that PPA is a “shell corporation,” formed by Intellitec for the
purpose of avoiding creditors, including Mr. Dill. It also reasoned
that PPA’s decision to execute the forbearance agreement in 2015
so as “not to crush RGI” showed that PPA “indulged RGI’s default”
in a manner “to which other creditors were unlikely to consent.” It
noted that, if the deceased common owner’s personal representative
had used the life insurance proceeds to allow RGI to pay RMMF
directly, this would have represented a satisfaction of the debt, and
Mr. Dill would have become the senior creditor under the IC
9
agreement.5 Instead, the members of Intellitec, who also are
shareholders of RGI, formed PPA, funded PPA with the life
insurance proceeds to purchase the RMMF note, and thereby
defeated Mr. Dill’s rightful claim to collect on the Dill notes.
¶ 20 Finally, the trial court found that piercing the corporate veil
would yield an equitable result by extinguishing the senior
indebtedness and allowing Mr. Dill to obtain what he had bargained
for.
¶ 21 RGI and PPA appealed the court’s ruling. The first appeal was
dismissed without prejudice for lack of finality. The trial court then
clarified that, having found that RGI was in default under the Dill
notes, RGI had also breached the stock pledge agreement. The
court also clarified that Intellitec is not a party to this litigation and
that it had only found RGI and PPA (and not PPA and Intellitec) to
be alter egos. RGI and PPA now appeal the final judgment.
5 The trial court did not make findings explaining how a $1.5
million payment could have satisfied the $3 million debt. Because
the parties have not raised this discrepancy and the trial court did
not consider it, neither do we.
10
III. Horizontal Veil Piercing
¶ 22 RGI and PPA contend that the trial court erroneously pierced
the corporate veil to find that RGI’s indebtedness to PPA was
extinguished when RMMF assigned the RMMF note to PPA. They
argue that veil piercing cannot apply “horizontally” to two separate
entities not in a parent-subsidiary relationship that share no
common owners, an unresolved question in Colorado. Alternatively,
they argue that if horizontal piercing applies, it may occur only if
the veils separating each entity and a common parent or owner in
the ownership chain are first pierced by establishing that each
entity and its owner are alter egos.6
¶ 23 We hold that horizontal veil piercing may occur between
entities that do not share direct common owners, but that indirectly
share common owners through another entity in an ownership
chain. However, the veils between the separate entities and their
owners in the ownership chain must first be pierced. Because
6 In addition to establishing that the entities are alter egos, a
plaintiff must also establish the other two elements of veil piercing:
whether the corporate form was used to commit a fraud or defeat a
rightful claim, and whether equitable results will be achieved by
disregarding the corporate form. McCallum Family L.L.C. v. Winger,
221 P.3d 69, 74 (Colo. App. 2009).
11
nothing in the record shows that RGI is the alter ego of the five
common owners, that Intellitec is the alter ego of the five common
owners, or that PPA and Intellitec are alter egos of each other, the
court erred by finding that RGI and PPA are alter egos of each other
and, consequently, that RGI’s senior indebtedness was
extinguished. Accordingly, we reverse the court’s judgment.
A. Preservation
¶ 24 Mr. Dill disputes preservation of this issue. To preserve an
issue for appeal, all that is necessary is that the issue “be brought
to the attention of the trial court and that the court be given an
opportunity to rule on it.” Berra v. Springer & Steinberg, P.C., 251
P.3d 567, 570 (Colo. App. 2010).
¶ 25 Although neither RGI nor PPA explicitly used the term
“horizontal veil piercing” in the trial court, PPA’s trial brief argued
that “RGI and PPA have similar, but not identical, ownership” and
that PPA was “operated as a distinct business entity.” Moreover,
PPA argued in its Rule 41(b) motion that, to the extent any
“commonality of ownership” existed, it was not between RGI and
PPA, but between RGI and Intellitec. And RGI joined PPA in its
closing argument before submitting its own Rule 41(b) motion.
