The Alter Ego Doctrine in Colorado

• Publication year: 1999
• Pages: 53

28 Colo.Law. 53 Colorado Lawyer 1999.

1999, March, Pg. 53. The Alter Ego Doctrine in Colorado

---

53

Vol. 28, No. 1, Pg. 53

The Colorado Lawyer
March 1999
Vol. 28, No. 3 [Page 53]

Specialty Law Columns
The Civil Litigator
The Alter Ego Doctrine in Colorado
by F. J. "Rick" Dindinger, Dana L. Eismeier

The corporate structure creates an incentive for investment by limiting exposure to personal liability.1 A shareholder whether an individual or an institution, is generally not liable for corporate debts or obligations beyond the shareholder's investment.2 The "alter ego" doctrine developed as an exception to this general rule. It applies in those situations where a court disregards the corporate fiction and imposes personal liability on shareholders.3

This article analyzes the alter ego doctrine and its application in Colorado. The article first provides a historical overview of the alter ego doctrine and an introduction to the doctrine's general rules of application. The article then reviews the alter ego doctrine in Colorado in three distinct contexts: individuals as alter egos, corporations as alter egos, and other business entities as alter egos

Historical Development Of the Doctrine

Courts rarely address the historic origins of the alter ego doctrine.4 The doctrine developed to protect a corporation's creditors from shareholders who used the corporation's limited liability as a shield to engage in fraudulent business transactions.5 As early as 1865, in Booth v. Bunce,6 the New York Court of Appeals disregarded the corporate entity to prevent a corporation from defrauding creditors.7 In Booth, the members of a financially strapped partnership formed a corporation and transferred the partnership's property to that corporation. The court held that the partnership's creditor could reach the corporate assets because the partnership formed the corporation in bad faith with the intent to defraud the creditors

The alter ego doctrine assumed a more prominent place in this country's jurisprudence during the roaring twenties and the ensuing depression.8 A seminal alter ego case, Berkey v. Third Avenue Railway Co.,9 involved a plaintiff who suffered a personal injury on a street car operated by Forty-Second Street Railway Company. He sued Third Avenue Railway, the parent of the streetcar operator.

The Berkey court refused to pierce the corporate veil and find Third Avenue Railway liable for Forty-Second Street's negligence. Judge Cardozo, however, described three enduring situations in which the alter ego doctrine may apply: (1) when the parent corporation operates a business through a subsidiary characterized as an "alias" or "dummy"; (2) when dominion by one entity over another results in the second entity having no real separate existence; and (3) when the corporate entity provides a shield from liability because the legal relationship between the parent and the subsidiary works a fraud on the law.10

An early Colorado case applying the alter ego doctrine is Gutheil v. Polichio.11 The plaintiff sought to set aside a real estate conveyance made by a corporation on the grounds that the controlling shareholder, Gutheil, sold the property for purposes of defrauding corporate creditors. The corporation and Gutheil claimed that they needed the sale proceeds to pay a debt owed by the corporation to Gutheil's wife.

The Colorado Supreme Court agreed with the plaintiff that the corporation was Gutheil's alter ego. The court characterized the company's alleged indebtedness to the controlling shareholder's wife as "shrouded in doubt, mystery and uncertainty."12 The court further observed that the corporation employed Gutheil as secretary, treasurer, and manager and that Gutheil's "close and exclusive" association with the corporation stripped the company of its corporate cloak.13 In order to prevent the corporation from "accomplishing a fraud or an illegal act,"14 the court disregarded the corporate entity and set aside the real estate conveyance.

Alter Ego Doctrine In Colorado

Colorado courts consider disregarding the corporate form as a drastic remedy.15 Indeed, "[c]orporate veils exist for a reason and should be pierced only reluctantly and cautiously."16 As an initial matter, fraud or injustice must exist before courts consider applying the alter ego doctrine.17 Mere breach of contract does not justify disregarding the corporate entity.18 As a result, courts less frequently pierce the corporate veil in cases involving consensual, contract-like transactions than in cases involving nonconsensual, tort-like transactions.19

Colorado courts presume that creditors seeking relief in contract cases (such as customers, suppliers, and lenders) voluntarily entered into the agreement with knowledge of contractual risks. Not surprisingly, the party seeking to pierce the corporate veil bears the burden of proof.20

In Colorado state courts and in federal courts applying Colorado law, no right exists to a jury trial on the issue of whether the alter ego doctrine applies because "the alter ego doctrine provides an equitable remedy."21 Since alter ego is an equitable remedy, it falls within the providence of the trial judge, not the jury.22 On the other hand, many non-Colorado courts permit juries to decide the issue of alter ego or...