Tisch v. Tisch

          Jefferson County District Court No. 16CV30697 Honorable Laura A. Tighe, Judge Honorable Stephen M. Munsinger, Judge

          Aitken Law, LLC, Sharlene J. Aitken, Denver, Colorado; Mills Schmitz Halstead & Zaloudek, LLC, Michael F. Mills, Denver, Colorado, for Plaintiffs-Appellees and Cross-Appellants

          Stinson Leonard Street LLP, Perry L. Glantz, Ryan M. Sugden, Anna Day, Greenwood Village, Colorado, for Defendants-Appellants and Cross-Appellees

          OPINION

          FREYRE, JUDGE

         ¶ 1 In this individual and shareholder derivative action involving a closely held corporation, defendants - the Liquor Barn, Ltd.; and Gary D. Tisch as the officer, director, and controlling shareholder (collectively Gary) - appeal the jury's verdict in favor of plaintiffs and minority shareholders, Daniel E. Tisch and Eva R. Tisch (Tisch siblings). The jury found that Gary had committed civil theft against the Tisch siblings individually and against the Liquor Barn by using the Liquor Barn profits for his private use. It awarded the Tisch siblings $300, 000 in damages for civil theft and the Liquor Barn, on whose behalf the Tisch siblings brought a derivative action, zero damages for civil theft. The jury also found that Gary had violated his fiduciary duty to the Liquor Barn and the Tisch siblings. It awarded $150, 000 in damages to the Tisch siblings and zero damages to the Liquor Barn for breach of fiduciary duty. The trial court entered judgment against Gary and the Liquor Barn. The court then awarded the Tisch siblings treble damages, totaling $900, 000 for the civil theft claim, under section 18-4-405, C.R.S. 2018; $43, 837.40 in costs; and $150, 000 in attorney fees.

         ¶ 2 This case asks us to decide two issues not previously resolved by Colorado appellate courts. First, can corporate profits, not formally declared as distributions but used by the controlling shareholder for personal and other business matters, be found by a fact finder to constitute "distributions" to which minority shareholders are entitled a portion? We answer that question "yes" and in doing so affirm the trial court's decision to submit this issue to the jury. Second, can undeclared distributions provide a basis for a minority shareholder to bring an individual claim for civil theft against the majority shareholder? We again answer this question "yes" and hold that minority shareholders have a proprietary interest in undeclared distributions that can form the basis for an individual civil theft claim. ¶ 3 Gary raises five claims of error on appeal, and the Tisch siblings raise three claims of error in their cross-appeal. We affirm the jury's damages awards for the Tisch siblings and the trebling of damages under the civil theft statute. We also affirm the trial court's costs and attorney fees awards. Finally, we conclude that the Tisch siblings are entitled to their reasonable appellate attorney fees related to the civil theft claim and remand the case for that determination.

         I. Background

         ¶ 4 This is a dispute over a family business ― the Liquor Barn ― that was incorporated in 1975 by the parties' father, Rudolph Tisch (father). In 1982, father gave each of his three children 1600 shares of the Liquor Barn stock and kept the remaining 10, 500 shares of stock for himself. Between 1982 and 1991, Gary was the Liquor Barn's floor manager, and after 1991, Gary assumed responsibility for the company's books and for managing the inventory. The Tisch siblings worked sporadically at the business between 1991 and 1997, but they were never involved in the business' operations.

         ¶ 5 Father divorced in 1991 and a domestic court entered a dissolution decree that required him to transfer an additional 10% ownership in the Liquor Barn - 1530 shares - to each of his three children. The children knew of this order, but father never transferred the additional shares. On November 17, 1997, father amended the articles of incorporation - without notice to his children and without a shareholder vote - to recapitalize the business. This amendment exchanged one share of common stock for 7/10 of a class A voting share and 3/10 of a class B nonvoting share. Consequently, each of the children's 1600 shares of common voting stock were cancelled, and each child was re-issued 1500 shares of class B nonvoting common stock, while father retained all the class A voting stock.

         ¶ 6 In December 2000, father assigned his stock in the Liquor Barn to Gary, and Gary managed the business. Gary held 10, 500 class A voting shares and 1500 class B nonvoting shares, while the Tisch siblings each held 1500 class B nonvoting shares.

         ¶ 7 On November 19, 2003, Gary's attorney received a letter from the Tisch siblings' attorney with an offer to sell each siblings' 10% nonvoting shares of stock. No sale occurred.

         ¶ 8 Approximately one year later, the Tisch siblings, through counsel, demanded access to the Liquor Barn's financial and corporate records in connection with a dispute over father's estate. Gary made the records available, but the Tisch siblings never examined them because they could not afford to hire an accountant. They made similar inspection requests for the purpose of valuing their shares between 2004 and 2014, but they never examined the records because of financial constraints. After Eva Tisch received funds in connection with an estate dispute in 2011, the Tisch siblings had the financial means to determine the value of their stock.