12
Under these circumstances, we conclude that PPA and RGI
sufficiently preserved for our review “the sum and substance of the
argument [they] now make[] on appeal.” Berra, 251 P.3d at 570.
B. Standard of Review and Applicable Law
¶ 26 We review de novo a trial court’s legal conclusions in finding
an alter ego and in piercing the corporate veil, and we examine its
related factual findings for clear error. Sedgwick Props. Dev. Corp.
v. Hinds, 2019 COA 102, ¶ 22. We defer to the trial court’s factual
findings and disturb them only when they are not supported by the
record. Amos v. Aspen Alps 123, LLC, 2012 CO 46, ¶ 25.
¶ 27 An LLC is a legal entity separate from the members who own
it. Griffith v. SSC Pueblo Belmont Operating Co., 2016 CO 60M,
¶ 11; Sedgwick, ¶¶ 15-17. Thus, neither the members of an LLC
nor its managers are personally liable for debts incurred by the
LLC. § 7-80-705, C.R.S. 2019; Griffith, ¶ 11. Indeed, the corporate
veil fiction “isolates ‘the actions, profits, and debts of the
corporation from the individuals who invest in and run the entity[,]’
[and] [o]nly extraordinary circumstances justify disregarding the
corporate entity to impose personal liability.” Sedgwick, ¶ 15
(quoting In re Phillips, 139 P.3d 639, 643 (Colo. 2006)).
13
¶ 28 To pierce the corporate veil in Colorado, a court must conduct
a three-part inquiry. Id. at ¶ 21. First, it must determine whether
the corporate entity is the alter ego of the person or entity in issue.
Id. An alter ego relationship exists when a corporation or LLC is
merely an instrumentality for the transaction of the shareholders’ or
members’ affairs and “there is such unity of interest in ownership
that the separate personalities of the corporation [or LLC] and the
owners no longer exist.” In re Phillips, 139 P.3d at 644 (quoting
Krystkowiak v. W.O. Brisben Co., 90 P.3d 859, 867 n.7 (Colo.
2004)).
¶ 29 To determine whether unity of interest exists, a court
considers several factors, including whether (1) the corporation or
LLC operates as a distinct business entity; (2) the two entities
commingle funds and assets; (3) the two entities maintain
inadequate corporate records; (4) the nature and form of the
entities’ ownership and control facilitates misuse by an insider; (5)
the corporation or LLC is “used as a ‘mere shell’”; (6) “the business
[i]s thinly capitalized”; (7) legal formalities are disregarded; and (8)
corporate funds or assets are used for noncorporate purposes. Id.
(quoting Leonard v. McMorris, 63 P.3d 323, 330 (Colo. 2003));
14
Sedgwick, ¶ 32. Courts examine the specific facts of the case and
need not find the existence of every factor to find an alter ego.
Great Neck Plaza, L.P. v. Le Peep Rests., LLC, 37 P.3d 485, 490
(Colo. App. 2001).
¶ 30 Second, upon finding that an entity is the alter ego of its
owners, a court must determine whether the corporate fiction was
used to perpetrate a fraud or defeat a rightful claim. Sedgwick,
¶ 21.
¶ 31 Third, a court must consider whether disregarding the
corporate form would achieve an equitable result. Id. If it finds
that the moving party has satisfied this three-part test by a
preponderance of the evidence, then it may disregard the corporate
identity and impute liability. Griffith, ¶ 14; Sedgwick, ¶ 21.
C. Horizontal Veil Piercing in Colorado
¶ 32 RGI and PPA assert that the trial court erred by piercing the
corporate veil because RGI and PPA have no parent-subsidiary
relationship and do not exercise control over each other. The trial
court found that, at the time RMMF assigned the RMMF note to
PPA, neither RGI nor PPA possessed any ownership interest in the
other, nor did either entity control the other. Rather, the five
15
common owners, who controlled 81.25 percent of RGI’s shares,
were also the founders and only members of Intellitec, the LLC that
wholly owned PPA.
