Piercing the Corporate Veil: Limited Liability
| Publication year | 1986 |
| Pages | 795 |
| Citation | Vol. 15 No. 5 Pg. 795 |
1986, May, Pg. 795. Piercing the Corporate Veil: Limited Liability
The recent Colorado Court of Appeals opinion of Ward v. Cooper(fn1) appears to eliminate the doctrine of limited liability of corporate shareholders in Colorado for closely held corporations. In Cooper, a shareholder and his wife owned 85 percent of the outstanding stock of a corporation. The shareholder was held personally liable to a creditor for breach of a contract of the corporation, even though the trial court found that there was no fraud practiced against the creditor and the shareholder had scrupulously observed the requirements of law in the technical operation of the corporation.
The Court of Appeals affirmed the trial court's findings that the shareholder dominated the corporation, caused the corporation to use funds for the benefit of another corporation in which he was interested and caused the corporation to repurchase his stock to avoid his future personal liability. These facts were sufficient to support findings that (1) the corporation was the shareholder's alter ego; (2) the shareholder's actions in causing the corporation to prefer one creditor over another operated to defeat the creditor's legitimate claim; and (3) the shareholder therefore was personally liable to the creditor.
The opinion may be surprising to corporate lawyers because most of the acts the court relied upon to establish liability would normally exist in any closely held corporation that became unable to pay its debts. Limitation of liability of corporate shareholders to the full consideration for which their shares are issued ("limited liability") is an essential element and characteristic of corporations and serves to encourage commercial undertakings and stimulate economic growth.
It is fortunate that a review of Colorado cases on piercing the corporate veil(fn2) suggests that Cooper is an anomaly and should not represent a change in direction from the strong public policy favoring limited liability of corporate shareholders.
To disregard the corporate entity, the corporation must be established as the alter ego of its shareholders. This can be done by showing that (1) the shareholders' disregard of the corporate entity made it a mere instrumentality of their own affairs; (2) there is such unity of interest in ownership that the separate...
To continue reading
Request your trial