A single-member LLC has one foot already in the grave against an alter ego challenge. For proof of this maxim, one need only examine the opinion involving a Colorado asset protection attorney who had one of his own entities pierced by way of an alter ego challenge, in Boxer F2, L.P. v. Bronchick, 2024 WL 1141483 (D.Colo., March 15, 2024). This opinion explores alter ego in the asset protection context, but also presents an example of when alter ego can fail in the context of a professional corporation and also where an innocent ex-spouse is a co-owner of an entity.
The creditor in this case was Boxer F2, L.P., which obtained two judgments totaling $891,970 against Colorado attorney William Bronchick. The creditor attempted to get paid by the traditional means, but eventually brought a lawsuit seeking various relief against Bronchick, his ex-wife, and three Bronchick entities. The Court held a bench trial and issued a lengthy opinion that made findings of fact and conclusions of law that will be summarized in brief below.
As always, to the extent that my summary or characterization of the opinion differs from that of the opinion, then the opinion of course controls. No information here comes from outside the opinion, and the opinion itself may be subject to an appeal. You can, and should, read the opinion for yourself here. Finally, note that this is a U.S. District Court opinion and thus is subject to further appeal to the U.S. Court of Appeals for the Tenth Circuit.
William Bronchick was an attorney practicing in Colorado. He was married to Caroline, and she was a nurse. To skip ahead — and this becomes an important fact — William and Caroline separated in 2019 and divorced in 2020.
In 2016, Boxer won its two judgments against William totaling $891,970. William appealed to the U.S. Tenth Circuit Court of Appeals and lost. At this time, William had interests in at least three companies.
First, there was Bronchick & Associates, P.C. (“B&A”) which was the Colorado professional corporation through which Bronchick ran his law practice. William was the sole shareholder, director and officer of B&A.
Second, Bronchick Consulting Group, LLC (“BCG”) was a Colorado LLC of which William was the sole member, i.e., BCG was a single-member LLC. BCG was also a subtenant in B&A’s office.
Third, Hasaki Property Holdings, LLC was a Delaware Series LLC in which both William and Caroline were members. Hasaki was authorized to conduct business in Colorado. The business of Hasaki was purchasing residential real estate for leasing purposes.
To enforce its judgment, Boxer garnished B&A for William’s wages. Boxer also obtained a charging order in Colorado against William’s interest in BCG in 2018 and a charging order that same year in Delaware for William’s interest in Hasaki. Note that there was no charging order against B&A, but rather Boxer was apparently content to simply garnish William’s wages from that entity.
Boxer’s judgment apparently arose out of a lease agreement that was breached by William, and at least in some part by another Bronchick entity known as Flamingo, with the last lease payment made in 2012. That same year, Boxer made a written demand for payment to William, and William indicated in return that he would abandon the leased space.
In 2014, William caused Hasaki to extend one letter of credit agreement to B&A and another to BCG. Wiliam drafted and signed these agreements on behalf of all the involved companies. What happened is that since Hasaki could not make distributions to William without it being caught up by the Boxer charging order, William instead used Hasaki to make loans to B&A and BCG. The letters of credit authorized B&A and BCG to take up to $400,000 each in loans from Hasaki. These letters of credit were unsecured and did not provide for a default interest rate.
What was curious is that William apparently never could get the paperwork quite right for the transfers, as some of them were designated as loans, while others were listed as “mentoring income”. In fact, the Hasaki ledgers were a mess and, as certain of Hasaki’s residential properties were sold off, transactions were recorded late or were inaccurate.
Now we get to Caroline Bronchick, who was a nurse. She had no legal training, and apparently left many things to William, but as a 41% member of Hasaki she did help to manage the properties and kept Hasaki’s books until around 2013. One gets the impression that after 2013, Caroline mostly left the business to William so that she could offer more care for their children.
After Boxer obtained its charging orders, Williams did not take any distributions from either Hasaki or BCG. Why? Because of the charging orders, of course.
“Mr. Bronchick testified that he has not taken any draws out of Hasaki since the service of the charging order on Hasaki because he does not want those distributions to be subject to Boxer’s charging order. He likewise testified that he has not taken any draws out of BCG since the service of the charging order on BCG because he does not want those distributions to be subject to Boxer’s charging order.”
Instead, William caused Hasaki to transfer money (the opinion is frustrating unclear on just how much) to B&A and BCG. What was clear is that the loans were poorly documented, and Hasaki’s general ledger was likewise unclear about the transfers. There were also apparently very small transfers of money made just to take the BCG or B&A accounts out of negative balances.