¶ 33 Entities that share common shareholders, owners, or parents
are sister companies. Black’s Law Dictionary 418 (10th ed. 2014)
(defining sister corporation as “[o]ne of two or more corporations
controlled by the same, or substantially the same, owners”); see
also Minno v. Pro-Fab, Inc., 905 N.E.2d 613, 617 (Ohio 2009). RGI
and PPA are therefore sister entities because the five common
owners who own 81.25 percent of RGI also own the LLC that, in
turn, owns PPA. Mr. Dill does not cite, nor have we found, any
Colorado case that extends piercing the corporate veil horizontally
to sister companies.
¶ 34 Some jurisdictions categorically bar piercing the corporate veil
between entities that are not in vertical, or parent-subsidiary,
relationships. See Minno, 905 N.E.2d at 617 (holding that “a
plaintiff cannot pierce the corporate veil of one corporation to reach
its sister corporation” because the “lack of ability of one corporation
to control the conduct of its sister corporation precludes application
of the piercing-the-corporate-veil doctrine”); see also Madison Cty.
16
Commc’ns Dist. v. CenturyLink, Inc., No. CV 12-J-1768-NE, 2012
WL 6685672, at *4 (N.D. Ala. Dec. 20, 2012) (horizontal veil piercing
cannot occur because “[s]ister corporations do not benefit from the
corporate form of their siblings” and because, without evidence of
ownership interest, complete domination and control necessary for
the alter ego element cannot be established); Kiesel Co. v. J & B
Props., Inc., 241 S.W.3d 868, 872 (Mo. Ct. App. 2008) (piercing the
corporate veil doctrine “generally serves to reach shareholders, not
horizontal affiliates, in cases involving fraud”). Unlike Colorado,
these jurisdictions typically do not recognize reverse veil piercing.7
¶ 35 In jurisdictions where horizontal piercing is recognized, a
plaintiff seeking to disregard the corporate formalities separating
horizontal affiliates must first pierce the veils separating each entity
7 The Colorado Supreme Court has held that Colorado law allows a
corporate outsider to press an action against a corporate insider
and subject corporate assets to such a claim by disregarding the
corporate entity through reverse veil piercing. In re Phillips, 139
P.3d 639, 645 (Colo. 2006). “Reverse piercing occurs when a
claimant seeks to hold a corporation liable for the obligations of an
individual shareholder.” Id. at 644. The court explained that the
same three-factor test used in traditional veil piercing also applies
to reverse veil piercing. Id. at 646. This is the opposite of
traditional veil piercing, which “imposes liability on individual
shareholders for the obligations of the corporation.” Id. at 644.
17
from their shared corporate parent. Capmark Fin. Grp. Inc. v.
Goldman Sachs Credit Partners L.P., 491 B.R. 335, 349 (S.D.N.Y.
2013); Outokumpu Eng’g Enters., Inc. v. Kvaerner EnviroPower, Inc.,
685 A.2d 724, 729 (Del. Super. Ct. 1996) (refusing to pierce the veil
between sister entities for personal jurisdiction without first
piercing the veils to the common parent); see also Huntsville
Aviation Corp. v. Ford, 577 So. 2d 1281, 1287-88 (Ala. 1991) (a
sister corporation could be held liable for the debts and obligations
of a corporation owned by the same parent because the parent used
the corporations “interchangeably”). Except for Alabama, these
jurisdictions typically recognize reverse veil piercing.
¶ 36 But even in jurisdictions that do not explicitly recognize
reverse veil piercing, horizontal piercing between sister entities can
still occur when the veil piercing elements are satisfied. See Tower
Inv’rs, LLC v. 111 E. Chestnut Consultants, Inc., 864 N.E.2d 927,
941 (Ill. App. Ct. 2007) (courts may also pierce the corporate veil
between two affiliated, or “sister,” corporations when there is such
unity of interest and ownership between the corporations that
separate personalities between the corporations no longer exist, and
adherence to the fiction of separate personalities would promote
18
injustice or inequitable circumstances); see also Greenspan v. LADT,
LLC, 121 Cal. Rptr. 3d 118, 138 (Ct. App. 2010) (“Generally, alter
ego liability is reserved for the parent-subsidiary relationship.
