In re Phillips

Decision Date26 June 2006
Docket NumberNo. 05SA316.,05SA316.
PartiesIn re Phillip Eugene PHILLIPS, Debtor. Tom H. Connolly, Chapter 7 Trustee, Plaintiff-Appellant v. Englewood Post No. 322 Veterans of Foreign Wars of the United States, Inc.; Margaret M. Phillips; Troy Brackeen; Ramona Brackeen; Philsax Incorporated; Action Properties, Inc.; and Phillip Eugene Phillips, Defendants-Appellees.
CourtColorado Supreme Court

Weinman & Associates, P.C., Jeffrey A. Weinman, William A. Richey, Denver, Colorado, Attorneys for Plaintiff-Appellant.

John A. Cimino, Daniel F. Lynch, Denver, Colorado, Attorneys for Phillip Eugene Phillips.

Justice MARTINEZ delivered the Opinion of the Court.

Pursuant to C.A.R. 21.1, we agreed to answer a certified question of law posed to us by the United States District Court for the District of Colorado. The federal district court requested a determination of whether Colorado law recognizes the so-called reverse piercing of the corporate veil doctrine. Reverse piercing occurs when a claimant seeks to disregard the separate existence of a corporation and obtain the assets of the entity due to the actions of a dominant shareholder or other corporate insider. Zahra Spiritual Trust v. United States, 910 F.2d 240, 244 (5th Cir.1990).

We have not previously considered whether reverse piercing is appropriate under Colorado law. Colorado does permit traditional piercing of the corporate veil, however, in extraordinary circumstances. Leonard v. McMorris, 63 P.3d 323, 330 (Colo.2003). Traditional piercing occurs when a trial court disregards the corporate form and attaches liability on individual shareholders for the obligations of the corporation. Contractors Heating & Supply Co. v. Scherb, 163 Colo. 584, 587-88, 432 P.2d 237, 239 (1967).

While some different considerations color the unique types of piercing, traditional veil piercing and allowing a corporate outsider to reverse pierce the corporate form are substantially similar and both serve the purpose of achieving an equitable result. Accordingly, we determine that a corporation, in limited circumstances, may be liable for the debts of a controlling shareholder or other corporate insider where the shareholder or insider treated the corporation as his alter ego to perpetuate a fraud or defeat a rightful claim and an equitable result is achieved by piercing.

I. Facts and Procedural History

Appellant, Tom Connolly, is the Chapter 7 Bankruptcy trustee of Debtor Phillip Eugene Phillips's bankruptcy estate. In that capacity, Appellant seeks to avoid certain transfers of real and personal property owned by Debtor and transfers of real and personal property owned by Philsax, Inc. ("Philsax"), a Colorado corporation. Prior to the property transfers, Debtor was the dominant and controlling shareholder of Philsax. To avoid the transfers made by Philsax and keep the property in the bankruptcy estate, Appellant seeks to show that Philsax is the alter ego of Debtor and, therefore, actions taken by the corporation were, in effect, actions taken by the Debtor. The United States Bankruptcy Court for the District of Colorado dismissed Appellant's claim. The bankruptcy court held that absent clear Colorado precedent allowing reverse piercing, the court would not disregard Philsax's corporate status and invalidate the transfers.

Appellant appealed to the United States District Court for the District of Colorado. Pursuant to Rule 21.1, Appellant also sought certification of a question of law to this court. Judge John L. Kane certified the question of law to this court.

A. Facts Contained in the Certification Order

The United States District Court set forth its understanding of the facts relevant to the question as required by Rule 21.1(c)(2). This information was taken from a default judgment against Debtor in an adversary proceeding before the bankruptcy court. We recite these facts here to give context for the certified question.

Prior to May 2000, Debtor was the principal shareholder of Philsax, holding 5100 or 51% of the outstanding shares. His wife, Margaret M. Phillips, owned the remaining 4900 or 49% of the remaining shares. Debtor also owned 51% of Action Properties, Inc. ("Action Properties"), prior to his November 2002 bankruptcy petition. Margaret M. Phillips owned the remaining Action Properties shares.

Although Margaret M. Phillips was the only other shareholder, officer, and director of Philsax and Action Properties, she could not testify as to her role in either corporation nor could she explain her duties or obligations as a director or officer in the entities.

While incorporated, Philsax had no bank account, no written bylaws, and maintained no written financial statements. Philsax failed to provide written notice of the board of directors meetings and the Debtor removed and added directors at will.

Philsax's primary asset was the ownership of Parcel A and Parcel B, two parcels of real property in Arapahoe County. In early March 2000, Philsax entered into a written agreement to sell a 99.99% interest in Parcel A with the Veterans of Foreign Wars of the United States Post No. 32 ("VFW").

Although Philsax owned Parcel A, VFW executed a Promissory Note for approximately $260,000.00 to Margaret M. Phillips at the closing. VFW also provided Margaret M. Phillips and Action Properties with a check for approximately $90,000.00. Troy Brackeen, the Commander of the VFW, and Debtor, a member of the VFW, executed the check on behalf of the VFW. The VFW also made monthly payments to or for the benefit of Margaret M. Phillips.