Moreover, while Williams testified that he always told Caroline about the loans and transfers, since she was a co-member of Hasaki, Caroline testified that the first time that she heard about the loans and at least some of the transfers, plus some other smelly transactions, was at her deposition in the case prior to the trial.
Caroline further testified to the effect that:
“When Mr. Bronchick explained to Ms. Bronchick his desire to place title to the properties that he had purchased in his own name into trusts, he ‘explained to me in a very basic way about asset protection, how it protects us against the tenants from knowing where we live….I’m not sure he used the word *protection against creditors.* My concern was about asset protection and anonymity for family reasons.’ “
The opinion does not state why they were worried about their tenants knowing where they lived, but it does recite that Caroline also did not know until her deposition that William had also used Hasaki to lend $5,000 to his disabled sister. Finally, William caused Hasaki to make personal loans to himself without Caroline’s agreement, and the court found this ” significant and reflects a lack of credibility on the part of Mr. Bronchick.”
This was not the end of William’s hinky transfers. William cut a check for $50,000 from Hasaki to B&A (Williams’ professional corporation) and noted on the memo line of the check “Capital distribution to C. Bronchick.” Of course, Caroline was not any shareholder, director or officer of B&A, and if she was to receive a distribution from Hasaki then the check should have been made directly to her. Even William was forced to admit at trial that this “was probably not the brightest way to do it.”
It gets worse as we go.
On June 18, 2018, BCG’s ledger listed a transaction from William’s lawyers trust account (called a “COLTAF” account in Colorado). As a quick aside, using one’s lawyers trust account for personal transactions is usually a real no-no.
Hasaki also made distributions to William’s family members, which sounds fine in the abstract until one realizes that the family members were not members of Hasaki and there were not entitled to any distributions. One such “distribution” went to William’s mother.
Another strange transaction was that William caused Hasaki to pay at least $35,000 in legal fees to a law firm for legal services (the aforementioned 10th Circuit appeal of William’s case that end up with Boxer’s judgment) that had been rendered not to Hasaki, but to William personally.
This more-or-less summarizes the factual findings of the court, and we now move on to the court’s legal findings.
Boxer’s first three causes of action alleged that William was the alter ego of each of B&A, BCG and Hasaki. Essentially, these causes of action requested the court to pierce the corporate veil so that the assets of each entity were available to Boxer as the creditor of their owner in William. This is known as reverse veil piercing, to be distinguished from traditional veil piercing where a judgment against an entity is sought to be enforced against the entity’s owner.
Under Colorado alter ego law, and essentially alter ego law just about everywhere in the United States with minor variations, Boxer as the creditor needed to prove three things:
(1) The person and entity were alter egos of each other, i.e., they were really just one and the same for all practical purposes, and this is often expressed as a unity of ownership and control under the totality of the relevant facts and circumstances of the case;
(2) The entity was used to perpetrate a fraud or some other wrong; and
(3) Disregarding the corporate veil (read: the legal separateness of the person and the entity) would achieve an equitable result.
Looking at the first element, the court found that there was ample evidence that William was the alter ego of all of B&A, BCG and Hasaki, and they his. There was commingling of money and other assets, the financial operations of these entities were blurred and William admitted that he was not keeping track of how much was owed in principal or interest between entities. The records kept by Bronchick were inadequate, with numerous false or missing entries, and certain transactions characterized several different ways. The form of the entities was disrespected, especially as to Hasaki where William sometimes did not treat that company as if Caroline was a member. All three companies were undercapitalized, often keeping either minimal balances or negative balances. Formalities were disregarded and company funds were used for William’s personal purposes, such as to pay the legal fees for his appeal.
But the court’s alter ego analysis was only the first prong in its analysis. The second prong was whether B&A, BCG and Hasaki had been used to perpetrate some wrong. It is here that we get to a truism of veil piercing, which is that, as explained by the court: “The mere fact that corporate creditors would go unsatisfied because they cannot reach a shareholder’s personal assets does not, by itself, justify piercing the corporate veil.” In other words, a party like Boxer must show that a putative alter ego entity was not merely misused in some way by the debtor, but it must be misused in some way that caused the creditor harm.
The court held that B&A, BCG and Hasaki caused the creditor harm because William misused them specifically for the purpose of defeating Boxer’s claim. Moneys were transferred around with William’s intent that no distributions would be made to him such as would be picked up by the charging orders against those two entities. This was due to William himself designing and implementing the letters of credit precisely for that purpose. Thus, the second element was satisfied as well.
The third element to be proven by Boxer was whether considerations of equity would be served by piercing the corporate veil of B&A, BCG and Hasaki. Here, the court looked at each company individually — and reached very different results.