However, under the single-enterprise rule, liability can be found
between sister companies.” (quoting Las Palmas Assocs. v. Las
Palmas Ctr. Assocs., 1 Cal. Rptr. 2d 301, 318 (Ct. App. 1991))).8
¶ 37 Because our supreme court has not explicitly barred
horizontal piercing to find that sister entities are alter egos, and it
recognizes the doctrine of reverse veil piercing, see In re Phillips,
139 P.3d at 645, we reject RGI and PPA’s contention that Colorado
courts may never pierce the veil to reach sister entities. See
McCallum Family L.L.C., 221 P.3d at 75 (“‘[T]he mere existence or
nonexistence of formal stock ownership is not necessarily
conclusive’ in determining whether the corporate veil may be
pierced.” (quoting William M. Fletcher, Cyclopedia of Corporations
§ 41.10, at 141 (2006))); see also Nursing Home Consultants, Inc. v.
Quantum Health Servs., Inc., 926 F. Supp. 835, 840 n.12 (E.D. Ark.
8 Colorado courts have not recognized the single-enterprise rule, nor
have the parties raised it on appeal. Therefore, we do not consider
it.
19
1996) (“horizontal” or “triangular” veil piercing “results from a
sequential application of the traditional piercing doctrine and the
‘reverse piercing’ doctrine”), aff’d, 112 F.3d 513 (8th Cir. 1997).
Indeed, another division of this court held an individual, who was
not a shareholder, officer, or director, but who had some beneficial
interest in a corporation, liable for the debts and obligations of the
corporation over which he exercised dominion and control through
its owners. McCallum Family L.L.C., 221 P.3d at 75; see also Cathy
S. Krendl & James R. Krendl, Piercing the Corporate Veil: Focusing
the Inquiry, 55 Denv. L.J. 1, 24 (1978).
¶ 38 However, we agree with RGI and PPA that horizontal veil
piercing between sister entities may occur only if (1) the entities
share a parent or common owners in the ownership chain and (2)
the veils separating each entity from the parent or common owners
are first pierced to find that each sister entity is the alter ego of its
owners.
¶ 39 Recently, a division of this court considered circumstances
involving piercing the veil between related entities. Sedgwick, ¶ 45.
In Sedgwick, the plaintiff sought to pierce the veil between a single-
member, single-purpose LLC (1950 Logan) and its manager
20
(Sedgwick, another LLC). Id. at ¶ 16. The division concluded that
the trial court erred in finding that Sedgwick and 1950 Logan were
alter egos in part because the court had failed to first find that
Sedgwick was the alter ego of its principal, Paris, an individual who
also controlled 1950 Logan through other business entities. Id. at
¶ 45.
¶ 40 We therefore conclude that Colorado corporate law permits
horizontal veil piercing, under the traditional veil piercing test,
between entities that share common ownership through another
entity, but only if the veil of each corporate entity is also pierced.
D. Alter Ego Analysis
¶ 41 In order to reach the conclusion that RGI and PPA are alter
egos, three prerequisites would need to be satisfied. First, the veil
separating RGI from the five common owners would need to be
pierced to hold the five common owners liable for RGI’s actions.
Next, the veil separating the five common owners and Intellitec
would need to be pierced to hold Intellitec liable for the actions of
the five common owners. And finally, the veil separating Intellitec
and PPA would need to be pierced to hold PPA liable for the
21
obligations of Intellitec. See Capmark Fin. Grp. Inc., 491 B.R. at
349.
¶ 42 Mr. Dill failed to present any evidence to support the multiple
piercings required to disregard the separate corporate identities of
RGI and PPA. See id. Nothing in the record shows that (1) RGI is
the alter ego of the five common owners; (2) RGI’s corporate fiction
was used to perpetrate a fraud or defeat a rightful claim; or (3)
piercing the veil would achieve an equitable result. See Sedgwick,
¶ 21.
