Daniel E. Tisch and Eva R. Tisch, Plaintiffs-Appellees and Cross-Appellants,
v.
Gary D. Tisch and The Liquor Barn, Ltd., Defendants-Appellants and Cross-Appellees.
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 ...