McCallum Family LLC v. Winger

Citations: 221 P.3d 69; 2009 Colo. App. LEXIS 1867; 2009 WL 3465332Docket: 09CA0212

Court: Colorado Court of Appeals; October 29, 2009; Colorado; State Appellate Court

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The Colorado Court of Appeals addressed four key issues regarding personal liability in the case of McCallum Family L.L.C. v. Marc Winger and Karen Winger. The court clarified that the burden of proof for piercing the corporate veil is by a preponderance of the evidence, contrary to some past interpretations suggesting a clear and convincing standard. It also determined that personal liability could be imposed on a corporate insider who is not a shareholder, officer, or director under certain circumstances. Additionally, it identified conduct that could defeat creditors' rightful claims, warranting veil piercing. The court also examined the conditions under which a corporate shareholder might be liable to a creditor for breach of fiduciary duty. The appeal originated from a judgment favoring the defendants after trial, with the court affirming in part, reversing in part, and remanding for further proceedings. Notably, Marc Winger, while managing Manitoba Investment Advisors, paid personal bills with corporate funds and allowed the corporation to default on lease obligations, contributing to its insolvency. The trial court had incorrectly applied the clear and convincing standard for the veil-piercing claim, a point the appellate court corrected based on section 13-25-127(1) of C.R.S. 2009.

The court determined that the burden of proof for a specific legal issue, as stated by the Colorado Supreme Court, regarding the need for "clear and convincing evidence," is non-binding as it was not the question certified by the federal court. The precedent in Contractors Heating, Supply Co. v. Scherb, which stated that the corporate form will only be disregarded under clear evidence of fraud or wrongful claims, is outdated following the 1972 adoption of section 13-25-127(1). The Colorado Supreme Court ruled in Gerner v. Sullivan that statutory burdens of proof take precedence over conflicting case law unless constitutional issues arise. Since no such issues were raised in the trial court, it erred in not applying the preponderance of the evidence standard. 

McCallum met the first two prongs of the veil-piercing test, and the case is remanded for the trial court to decide if McCallum can prove the third prong by a preponderance of the evidence. The court ruled that McCallum established a prima facie case to pierce the corporate veil against Marc Winger, thus allowing for further findings under the correct burden of proof. The veil-piercing inquiry involves assessing whether the corporation is the "alter ego" of the individual in question, considering factors such as the corporation's operation as a distinct entity, commingling of funds, maintenance of corporate records, capitalization, and adherence to legal formalities.

Alter ego status can be established by evaluating the unique facts of each case, without the necessity of proving all listed factors. Courts must balance the equities involved and determine if justice necessitates recognizing the substance of the relationship over the corporate form, especially when the corporate entity is used to commit fraud or evade rightful claims. Piercing the corporate veil is an equitable remedy, requiring that all three analytical prongs be met to achieve a fair outcome.

McCallum argues for personal liability against Marc Winger, despite Winger not being a shareholder, officer, or director, asserting that corporate insiders can be held liable under the veil-piercing doctrine. While this doctrine traditionally applies to shareholders, it can also extend to non-shareholder insiders, as demonstrated in Colorado case law. For instance, in LaFond v. Basham, liability was imposed on a non-shareholder who exercised significant control over the corporations, and recent rulings have similarly held non-member managers accountable for misappropriating corporate assets.

The doctrine allows for piercing the corporate veil when the corporate form has been misused, creating an injustice or fraud, particularly when there is substantial control and a lack of separation between the corporation and the individual. Courts consider factors such as control over corporate activities and the treatment of corporate funds as personal assets, indicating that formal stock ownership or corporate titles do not solely determine liability.

Marc Winger operated effectively as a de facto shareholder, officer, or director of the corporation, despite lacking formal titles. His close ties to the actual shareholders and his use of corporate assets as if they were his own support potential personal liability if the veil-piercing criteria are satisfied. Colorado case law and precedents from other jurisdictions affirm that individuals exercising significant control over a corporation can be viewed as 'equitable owners' and thus alter egos of the corporation, even without formal shareholder status. The court highlighted that control, rather than title, is the critical factor in determining liability. Evidence indicated that Winger was the dominant figure in corporate operations, managing affairs and making financial decisions without proper oversight from the nominal shareholders—his wife and mother. The lack of formal documentation, inadequate capitalization, and failure to maintain corporate formalities further bolstered the case for piercing the corporate veil. Related cases from Illinois, Minnesota, and New York reinforced that control and involvement in management can lead to personal liability, regardless of formal ownership status. Ultimately, the court concluded that Winger's significant dominion over the corporation justified considering him an equitable owner, warranting reevaluation of the veil-piercing claim against him.

A reasonable fact finder could infer that the father signed the lease using a pseudonym to obscure Marc Winger's role as the corporation's alter ego and to evade personal liability. Marc Winger managed most of Manitoba's operations, including financial transactions and lease negotiations, and took distributions despite not being a shareholder, indicating he functioned as a de facto owner. An expert witness noted that corporate funds were improperly used for outside investments and that Winger frequently mixed personal and corporate finances, treating the corporation as if it were his personal asset. This misuse led to a conclusion that Manitoba lacked economic substance and was merely a shell corporation, with Winger acting as an equitable owner.

The inquiry into whether to pierce the corporate veil continues beyond establishing Winger as the alter ego. The second prong of the veil-piercing test examines if the corporate structure was used to commit fraud or defeat rightful claims. The trial court initially decided against piercing the veil, asserting McCallum needed to demonstrate that Winger used Manitoba to commit fraud specifically in the relevant transaction, which McCallum failed to do. However, McCallum argued that the evidence showed Winger did use the corporate form to undermine his claims. The trial court’s position was acknowledged as overly narrow, as it required evidence of direct wrongdoing in the specific transaction rather than a broader understanding of Winger's control and misuse of the corporation.

To establish the second prong for piercing the corporate veil, a plaintiff must demonstrate either fraud or abuse of the corporate form that undermines creditors' claims, without needing to show specific conduct directed at the plaintiff-creditor. McCallum provided evidence of corporate abuse, showing that Marc Winger withdrew all corporate funds from Manitoba, leaving it unable to satisfy its debt to McCallum. The evidence indicated that profits from corporate investments were not used for business operations, which the defendants did not contest. This uncontested evidence satisfied the second prong of the veil-piercing test.

Regarding the equitable prong, McCallum argued that equity necessitates piercing the veil concerning Marc Winger. Although McCallum established the first two prongs, the trial court must first decide whether to exercise its equitable discretion to pierce the veil, emphasizing that such decisions are fact-specific. The case is remanded for the trial court to assess whether an equitable outcome justifies disregarding the corporate form.

In addressing McCallum's claim against Karen Winger for breaching duties to creditors, the court found that the trial court did not err in rejecting this claim. Although common law suggests that officers of an insolvent corporation owe creditors a duty, a 2006 statute indicates that directors do not owe fiduciary duties to creditors solely by virtue of their status as creditors. The court noted that distributions to Karen Winger occurred before the corporation's insolvency date, and there was no evidence linking her actions to the corporation's insolvency. Consequently, the judgment against McCallum regarding Marc Winger is reversed, and the case is remanded for further proceedings, while the remainder of the judgment is affirmed. Judge RUSSEL and Judge J. JONES concur.