¶ 43 To be sure, the trial court found that the owners of Intellitec
also collectively own 81.25 percent of RGI, but it is well settled that
ownership alone is not a basis to find alter ego. See Indus. Comm’n
v. Lavach, 165 Colo. 433, 437, 439 P.2d 359, 361 (1968) (“Even
where all the stock is owned by a sole shareholder, there seems no
adequate reason to depart from the general rule that the
corporation and its shareholders are to be treated as distinct legal
persons.” (quoting Box v. Roberts, 112 Colo. 234, 238, 148 P.2d
810, 812 (1944))); McCallum Family L.L.C., 221 P.3d at 75 (“the
mere existence or nonexistence of formal stock ownership is not
necessarily conclusive” in determining whether the corporate veil
22
may be pierced (quoting Fletcher, § 41.10)). Moreover, no record
evidence exists or even suggests that the five common owners
exercise dominion and control over RGI to transact their own affairs
or for any unlawful purpose. McCallum Family L.L.C., 221 P.3d at
75.
¶ 44 As well, no record evidence supports the other alter ego
factors, such as whether RGI is undercapitalized, fails to follow
corporate formalities, commingles assets with the five common
owners, or operates as a “mere shell.” Because the record does not
support a finding that RGI and the five common owners, who also
owned Intellitec, are alter egos, the corporate veil separating those
owners and RGI cannot be pierced. And if the veil between RGI and
the five common owners cannot be pierced, then RGI and PPA
cannot be alter egos. We explain why next.
¶ 45 No one disputes that PPA is a single-member LLC and is not
owned by the five common owners. Therefore, neither RGI nor PPA
owns the other, and the only means of piercing the veil between
them is to show that the five common owners exercise dominion
and control over PPA via Intellitec. See id. at 77 (“When an
individual demonstrates great dominion and control over a
23
corporation, and especially over corporate assets, the lack of such a
formal role or title [such as a shareholder, director, or officer] will
not necessarily impede a finding of personal liability for corporate
activities.”).
¶ 46 Nothing in the record shows that Intellitec and its owners are
alter egos, or that the owners formed Intellitec for a fraudulent
purpose or to defeat a rightful claim. And, in a subsequent order,
the trial court clarified that it had not found Intellitec was an alter
ego of either RGI or PPA. Absent this finding, PPA cannot be the
alter ego of the five common owners and, thus, PPA and RGI cannot
be alter egos.
¶ 47 Mr. Dill’s factual allegations with respect to PPA, Intellitec, and
the Intellitec ownership chain merely point to benign actions typical
of parent-subsidiary relationships. Assuming, as Mr. Dill alleges,
that Intellitec created PPA solely to hold the RMMF note, single-
asset, single-member LLCs are permitted and may be formed for
any lawful business purpose. § 7-80-103, C.R.S. 2019 (an LLC may
be formed for any lawful business); § 7-80-204(1)(g), C.R.S. 2019
(requiring the articles of organization of an LLC to have at least one
member); see also Sedgwick, ¶ 17. Nothing in the record shows
24
that Intellitec formed PPA for an unlawful purpose, or that Intellitec
has misused PPA’s corporate form. See In re Phillips, 139 P.3d at
644 (holding claimant must prove the corporate structure was used
to perpetrate a wrong).
¶ 48 Moreover, while the record shows that one of the common
owners managed PPA for a period of time, this fact alone also
cannot support veil piercing. See Sedgwick, ¶ 49 (a managing LLC
did not exercise ownership and control over the LLC it managed
under contract); see also United States v. Friedland, 173 F. Supp.
2d 1077, 1092 (D. Colo. 2001) (overlapping directors and officers is
insufficient to warrant piercing the veil); Sumner Realty Co. v.
