One of the most difficult aspects of any lawsuit often isn’t winning your case, but is recovering your award from the opposing side. Unfortunately, all too frequently there are cases where a plaintiff is awarded damages against a business, only to discover that the business lacks the money to pay what it owes. However, when cases like this do arise, you may be able to go beyond the business and collect directly from those individuals who actually own or operate the business[i]. In the legal world, we call this piercing the corporate veil and it can be a valuable tool to have at your disposal.
Whether this valuable tool is a viable one in your case will depend on the specific nature of the case and how the business was operated[ii]. One of the more common circumstances where courts pierce the corporate veil is when the business is merely an alter-ego of business insiders. In determining whether the business is a mere alter-ego, courts consider a number of factors including: 1) if the business is operated as a distinct business entity from business insiders, 2) whether the commingling of business funds and assets occurred, 3) whether adequate business records were maintained, 4) whether the nature and form of the business’s ownership and control facilitate insider misuse, 5) whether the business was properly financed, 6) whether the business is used as a mere shell, 7) whether the business disregarded legal formalities, and 8) whether business funds or assets are used for non-business purposes[iii].
If the court is satisfied that the business is a mere alter-ego, then the court may ignore the independent existence of the business and hold business insiders liable for the business’s actions[iv]. Additionally, if holding only the business liable would promote injustice, protect fraud, defeat a legitimate claim, or defend crime, then a court may also hold business insiders liable. Which business insiders are liable will depend on their involvement with the wrongful acts of the business, but it could include, among others, owners, managers, members or shareholders.
If you have a judgment against a business, our firm uses the expedient of C.R.C.P. Rule 69 interrogatories served upon the business to prove up the case for piercing. Often-times these interrogatories are ignored by the business and courts universally will consider the default as converting the unanswered questions into admitted facts in the case for piercing.
Because the recovery of what you have earned is of paramount importance, whenever a business is involved, you need to be cognizant of the business’s ability to pay. The experienced attorneys at Jorgensen, Brownell & Pepin, P.C. can help you evaluate a business’s financial situation and, if necessary, guide you thought the unique requirements and nuances involved in piercing a business’s corporate veil. Telephone and video conferences are currently available.
This blog is intended to provide general information and, therefore, should not be treated as legal advice. You should contact a qualified attorney for questions about legal issues.
[i] C.R.S. § 7-80-107
[ii] C.R.S. § 7-80-107(1); see also Griffith v. SSC Pueblo Belmont Operating Co. LLC, 381 P.3d 308, 313 (Colo. 2016)
[iii] Martin v. Freeman, 272 P.3d 1182, 1184-85 (Colo. App. 2012)
[iv] In re Phillips, 139 P.3d at 644; Stockdale, 407 P.3d at 577, see also LaFond v. Basham, 683 P.2d 367, 369 (Colo. App. 1984)