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Sedgwick Properties Development Corporation v. Hinds

Court of Appeals of Colorado, Fifth Division

July 3, 2019

Christopher HINDS, Appellee.

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          Court of Appeals No. 17CA2102, City and County of Denver District Court No. 13CV33659, Honorable Ross B. Buchanan, Judge

         Hall Estill, E. Job Seese, Denver, Colorado, for Appellant

         Salazar Law, LLC, Joseph A. Salazar, Thornton, Colorado, for Appellee


          TERRY,  JUDGE

         [¶ 1] This appeal by Sedgwick Properties Development Corporation (Sedgwick) requires us to harmonize statutory law permitting the creation of a single-member limited liability company (LLC) with the judicially created doctrine of piercing the corporate veil.

         [¶ 2] In 2013, the Colorado Civil Rights Commission (Commission) sued 1950 Logan, LLC (1950 Logan), a single-member, single-purpose LLC, and obtained a default judgment against that entity. 1950 Logan had been created for the sole purpose of building the Tower on the Park condominium building and selling the units in that building.

         [¶ 3] The Commission claimed that 1950 Logan had violated the civil rights of appellee, intervenor Christopher Hinds — a disabled person who uses a wheelchair and owns a unit in the building — by selling the building’s handicapped parking spaces to non-handicapped buyers, years before Hinds bought his condo unit. Hinds intervened in the suit and got a default judgment against 1950 Logan. (The Commission does not appear on appeal.)

         [¶ 4] By the time Hinds sought to collect on the judgment, the condo development had long since been completed, management of the property had been turned over to a homeowners’ association (HOA), and 1950 Logan — its single purpose accomplished — had wound down operations and no longer had any assets.

         [¶ 5] Hinds filed a garnishment proceeding seeking to pierce the corporate veil of 1950 Logan to recover the judgment from Sedgwick, which Hinds alleged was the alter ego of 1950 Logan (even though Sedgwick had no ownership interest in 1950 Logan). Sedgwick is a developer services company that was hired under a contract to manage 1950 Logan and to oversee the development and marketing of the condo project.

         [¶ 6] After Sedgwick filed a traverse to the garnishment, the district court held an evidentiary hearing and pierced the corporate veil to hold Sedgwick liable to pay Hinds for the judgment against 1950 Logan. Sedgwick appeals the judgment piercing the corporate veil to reach its assets.

         [¶ 7] Because we conclude that Hinds did not present sufficient evidence to support a finding that Sedgwick was 1950 Logan’s alter ego, we reverse without addressing the other elements required for piercing the corporate veil.

         [¶ 8] As part of our analysis, we discuss certain factors of the alter ego rubric on which the district court relied, but which carry little weight in the context of a single-member, single-purpose LLC such as 1950 Logan that hired a management company to manage its affairs.

          I. The Traverse Hearing Was Sufficient to Protect Sedgwick’s Due Process Rights

         [¶ 9] We begin by addressing Sedgwick’s contention that its procedural due process rights were violated because it did not receive adequate notice of the attempt by Hinds to pierce the corporate veil to reach Sedgwick’s assets. Sedgwick argues that, as a result, it did not have an adequate opportunity to respond to the factual allegations of the complaint. Sedgwick’s argument boils down to this: if an entity might later be garnished in the event of a judgment against a defendant that has some relation to the entity, the entity must be served with notice and given an opportunity to defend the underlying suit. We reject this notion.

         [¶ 10] Nothing in Colorado law prohibits a judgment creditor from asserting a claim to

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pierce the corporate veil in a garnishment proceeding to collect on the judgment. And we see no due process violation that would arise from such a procedure. This is so because a garnishment proceeding adequately allows the garnishee to contest the garnishment.

         [¶ 11] In its answer under C.R.C.P. 103, section 4, to the writ of garnishment, Sedgwick asserted that it did not possess or control any payments, obligations, or assets of 1950 Logan. This assertion prompted Hinds to file a traverse under C.R.C.P. 103, section 8, seeking to hold Sedgwick liable by piercing the corporate veil to reach assets that he contended belonged to 1950 Logan. The district court held a hearing on the traverse under C.R.C.P. 103, section 8(b)(2).

         [¶ 12] These proceedings adequately protected Sedgwick’s due process rights. See Maddalone v. C.D.C., Inc., 765 P.2d 1047, 1049 (Colo.App. 1988). Maddalone recognized that garnishment procedures under C.R.C.P. 103 accord with due process and fully protect a garnishee who denies liability for a debt. Id. The garnishee is treated no differently than if it had been sued directly on the debt, and has the right to deny the debt, engage in discovery, and have an adversary hearing in which the judgment creditor must prove the allegations against the garnishee by a preponderance of the evidence. Id.