Willcott, 499 N.E.2d 554, 557 (Ill. App. Ct. 1986) (“The separate
corporate entities of two corporations may not be disregarded
merely because one owns the stock of the other or because the two
share common officers . . . .”). While common officers and directors
may be a prerequisite to piercing the corporate veil, commonality of
officers and directors is a regular business practice that exists in
most parent-subsidiary relationships. Judson Atkinson Candies,
Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371, 381 (7th Cir.
2008).
25
¶ 49 Because the record lacks any evidence to show that RGI is the
alter ego of the five common owners, that the five common owners
are the alter ego of Intellitec, or that Intellitec and PPA are alter egos
of each other, the trial court erred by piercing the veils of RGI and
PPA to find they are alter egos. Accordingly, we reverse the
judgment.
IV. Perpetrate a Fraud or Defeat a Rightful Claim Analysis
¶ 50 Even if RGI and PPA are alter egos, we would nevertheless
conclude that insufficient evidence supports the court’s finding that
PPA was formed to defeat Mr. Dill’s rightful claim.
¶ 51 “The mere fact that corporate creditors would go unsatisfied
because they cannot reach a shareholder’s personal assets does
not, alone, justify piercing the corporate veil.” McCallum Family
L.L.C., 221 P.3d at 78. Nor is piercing the corporate veil justified
“simply because a parent company receives a financial benefit from
its subsidiaries.” Griffith, ¶ 15. As one leading treatise on the law
of corporations summarizes, “[a]lthough wrongdoing by a parent
corporation need not amount to plain fraud or illegality, the injured
party must show some connection between its injury and the
parent’s improper manner of doing business.” 1 Fletcher Cyclopedia
26
of the Law of Corporations § 43, Westlaw (database updated Sept.
2019); see also McCallum Family L.L.C., 221 P.3d at 78 (“[T]he
creditor seeking to pierce the veil must show an effect on its lawful
rights as a creditor resulting from abuse of the corporate form.”);
Guptill Holding Corp. v. State, 307 N.Y.S.2d 970, 973 (App. Div.
1970) (using “control to commit the wrong complained of . . . and
. . . an injury proximately caused by said wrong” are required to
pierce the corporate veil); Krendl & Krendl, 55 Denv. L.J. at 27-28
(“[T]here must be some reasonable relationship between the injury
suffered by the plaintiff and the actions of the defendant. . . . [N]o
plaintiff may avoid corporate limited liability unless he can prove
injury resulting from misuse of the corporation . . . .”). “Thus, a
party seeking to pierce the corporate veil must show that the
financial setup of the corporation is a sham and causes an
injustice.” Scott v. AZL Res., Inc., 753 P.2d 897, 901 (N.M. 1988).
¶ 52 We begin by noting that RMMF assigned its note and its rights
under the IC agreement to PPA in April 2012. Although Mr. Dill
complains that he was unaware of this assignment, he
acknowledges that he was not entitled to notice of the assignment
under the IC agreement, nor has he articulated any harm resulting
27
from PPA’s acquisition of the RMMF note. Moreover, he points to no
evidence to indicate that this transaction was anything other than a
lawful business transaction. And nothing in the record shows that
the assignment was intended to defeat Mr. Dill’s claim against RGI
on the Dill notes.
¶ 53 The record, additionally, shows that, following this
assignment, RGI continued to pay both PPA and Mr. Dill. Indeed,
the court construed the continuing payments to Mr. Dill as evidence
that neither RGI nor PPA had engaged in fraud or wrongdoing. And
even when RGI defaulted on its payments to PPA in 2012, PPA
allowed RGI to continue paying Mr. Dill until 2015, rather than
immediately issuing a blockage notice under the IC agreement that
would have ceased payments to him. It also allowed RGI to reduce
its total indebtedness, a benefit to both creditors. Cf. McCallum
Family L.L.C., 221 P.3d at 79 (concluding the corporate form
defeated a rightful claim where evidence showed the defendant left
no funds in the corporation to satisfy the debt owed to plaintiff and
demonstrated that profits should have been applied to business
operations but were instead out of plaintiff’s reach).
