Piercing the Corporate and LLC Veil

Abstract

Piercing the veil of a corporation has long been possible for a court using its equitable powers to hold equity owners liable for the obligations of the entity, although it is a fact-specific inquiry. The courts make it clear that disregarding the corporate form should be considered a “drastic remedy,” and the “corporate veils exist for a reason and should be pierced only reluctantly and cautiously.” “The mere fact that corporate creditors would go unsatisfied because they cannot reach a shareholder’s personal assets does not, alone, justify piercing the corporate veil.” In other words, if a person invests in a limited liability entity and is not otherwise personally liable for a tortious action or other clear reason, that person’s risk should be limited to the amount of the investment. Piercing the veil of a limited liability company is of more recent vintage, but then limited liability companies (referred to herein as “LLCs”) have only become the entity of choice within the last ten to fifteen years. Colorado appellate courts have recently addressed piercing the veil of both corporations and LLCs in a number of contexts, and have used the same analysis in the corporate context as in the LLC context. Further, piercing is a remedy, not a separate cause of action. “[A]n action to pierce the corporate veil is not a separate and independent cause of action, but rather is merely a procedure to enforce an underlying judgment.” Thus, without an underlying liability, there is no basis for piercing the veil of limited liability. The equitable remedy of “piercing the veil” is not the only basis for holding the owners of an LLC or corporation liable for the debts of the entity. These other bases include provisions under the Colorado Corporations and Associations Act, the Colorado Uniform Fraudulent Transfer Act, the risks of single member LLCs, and the corporate family doctrine which will be discussed hereafter. This updated article addresses the June 2013 Colorado Supreme Court's decision in Weinstein v. Colborne Foodbotics, Inc. which addressed fiduciary duties of managers of an LLC in the “zone of insolvency” and determined that such duties did not exist under the Colorado Limited Liability Company Act. It also includes a discussion of the “corporate family doctrine” used to hold subsidiaries liable for the debts of the parent entity while (perhaps technically) avoiding “substantive consolidation.”