         ¶ 9 So, on April 3, 2015, the Tisch siblings made another request to examine the Liquor Barn's records, and this time they hired an accountant, Matthew Lausten, to conduct that examination. On April 29, 2016, they filed a complaint that asserted eight causes of action: (1) declaratory judgment; (2) accounting; (3) alter ego; (4) fraud; (5) an individual claim for civil theft; (6) a shareholder derivative claim for civil theft; (7) an individual claim for breach of fiduciary duty; and (8) a shareholder derivative claim for breach of fiduciary duty.

         ¶ 10 Before trial, the court partially granted Gary's motion for summary judgment and dismissed the declaratory judgment and fraud claims as barred by applicable statutes of limitations. At a case management conference, the trial court capped expert fees at $35, 000, and capped recoverable costs at $7000 under C.R.C.P. 16(b)(11). It permitted either side to seek relief from the caps by motion.

         ¶ 11 The Tisch siblings presented their case primarily through Mr. Lausten, who by then had reviewed all of the Liquor Barn's financial records. Mr. Lausten noted that the Liquor Barn's gross revenues steadily increased between 2004 and 2016, but that these revenues had not translated into increased profits. After further examination, Mr. Lausten identified several other businesses owned by Gary and found that the Liquor Barn had paid for many of these other business' expenses over the years. He opined that the Liquor Barn profits, which had been used by Gary personally or for his other businesses, should be reclassified as shareholder distributions and booked as retained earnings or distributed as dividends.

         ¶ 12 In particular, Mr. Lausten noted that insufficient receipts supported the QuickBooks expense entries and that the receipts that existed often did not identify the entity for which the expense had been incurred. He further noted that the Liquor Barn's records conflicted with the supporting documentation for intercompany transactions, expense reimbursements, and general operating expenses. Moreover, Mr. Lausten testified to strong indications that some of the Liquor Barn's inventory had been sold "off-book," and he said that Gary would have been able to do this. In the end, he opined that Gary had received between $600, 000 and $1.1 million beyond his reported salary from 2010-2016 and that this additional income should be reclassified as shareholder distributions. After conducting a comparative analysis, he opined that the Liquor Barn lost profits of $2, 172, 436 over a fifteen-year period.

         ¶ 13 Gary testified and provided explanations for the discrepancies observed by Mr. Lausten. He said that as the sole director and majority shareholder, he had never made a distribution or declared a dividend; instead, he had focused his efforts on growing the business. He disputed Mr. Lausten's profit figures and described his efforts to remain competitive when laws changed that allowed retail liquor sales in grocery stores. The court precluded him from presenting his endorsed accounting expert, Catherine Moeller, because she admitted having altered the Liquor Barn's records after Mr. Lausten's initial review and had based her opinions on those altered records.

         ¶ 14 Gary raised the statute of limitations as an affirmative defense to civil theft and breach of fiduciary duty in his pleadings and in a motion for a directed verdict at the close of the evidence. He argued that the Tisch siblings either knew or reasonably should have known of their injuries in connection with previous requests to inspect the Liquor Barn's records. The trial court disagreed and entered a directed verdict for the Tisch siblings, finding that no jury would conclude that the suit was filed outside the statute of limitations. The court also ruled against Gary on the alter ego claim, which had been tried to the court, finding that Gary and the Liquor Barn were alter egos of one another.^[1]

         ¶ 15 After the jury's verdict, the court awarded the Tisch siblings treble damages on the civil theft claim and entered judgment against Gary and the Liquor Barn on April 20.^[2] Gary moved to amend the judgment, contending that the court erred in piercing the corporate veil and that this error would prejudice the Liquor Barn's creditors. He then filed a combined motion for new trial and relief from judgment, arguing, as relevant here, that the trial court erred in disqualifying his expert witness and in piercing the corporate veil.

         ¶ 16 After receiving relief from a stay in Gary's bankruptcy, the trial court held a hearing and denied the postjudgment motions.^[3] It also ordered the Tisch siblings to submit a lodestar amount for attorney fees. The court awarded costs of $43, 837.50 ($35, 000 in expert fees and $8837.50 in general litigation costs), and $150, 000 in attorney fees, which exceeded the lodestar.

         II. Gary's Direct Appeal

         ¶ 17 Gary challenges the judgment on five grounds: (1) the court erroneously excluded his accounting expert; (2) the court erroneously found that the Liquor Barn and Gary were alter egos; (3) the court erroneously directed a verdict on his statute of limitations affirmative defense and wrongfully imposed treble damages for civil theft beyond the one-year statute of limitations; (4) the court erroneously submitted the individual civil theft claim to the jury because the Tisch siblings failed to show a sufficient property interest in undeclared distributions; and (5) insufficient evidence supported the jury's damage award. We reject his contentions and affirm the judgment.

         A. Exclusion of Expert Witness

         ¶ 18 Gary first contends that the trial court erroneously excluded his expert accountant's testimony based on her alteration of the Liquor Barn's financial records. He argues that the court was required to hold a hearing, under People v. Shreck, 22 P.3d 68, 70 (Colo. 2001), to assess the reliability of her testimony. He reasons that any inconsistencies went to the weight of her testimony and not to its admissibility.