The first company taken up by the court was Hasaki. The problem here was that Hasaki was not just owned by William but also by Caroline. Essentially, the court found that Caroline was an innocent ex-spouse in all this:
“She testified credibly that for years she was unaware of the Underlying Judgment amount and thought it was somewhere around $200,000 or $300,000. Moreover, Ms. Bronchick was not represented by counsel in her divorce from Mr. Bronchick. She received no documentation regarding the finances of Mr. Bronchick’s businesses or the Underlying Judgments and was unaware of any rights she may have had to separate her interest in Hasaki from Mr. Bronchick’s. Indeed, Ms. Bronchick received a greater interest in Hasaki as part of the parties’ divorce proceedings. The Court finds credible Ms. Bronchick’s testimony that she took no steps to assist Mr. Bronchick in evading or frustrating Plaintiff’s collection efforts, and the Court finds no evidence establishing otherwise.”
If Boxer was able to pierce Hasaki’s corporate veil and liquidate its assets, then Caroline’s interest in the assets of Hasaki would be severely reduced — even though she did nothing wrong. Thus, the court declined to determine that it would be equitable for Hasaki’s veil to be pierced. The court also refused to hold Caroline liable to Boxer on a civil conspiracy theory for largely the same reasons.
A somewhat similar was reached by the court in relation to William’s professional corporation, B&A, although Caroline had no interest in that entity. The reason here was that B&A did have clients, and those clients’ interests could be negatively affected if B&A’s corporate veil was to be pierced. The court therefore declined to pierce the veil as to B&A.
That brings us to the third of William’s entities, being BCG. That company had no outsiders whose interests needed to be considered and thus the court would allow Boxer to pierce BCG’s veil. As to BCG, the court also ruled in favor of Boxer’s request that an equitable lien be placed on BCG’s assets, essentially freezing them until they could be liquidated to pay Boxer’s judgment.
The bottom line was that Boxer could not pierce B&A or Hasaki, nor hold Caroline liable as a co-conspiratory with William, but Boxer could pierce BCG’s corporate veil and impose an equitable lien on BCG’s assets.
ANALYSIS
The part of asset protection planning that gets all the glamour is the structuring, such as creating trusts and LLCs and various transactions to make it all come together. That is, at best, 10% of an asset protection plan. The other, and arguably much more important 90% or consists of the correct operation of the structure by respecting the entities that are created making sensible and well-documented transfers, and a thousand other things.
Where there are unusual transactions, transactions that don’t make sense, miscategorized transaction, or the commingling of assets, it really doesn’t matter how strong the structure itself is as the odds will be low that the courts will respect the form of the entities. This is something that I’ve seen probably hundreds of times over my career: Somebody will spend tens-of-thousands of dollars to create an asset protection structure, but then the next day they will start to treat everything as one big bucket as before. The problem is that if they are treating everything as essentially one big bucket, that is what the court is going to do as well. That is what alter ego is all about.
On that subject, one can see that it doesn’t take much for a single-member LLC to have its company shield pierced. There is unity of ownership and control. Allowing creditors to invade the LLC in most circumstances will not cause harm to others. That leaves only the element of the entity being used to commit some wrong, and if it is used to circulate money around so the creditor cannot collect on the judgment, that element would be satisfied too.
Yet, single-member LLCs are still widely marketed as asset protection vehicles, albeit they are very weak ones. In their defense, the company veil of a single-member LLC should not be any more susceptible to veil piercing than a sole shareholder corporation.
Changing gears, please do not think for a second that this opinion establishes that professional entities are somehow immune from creditor attack. They are not. While applicable state law usually prevents a non-professional from taking ownership in the entity, this does not mean that there are other ways that creditors can access the income or assets of a professional entity, such as by having a licensed professional act as a receiver (this is one of the classic uses of post-judgment receivers, in addition to dealing with things like liquor licenses).
Then finally we come to the issue of the innocent spouse. Take note that Caroline narrowly avoided having her interest caught up in all this, by having to take the stand and convince the court that she indeed had been hoodwinked by William. The term “innocent spouse” is easy to say, but in the creditor-debtor context is often very difficult to prove ― even when the innocent spouse is an innocent ex-spouse. It should certainly not be presumed.
Note also that Caroline’s testimony to protect her own interest simultaneously annihilated William’s credibility with the court. This happens too and is one of those things that a good litigator will see a mile away but a planner will never suspect.
For what it is worth, I think the District Court got it right here but if there is an appeal then it will be interesting to hear what the 10th Circuit says about all this. Stay tuned.
Read the full article here
