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Colorado Court of Appeals issues strong ruling on “horizontal veil piercing”

The Colorado Court of Appeals issued a strong decision involving “horizontal veil piercing.” The case involved a junior creditor suing his debtor and its senior creditor, alleging that the debtor and senior creditor were commonly owned. The debtor was owned in large part (81.25%) by the same five owners who owned 100% of a third company, which in turn owned 100% of the senior creditor. The junior creditor argued that the corporate veils between the entities should be pierced, that they were all “alter egos” of each other. The debtor argued that the senior creditor had been created solely for the purpose of holding the senior debt, which had subordinated his own claim.

Although the trial court had ruled in the plaintiff’s favor, the Colorado Court of Appeals reversed. The court held that the sister entities’ veils could only be pierced if the corporate veil between each of the entities and their respective owners were pierced. Here the court held that the plaintiff had failed to muster sufficient evidence to warrant piercing all of the corporate veils involved.

In so ruling the court re-affirmed that it is not sufficient to show common owners, and/or even common officers and directors. Commonality of owners, officers and directors is common in corporate structuring. Additionally it was not sufficient to show that the one entity had been (arguably) created for the purpose of holding the senior debt simply to keep the plaintiff subordinate; even if true, holding a note is a lawful purpose for which an entity may be formed.

Source: Dill v. Rembrandt Group, Inc., 2020 COA 69 (Colo.App. 4/16/2020).