         ¶ 19 Gary never asked the court for a Shreck hearing and he conceded in closing argument that the court had "properly ruled" that she should not be allowed to testify. Under these circumstances, we conclude that these issues were not preserved for our review. Vititoe v. Rocky Mountain Pavement Maint., Inc., 2015 COA 82, ¶ 60 (failure to raise issues waives them on appeal); see also In re Marriage of Robbins, 8 P.3d 625, 630 (Colo.App. 2000) (A party affects an express waiver "when [that] party states its intent to abandon an existing right.").

         B. Piercing the Corporate Veil

         ¶ 20 Gary next contends that the trial court erroneously found that he, as an individual, and the Liquor Barn were "alter egos." He also argues that the court improperly employed "inside reverse veil piercing" to hold the Liquor Barn liable for Gary's debts. We discern no error in the court's alter ego determination, and we conclude that his inside reverse veil piercing argument was not preserved for our review. Vititoe, ¶ 60.

         1. Additional Facts

         ¶ 21 Before trial, the parties agreed to try the alter ego claim to the court. At the end of the evidence, the court found as follows:

Well, I don't think it really matters, because whether it's an ex - if it's an alter ego, or it's not an alter ego, the claim's against this gentleman [Gary]. And he's the - the president, managing shareholder, whole - sole shareholder of any voting stock. So he is the alter ego, realistically. So I find he is the alter ego. Is there any - do you want to argue that with me?

         ¶ 22 Gary's counsel responded, "it - it's moot, Your Honor." Counsel for the Tisch siblings disagreed it was moot, so the court made further findings:

I find the elements of alter ego. I find he is the alter ego, they're one and the same for the purp - for this purpose.

. . . .

He still has corporate shield and everything else. The corporation is a valid corporation. But he's - he is the sole controller of the corporation. . . . I'm - you know, as to the purposes of this case, and given the parties in this case, and the way it's lined up, I am piercing the corporate shield as to him, in - as [to] these claimed damages.

         ¶ 23 Gary moved to amend the judgment, but he only argued that the alter ego determination was erroneous because an equitable result would not be achieved by piercing ― he never argued the court's ruling constituted inside reverse veil piercing.

         2. Standard of Review and Relevant Law

         ¶ 24 Piercing the corporate veil and imposing liability for corporate obligations on the shareholders is an equitable remedy. Gorsich v. Double B Trading Co., 893 P.2d 1357, 1362 (Colo.App. 1994). Whether to exercise the equitable remedy and pierce the corporate veil is a mixed question of law and fact. See Stockdale v. Ellsworth, 2017 CO 109, ¶ 17. "We defer to the trial court's findings of fact if they are supported by the record, but [we] review the trial court's legal conclusions de novo." Id. (quoting People v. Marquardt, 2016 CO 4, ¶ 8).

         ¶ 25 Generally, a duly formed corporation is a separate legal entity, distinct from its officers and shareholders. Micciche v. Billings, 727 P.2d 367, 372 (Colo. 1986). However, the corporate form may be disregarded by piercing the corporate veil when the corporation is merely the alter ego of the shareholder. In re Phillips, 139 P.3d 639, 644 (Colo. 2006). Traditional piercing of the corporate veil imposes liability on individual shareholders for the obligations of the corporation. Id. Reverse piercing of the corporate veil holds the corporation liable for the debts of a corporate insider. Id. at 645.

         ¶ 26 To determine whether sufficient unity of interest exists to establish alter ego, courts consider several factors, including whether

(1) the corporation is operated as a distinct business entity, (2) funds and assets are commingled, (3) adequate corporate records are maintained, (4) the nature and form of the entity's ownership and control facilitate misuse by an insider, (5) the business is thinly capitalized, (6) the corporation is used as a "mere shell," (7) shareholders disregard legal formalities, and (8) corporate funds or assets are used for noncorporate purposes.

Id. at 644.

         ¶ 27 A court may reverse pierce the corporate veil only upon a clear showing by the requesting party of all the following factors: (1) the controlling insider and the corporation are alter egos of each other; (2) justice requires recognizing the substance of the relationship over the corporate form because the corporate form is used to perpetuate a fraud or to defeat a rightful claim; and (3) an equitable result is achieved by piercing. Id. at 646.

         3. Application

         ¶ 28 We perceive no error in the trial court's decision to pierce the corporate veil because ample record evidence supports that decision. First, the record shows that (1) Gary commingled his personal funds with the Liquor Barn's funds and with his other companies' funds in a way that made it unclear which funds belonged to whom; (2) Gary's individual position as the controlling and sole voting shareholder facilitated his misuse of the Liquor Barn's funds (as evidenced by the Liquor Barn paying his personal expenses, personal loans, and the expenses of his other companies); (3) Gary kept inadequate corporate records, including insufficient receipts and insufficient descriptions in QuickBooks; (4) the Liquor Barn was thinly capitalized because it had little to no retained earnings; (5) Gary routinely disregarded the legal formalities of ...