Colorado Business Litigation Lawyer Blog

The Department of Homeland Security (DHS) and the Social Security Administration (SSA) have established an electronic system called E-Verify (formerly the Basic Pilot/Employment Eligibility Verification Program) to assist employers further in verifying the employment eligibility of all newly-hired employees. As most businesses with federal contracts know, effective September 8, 2009, compliance with the E-Verify system became mandatory. Executive Order 12989 mandates the electronic verification of all employees working on any federal contract. The amended Executive Order reinforces the policy that the federal government supports a legal workforce. In short, E-verify is mandatory if the prime contract for services or construction is more than $100,000 with a period of performance longer than 120 days. For subcontractors, the value of services or construction must exceed $3,000.

The E-verify system requires that employers run new hires, and existing employees hired after November 6, 1986, through the E-Verify system to determine the person’s eligibility to work in the U.S. E-Verify compares the information on the employees name, Social Security Number, date of birth, citizenship status, and any other non-citizen information provided.

As of October 12, 2009 there has already been close to 400,000 quires run through the system. E-Verify is an essential tool for employers committed to maintaining a legal workforce, and the number of registered employers is growing by over 1,200 per week.

Our engagement in wars on two fronts and the daily reminders of the politics of such wars sometimes blurs the stark fact that it is people who fight wars, not politicians. We often fail to remember the many sacrifices being made by the members of our armed forces and of the hardships and mental anguish suffered by their families. The brave and loyal defenders of our liberty freely and unselfishly volunteered to serve. Those in combat risk their lives daily, usually with little or no expectation of recognition or of reward for their efforts. Those on patrol on the deadly streets of Afghanistan and, until recently, on the even more deadly streets of Iraq, wake in the morning, never knowing if they will still be alive and unwounded by nightfall. We cannot even imagine the amount of stress that soon becomes a part of their every waking moment. Those in the important role of support are no less honorable and brave.

We would like, therefore, to give our recognition to the fighting men and women of our military for their superb efforts in keeping us safe and free. They did not ask when they volunteered about the politics of entering or continuing the wars. And they are not defending one political party over the others. They courageously defend the freedom of all of us. We give our sincere thanks to each and every one of them.

One of the advantages of operating a business as a corporation in Denver is that, with some exceptions, shareholders (owners), officers and directors normally do not have personal liability for corporate debts. Under certain circumstances, however, there may be personal liability, such as for certain unpaid taxes and when equitable principles cause the court to “pierce the corporate veil,” where the court looks behind a corporate entity and takes action as though no entity separate from the members itself existed.

In the recent (October 29, 2009) Colorado Court of Appeals opinion in McCallum Family L.L.C. v. Winger, the court succinctly sets out the requirements for piercing the corporate veil. These requirements are:

1. The corporation is the “alter ego” of the person or entity in issue. Factors determining status as an alter ego may include whether:
a. The corporation is operated as a distinct business entity;
b. funds and assets are commingled;
c. adequate corporate records are maintained;
d. the nature and form of the entity’s ownership and control facilitate
misuse by an insider;
e. the business is thinly capitalized;
f. the corporation is used as a "mere shell";
g. legal formalities are disregarded; and
h. corporate funds or assets are used for noncorporate purposes.

Not all of the requirements need be present in every case. Each case must be decided on its unique factors.

2. The court 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."

3. The court must consider whether an equitable result will be achieved by disregarding the corporate form and holding a shareholder or other insider personally liable for the acts of the business entity.

A major lesson to be learned from the foregoing principles is that a corporation must be operated in all respects as a business entity separate and apart from its shareholders, officers, directors and insiders. The requirements of paragraph No. 1 should be strictly observed; otherwise the benefits of immunizing individuals from corporate debt may be placed in jeopardy.

In an opinion dated October 29, 2009, the Colorado Court of Appeals affirmed the principle that a creditor of a corporation can “pierce the corporate veil” (ask the court to look behind a corporate entity and take action as though no entity separate from the members itself existed). A unique part of the decision holds that it is not just a shareholder, officer or director against whom the corporate veil can be pierced, but also a corporate insider (such as a manager) who can personally be held liable for a corporate obligation.

Marc Winger managed a Wyoming corporation authorized to do business in Colorado, named Manitoba Investment Advisors, Inc. (Manitoba). His wife was a director and 50% shareholder and president, while his mother was a director, 50% shareholder, vice-president and secretary. Marc Winger routinely used corporate funds to pay his personal expenses, including $95,400 to the State of California in connection with a felony conviction there for failure to pay state taxes.

Manitoba leased property from McCallum Family L.L.C. in Grand Junction for business use. Manitoba failed to pay county taxes for over three years and vacated the property seven months before the expiration of the lease, defaulting on the remaining rent. McCallum obtained judgment against Manitoba for $76,224. Manitoba was administratively dissolved on May 31, 2006.

After first holding that the burden of proof of one seeking to pierce the corporate veil is proof by a “preponderance of the evidence” (a lesser burden) and not proof by “clear and convincing” evidence (a greater burden), the court went on to discuss under what circumstances the corporate veil may be pierced (a subject I will discuss in a later blog).

The court examined the issue of piercing the corporate veil as against one who manages the corporation, but who is not a shareholder, officer or director. The court holds that where the person sought to be held liable for corporate debts exercises sufficient “dominion and control” over the corporation and its assets, that person may be deemed an “equitable owner” and thus an “alter ego” of the corporation. Marc Winger admitted that his wife was a shareholder and director in name only. Neither shareholder exercised any supervisory power over Marc Winger, who “managed the whole affair.” Marc Winger’s activities were directed at defeating McCallum’s claim.

The court then remanded the case to the trial court to determine whether or not equity required piercing of the corporate veil and holding Marc Winger liable for McCallum’s claim.