28
¶ 54 The trial court relied primarily on the fact that the five
common owners own Intellitec and 81.25 percent of RGI, and on its
conclusion that Intellitec formed PPA to defeat Mr. Dill’s rightful
claim to repayment of the Dill notes. But it never explained how
this corporate structure defeated Mr. Dill’s claim or harmed him,
nor did it cite to any evidence that PPA was formed to avoid
creditors. As previously noted, commonality of ownership, without
more, is insufficient to pierce the corporate veil. See id. at 75.
¶ 55 None of the parties assert that it would have been improper for
a third party that did not have common owners with RGI to have
purchased the note from RMMF and to have taken actions identical
to those taken by PPA. To the contrary, the court acknowledged in
its order denying the preliminary injunction that “if [RMMF] were
still the senior creditor, or if persons unrelated to RGI received the
assignment, this litigation would not exist.” However, the harm (or
lack thereof) in the trial court’s scenario is no different than that
which exists here. Absent some evidence showing that transferring
the RMMF note to PPA harmed Mr. Dill, Mr. Dill cannot show that
the corporate fiction was used to a defeat a rightful claim. See id. at
78.
29
¶ 56 Moreover, the record contains no evidence that RGI’s and
PPA’s conduct contravened the IC agreement. The trial court
acknowledged that, although the ownership structure between RGI
and PPA could facilitate misuse, PPA’s issuance of the payment
blockage notice was consistent with the IC agreement, which Mr.
Dill had negotiated and signed with the assistance of counsel in
2000. And that agreement permitted RMMF to freely assign its note
and to transfer senior creditor status to a third party, including the
right to issue payment blockage notices and to bar Mr. Dill from
bringing an action to collect his debt until the senior creditor’s debt
was satisfied. Mr. Dill reaffirmed these terms when he settled RGI’s
first default, and he testified that he understood the IC agreement’s
terms.
¶ 57 The trial court never found that PPA breached the IC
agreement, and the record shows that Mr. Dill actually benefited
from PPA’s flexible conduct — namely, through PPA’s decision not
to issue a payment blockage notice in 2012 — because it enabled
Mr. Dill to receive payments from RGI between 2012 and 2015 in
excess of $1 million. Far from defeating a rightful claim, PPA’s
conduct enabled RGI to continue paying Mr. Dill.
30
¶ 58 Consequently, in the absence of evidence that PPA’s purchase
of the RMMF note harmed Mr. Dill, we conclude that the record
does not support the court’s finding that PPA was formed to defeat a
rightful claim.
V. Remaining Contentions
¶ 59 Because we reverse the court’s alter ego and rightful claim
findings, we need not address RGI’s or PPA’s remaining contentions
about the admissibility of the Dill notes or about the scope and
application of section 7-80-107(1), C.R.S. 2019. We also need not
address RGI’s contention that the trial court erred by entering
judgment in favor of Mrs. Dill on the breach of the Dill notes and
breach of stock pledge agreement claims, because Mrs. Dill was not
a party to either.
VI. Appellate Attorney Fees
¶ 60 RGI and PPA request appellate attorney fees and costs, as the
prevailing parties, pursuant to section 17 of the IC agreement and
C.A.R. 39.1. As relevant here, the IC agreement provides as follows:
Costs and Attorney Fees. If there is any claim
or controversy litigated in any lawsuit between
any of the parties hereto in connection with
[the IC agreement], the prevailing parties in the
lawsuit shall be entitled to recover from the
31
other parties their reasonable costs and
attorneys’ fees.
¶ 61 Because we reverse the judgment, we conclude that RGI and
PPA are the prevailing parties under section 17 and award them
reasonable fees and costs under C.A.R. 39.1. Accordingly, we
remand the case to the trial court to determine and award
reasonable appellate attorney fees and costs.
VII. Conclusion
¶ 62 The judgment is reversed, and the case is remanded for entry
of judgment in favor of RGI and PPA and the computation and
award of reasonable attorney fees and costs.
JUDGE RICHMAN and JUDGE GROVE concur.
32