         [¶ 13] In the traverse hearing, the district court allowed garnishee Sedgwick to (1) cross-examine the witness called by garnishor Hinds; (2) challenge the evidence Hinds presented; and (3) present Sedgwick’s own witness testimony and evidence. These procedures are consistent with the due process rights of a garnishee. See Gen. Accident Fire & Assurance Corp. v. Mitchell, 120 Colo. 531, 539, 211 P.2d 551, 555 (1949) (burden of proof is on the garnishor to establish by a preponderance of the evidence all the facts on which it relies to charge the garnishee); Anderson Boneless Beef, Inc. v. Sunshine Health Care Ctr., 852 P.2d 1340, 1343 (Colo.App. 1993) (same); see also Struble v. Am. Family Ins. Co., 172 P.3d 950, 955 (Colo.App. 2007) (reviewing the record before the district court and concluding there were no issues of material fact as to issuance of an insurance policy by the garnishee to the judgment debtor).

         [¶ 14] We now move to the merits of Sedgwick’s substantive contentions.

          II. Corporate Veil-Piercing of a Single-Member, Single-Purpose LLC

         [¶ 15] A duly formed corporation is treated as a separate legal entity, unique from its officers, directors, and shareholders. In re Phillips, 139 P.3d 639, 643 (Colo. 2006). The fiction of the corporate veil isolates "the actions, profits, and debts of the corporation from the individuals who invest in and run the entity." Id. Only extraordinary circumstances justify disregarding the corporate entity to impose personal liability. Id. at 644.

         [¶ 16] Colorado’s appellate courts have not previously addressed corporate veil-piercing in the context we encounter today: a single-member, single-purpose LLC that is managed under a contract by another company (in this case, 1950 Logan, which was managed by Sedgwick). Cf. Highlands Ranch Univ. Park, LLC v. Uno of Highlands Ranch, Inc., 129 P.3d 1020, 1022 (Colo.App. 2005) (noting that an LLC party in that case was "a single-purpose entity created for the sole purpose of entering into the lease at issue").

         [¶ 17] Single-member LLCs are permitted by statute, § 7-80-204(1)(g), C.R.S. 2018, and may be formed for any lawful business purpose, § 7-80-103, C.R.S. 2018.

          A. Burden of Proof for Veil-Piercing: Preponderance of Evidence

         [¶ 18] The burden of proof for establishing a claim to pierce the corporate veil has been the subject of inconsistent judicial precedent.

         [¶ 19] In In re Phillips, 139 P.3d at 644, the supreme court said that the burden of proof is by "clear and convincing" evidence. But the same court in Griffith v. SSC Pueblo Belmont Operating Co. LLC, 2016 CO 60M, ¶ 12, 381 P.3d 308, concluded that this language from Phillips was mere dictum. The court instead applied section 13-25-127(1), C.R.S. 2018, which mandates that "[a]ny provision

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of the law to the contrary notwithstanding and except as provided in subsection (2) of this section, the burden of proof in any civil action shall be by a preponderance of the evidence."

         [¶ 20] A year after announcing Griffith, however, the supreme court decided Stockdale v. Ellsworth, 2017 CO 109, 407 P.3d 571, and once again said that the burden of proof for piercing the corporate veil is "clear and convincing" evidence. Id. at ¶ 23. But the supreme court was not called on in Stockdale to decide the burden of proof issue. And it provided no reasoning as to why a burden of proof contrary to the one set out in section 13-25-127(1) and endorsed in Griffith should apply to veil-piercing cases. We therefore conclude that this language from Stockdale was dictum, and we instead apply Griffith’s ruling that the burden of proof is by a preponderance of the evidence, as required by statute.

          B. Elements of Veil-Piercing

         [¶ 21] To determine whether it is appropriate to pierce the corporate veil, a court must conduct a three-part inquiry. First, the court must determine whether the corporate entity is the alter ego of the person or entity in issue. Phillips, 139 P.3d at 644. Second, it must determine whether justice requires recognizing the substance of the relationship between the person or entity sought to be held liable and the corporation over the form, because the corporate fiction was "used to perpetrate a fraud or defeat a rightful claim." Seeid. (citation omitted). Third, the court must consider whether an equitable ...

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