At a March 8, 2000, special meeting of the board of directors of Philsax, Parcel B was transferred to Margaret M. Phillips and Action Properties. On March 13, 2000, the Philsax board of directors held a second special meeting. During the meeting, Debtor received approximately $90,000.00 for the transfer of 2000 shares to Troy Brackeen and 2000 to Troy Brackeen's wife, Ramona Brackeen. Ramona Brackeen is a niece by marriage of Debtor. Debtor also transferred 300 shares to Margaret M. Phillips, making her the majority shareholder of Philsax. Debtor used the money to pay personal expenses and transferred the remainder to Troy Brackeen.

A quit claim deed dated March 15, 2000, purportedly transferred VFW's 99.99% interest in Parcel A and Philsax's 0.01% interest in Parcel A to Margaret M. Phillips. Troy Brackeen and John Greenway signed the deed on behalf of the VFW. The deed was recorded on January 26, 2005.

Prior to these transfers, third parties sought and obtained a $135,000.00 civil judgment against Debtor. Action Properties and Philsax were both served with writs of garnishment. However, the transferring of Action Properties's and Philsax's assets rendered both corporations insolvent and the civil judgment creditors did not receive any payment.

B. Certified Question

In his certification order, Judge John L. Kane requested that this court exercise its original jurisdiction and determine whether Colorado law permits a creditor or shareholder of a corporation to reverse pierce through the corporate veil and reach the assets of a corporation to cover the debts of a dominant shareholder.1 The order also declared that "no controlling precedent [on] this issue has been determined by the Colorado Supreme Court" and the determination of the questions of law "will be determinative of the matter pending before [the federal district] Court."

We accepted jurisdiction.

II. Analysis

Previously, this court has not addressed whether Colorado law permits a court to reverse pierce the corporate veil and obtain funds from the corporation for the debts of a dominant shareholder or other corporate insider. While we generally do not review issues of law without the benefits of a full factual record, there are many exceptions to this doctrine. For example, this court has the discretion to accept interrogatories from the legislature and certified questions of law from the federal courts. See Common Sense Alliance v. Davidson, 995 P.2d 748, 749 (Colo.2000); In re Submission of Interrogatories on House Bill 99-1325, 979 P.2d 549, 551 (Colo.1999). Even though we may accept certified questions that lack a developed factual record, we are disinclined to adopt a new principle of law in any context other than an appeal. In this case, however, we recognize that the United States Court of Appeals for the Tenth Circuit prohibits reverse piercing of the corporate veil absent a clear expression of state law by a state appellate court. Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1577 (10th Cir.1990). Accordingly, unless this court speaks to the reverse piercing issue, our failure to address the issue here would be tantamount to a refusal to adopt the doctrine as to this claimant and all future claimants until such time as an appeal before this court is taken. Due to the effect on Petitioner and all similarly situated future claimants we agreed to consider reverse piercing in a certified question.

A. Traditional Piercing of the Corporate Veil

Although Colorado has not previously recognized the reverse piercing doctrine, Colorado does permit traditional piercing of the corporate veil in extraordinary circumstances. Leonard, 63 P.3d at 330. The concepts of traditional veil piercing aid in our determination of whether reverse piercing is permitted under Colorado law. We review them briefly.

Generally, a duly formed corporation is treated as a separate legal entity, unique from its officers, directors, and shareholders. Id.; Micciche v. Billings, 727 P.2d 367, 372 (Colo.1986) (citing Krendl & Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Den. L.J. 1 (1978)). This separate status isolates the actions, profits, and debts of the corporation from the individuals who invest in and run the entity. Micciche, 727 P.2d at 369 (citing H. Henn & J. Alexander, Laws of Corporations 14446 (3d ed.1983)). "Insulation from...

To continue reading

Request your trial
71 cases
  • Kelley v. Opportunity Fin., LLC (In re Petters Co.)
    • United States
    • United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota
    • December 1, 2016
    ...See Gregory S. Crespi , The Reverse Pierce Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33 (1990).49 In re Phillips , 139 P.3d 639, 644–645 (Colo. 2006) ; citing Crespi , 16 J.Corp.L. 33, 34 (1990).50 Insider reverse veil piercing may be used for other purposes inapplicable here......
  • In re First Assured Warranty Corp., 06-13669 MER.
    • United States
    • United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado
    • March 6, 2008
    ...such unity of interest in ownership that the separate personalities of the corporation and the owners no longer exist.'" In re Phillips, 139 P.3d 639, 644 (Colo.2006) (citing Krystkowiak v. W.O. Brisben Co., Inc., 90 P.3d 859, 867 n. 7 (Colo.2004); Gude v. City of Lakewood, 636 P.2d 691, 69......
  • McKay v. Longman, SC 20013, (SC 20014)
    • United States
    • Supreme Court of Connecticut
    • July 23, 2019
    ...of Corporations, supra, § 41.70.A number of jurisdictions have recognized outsider reverse piercing claims. E.g., In re Phillips , 139 P.3d 639, 646 (Colo. 2006) (en banc) (recognizing outsider reverse piercing and citing to several jurisdictions noting same); C.F. Trust, Inc. v. First Flig......
  • Phillips v. Reed Grp., Ltd.
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • July 1, 2013
    ...will be achieved by piercing the corporate veil. Connolly v. Englewood Post No. 322 Veterans of Foreign Wars of the United States, Inc., 139 P.3d 639, 643–44 (Colo.2006). An “alter ego relationship exists when the corporation is a ‘mere instrumentality’ for the transaction of the shareholde......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT