Colorado Bar Association
Section Newsletter
Ed Naylor, Editor


Alert from Colorado Secretary of State for End-of-Year Hours

The Secretary of State’s office will be closed on Monday, Jan. 1.

In addition, online services will be unavailable from 11:30 p.m. on Sunday, Dec. 31 until noon on Monday, Jan. 1. The Secretary of State is conducting yearly maintenance during this time and services like filing and searching are affected. Filing deadlines will not be extended, so be sure to finish your filings before 11:30 p.m. on Dec. 31.

The filing of paper forms, such as mergers, will be unavailable from Dec. 30, 2017 until January 2, 2018. If a filing has an effective date of December 30, 2017, Dec. 31, 2017, or Jan. 1, 2018, it should be submitted before Dec. 29, 2017 and include a delayed effective date.

Drafting Effective Export Control Clauses in Contracts

By Steve Suneson, Coan, Payton & Payne, LLC

In this global economy, more and more contracts with Colorado clients involve export issues. This means that any practitioner assisting a Colorado client should have a basic familiarity with how to draft an effective export control clause.  While the statutory export control laws cannot be overridden or modified through the contract, adding an export control clause may protect your client in other ways - especially vis-à-vis the other party. The practitioner usually does not need to be an expert in export control compliance. However, while most transactions will not necessitate an export license or government approval, the Colorado business should nevertheless research whether a license or other approval may be required to avoid civil and criminal penalties and, as appropriate, consult with a practitioner familiar with export regulatory compliance.

Does the contract involve export?

The first issue to consider is whether the contract with the foreign party involves an “export”. An export is broadly defined as any item that is sent from the United States to a foreign destination. “Items” include commodities, technology, and software (especially encryption software and including SaaS if any software is to be downloaded) and technical information.

Broadly speaking, an item is also generally considered an export if: (i) it is exported to a wholly-owned US subsidiary in a foreign country, (ii) it leaves the US temporarily, or (iii) it leaves the US but is not for sale (e.g., a gift). See generally 15 CFR 734.3.

Release of technology or source code to a foreign national in the United States may also be “deemed” to be an export to the home country of the foreign national under the export administration regulations (“EAR”).

Finally, many re-exports are also regulated under the EAR.

For all of the above reasons, there are a substantial number of contracts that will implicate the EAR or other export control regulations, and they will all be prime candidates for an export control clause.

Contractual provisions for export control.

There are a number of reasons why including an export control cause is a good idea if the contract involves an export. Adding an appropriate export control clause is usually viewed favorably by the US government, which can be a tremendous benefit in the event of an investigation by the US government. At a minimum, it shows some deliberation in the area and an attempt to comply.

Another material reason for including an export control clause is the allocation of cost and risk among the parties. Although all parties must comply with export control laws, the parties are generally free to negotiate contractual obligations for assuming the risk and cost of compliance. Negotiating these terms often spurs the parties to review and understand the risk and requirements compliance, such as if a foreign party intends to re-export the items outside of the contract.

The following are some specific contractual provision suggestions in connection with drafting an effective export control clause:

  1. A contract should provide that a foreign buyer must comply with all applicable US export laws. This imposes both a contractual and statutory obligation and may allow the Colorado business to pursue a breach of contract claim if necessary.

  2. The export control clause should seek to define terms such as export, re-export, technology and other terms. The more effort to define such terms with precision the more it will avoid ambiguity and potential dispute.

  3. The export control clause should include language showing that both parties are aware of the applicable export control laws. Such language may ensure better regulatory compliance. For example, a Colorado business may have liability if a foreign buyer exports or re-exports directly or indirectly to any unauthorized destinations or persons. The Office of Foreign Assets Control (OFAC) maintains lists of Specially Designated Nationals and Blocked Persons and no party should export an item to any such individuals or organizations. The inclusion of an export control clause may alert the parties to these lists.

  4. The export control clause should include a survival clause (for at least the length of the applicable statute of limitations) because in many instances the US government may launch an investigation after the agreement has been terminated or expired.

  5. If the contract refers to Incoterms for applicable trade terms (FOB, FAS, etc.), confirm the right terms are used as they allocate the export clearance obligations to buyer or seller.

  6. Finally, export control liabilities should be included within the definition of liabilities for which an indemnifying party will indemnify (and defend) an indemnified party.

Wrong Law Applied, Wrong Words Used, But the Correct Result Reached

Stockdale v. Ellsworth

By Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C., Greenwood Village, CO

On December 18, 2017, the Colorado Supreme Court issued its opinion in Stockdale v. Ellsworth, 2017 CO 109. This opinion discussed some of my favorite subjects – piercing the veil of a limited liability entity (in this case, a limited liability company) and tracking down missing heirs of a successful oil and gas property. It also included some interesting civil procedure conclusions, as well.

Title Searches and Missing Heirs

Stockdale was based on production from oil properties in La Plata County, Colorado, owned of record by Roy P. Cardwell, deceased, who obtained record title to his mineral interest in 1938. Because Cardwell and his heirs could not be located in the 1990s when the Colorado Oil and Gas Conservation Commission authorized the pooling of interests in the area, the proceeds attributable to Cardwell’s interest were held in suspense as the natural gas wells were developed. When XTO filed the interpleader action in 2009, the proceeds attributable to Cardwell’s interest totaled approximately $2.7 million, and it was growing due to continuing production. That’s real money in most people’s opinion.

Chester J. Ellsworth had identified potential heirs of a Mr. Cardwell who died in California in 1971 (the “California heirs”) and acquired a mineral deed from them based on representations that the properties in La Plata county were valueless because there was no oil and gas production and in fact there may be no minerals on the property. According to the Court, “Ellsworth also falsely warned the California heirs that they could be liable for any costs of production or accidents associated with their interests.” Ellsworth made these misrepresentations to the California heirs even though (in the Court’s words) “Ellsworth (or entities he controlled) had already received over $1 million in proceeds from mineral interests in adjoining lands.”

In researching the interpleader action, XTO also identified heirs of a Roy P. Cardwell who died in Kansas in 1980 (the “Kansas heirs”), as well as two business entities managed by Ellsworth – CEMPCO, Inc. (a Colorado corporation formed in 1978) and Seawatch Royalty Partners, LLC (a Wyoming manager-managed LLC formed in 2009 and qualified to do business in Colorado). Before trial, the Kansas heirs and CEMPCO withdrew their claims, leaving the battle for rightful ownership between the California heirs and the grantee of the mineral deeds, Seawatch. Ellsworth, individually, was not a party to this action.

After a seven-day bench trial, La Plata County Judge Dickinson issued his findings, order, and judgment on November 11, 2011.  In the judgment, the trial court:

  1. Granted the California heirs’ claims for rescission of the mineral deeds and assignments, concluding that Ellsworth (on behalf of Seawatch) had obtained the deeds and assignments by fraud and misrepresentation.

  2. Found that “Seawatch was at all material times an alter ego of Ellsworth” and therefore found Seawatch and Ellsworth “jointly and severally liable for attorney’s fees incurred by XTO and the California heirs in responding to Seawatch’s frivolous claims. The trial court referred to this as “piercing the corporate veil” even though Seawatch was a limited liability company. More on this below.

Seawatch appealed the judgment on various grounds. The Court of Appeals affirmed the trial court’s judgment against Seawatch. The Colorado Supreme Court denied certiorari.

While the first appeal was pending, XTO and the California heirs filed motions seeking attorney’s fees and costs from Seawatch and Ellsworth. They also filed a joint motion to join Ellsworth to the post-judgment proceedings pursuant to C.R.C.P. Rule 21 and City of Aurora v. Colorado State Engineer, 105 P.3d 595 (Colo. 2005). They were unable to serve Ellsworth (you can imagine him dodging service), and the trial court granted substituted service.

Ellsworth (acting pro se) made what he referred to as a “limited appearance” in the trial court in 2013 to argue several motions, including that the trial court lacked personal jurisdiction and the substitute service had been improper. In April 2014, Judge Herringer (replacing Judge Dickinson who had retired) denied those and other Ellsworth motions. In reaffirming the alter ego holding, the trial court articulated several additional findings relevant to whether “piercing the corporate [sic] veil was necessary to achieve an equitable result.” The court found, for example, that:

  1. Seawatch’s sole business function was to acquire the mineral deeds from the California Heirs for Ellsworth’s benefit, had no other business dealings, and was controlled entirely by Ellsworth;

  2. Seawatch had no bank account and purchased the mineral deeds from the California heirs with personal checks from Ellsworth, and Ellsworth used personal checks or cash for other Seawatch expenses;

  3. Seawatch was apparently insolvent and had no assets, such that limiting liability to Seawatch would foreclose any meaningful opportunity for injured parties to recover for conduct for which Ellsworth was responsible; and

  4. There was no indication that Seawatch’s litigation strategy was controlled by anyone other than Ellsworth.

The trial court concluded that “[t]he only respect in which Ellsworth has treated Seawatch as a corporate [sic] entity, independent of him personally, is as a barrier to liability. . . . To the extent that Seawatch advanced frivolous argument and made groundless claims, Ellsworth is the person who should ultimately be held responsible for that conduct.” The trial court awarded fees and costs to XTO and the California heirs in May 2015. Ellsworth appealed pro se against his personal liability inasmuch as he alleged that he was not a proper party to the case. The Court of Appeals agreed with Ellsworth and vacated that part of the trial court’s judgment.

Ah, then the greed really kicks in. Ellsworth, having just been exonerated from personal liability by the Court of Appeals, files a petition for a writ of certiorari with the Colorado Supreme Court seeking “relief of manifest injustice to include $200,000,000 in exemplary damages pursuant to § 13-17-101 to punish the trial court’s and Respondent’s acts of frivolous, groundless and vexatious litigation.” Talk about hubris. After some further filings by Ellsworth, the Supreme Court denied Ellsworth’s petition for certiorari but granted the cross-petition filed by the California heirs to review the Court of Appeals’ ruling on whether Ellsworth had been properly joined in the case – leading to his liability on the alter ego theory.

Piercing the Veil and Colorado’s Internal Affairs Doctrine

The principal case is long over, but the history and the course of the litigation is fascinating. I have written several times about judicial decisions dealing with piercing the entity veil – not always in a favorable manner. See my discussions of Weinstein v. Colborne Foodbotics, LLC, 302 P.3d 263 (Colo. 2013) (which I discussed in the June 2013 Business Law Section Newsletter), Martin v. Freeman, 272 P.3d 1182 (Colo. App. 2012) (which I discussed in February 2012), McCallum Family LLC v. Winger, 221 P.3d 69 (Colo. App. 2009) (which I discussed in December 2009), and Sheffield Services Co. v. Trowbridge, 211 P.3d 714 (Colo. App. 2009) (discussed in November 2009). I have also seen too many litigators discuss piercing the entity veil of a limited liability company without recognizing that, as the Colorado Supreme Court recognized in Weinstein (in connection with potential liability under C.R.S. § 7-80-606(2)), an LLC is not a corporation.

The Internal Affairs Doctrine – Application of Wyoming Law Should Have Been Considered

Seawatch is a Wyoming LLC.  Colorado, like most other states, has adopted the “internal affairs” doctrine by which “As to any foreign entity transacting business or conducting activities in this state, the law of the jurisdiction under the law of which the foreign entity is formed shall govern the organization and internal affairs of the foreign entity and the liability of its owners and managers.” C.R.S. § 7-90-805(4). Thus, the court should have looked to Wyoming law, and specifically Wyo. Stat. § 17-29-304. Even then, I think that the Colorado courts would have imposed liability on Ellsworth, but the fact remains that the Colorado courts did not even consider the applicability of Wyoming law.

An LLC Is Not A Corporation And Does Not Have A Corporate Veil

Even assuming that Colorado law (as applied by the courts and apparently argued by the Colorado litigators) was applicable, another failure was that the Supreme Court uses the phrase “corporate veil” 21 times. Only three times is the term used in reference to a corporation. The opinion refers to “corporate veil piercing” with respect to Seawatch, a limited liability company and not a corporation, at least eight times, including those mentioned above. The fact remains that a limited liability company does not have a “corporate veil” even though it is intended to provide liability protection to its members except as described in C.R.S. § 7-80-107 (again, assuming that Colorado law was applicable):

  1. In any case in which a party seeks to hold the members of a limited liability company personally responsible for the alleged improper actions of the limited liability company, the court shall apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under Colorado law.

  2. For purposes of this section, the failure of a limited liability company to observe the formalities or requirements relating to the management of its business and affairs is not in itself a ground for imposing personal liability on the members for liabilities of the limited liability company.

  3. The Colorado Limited Liability Company Act requires the court to apply common law applicable to piercing the veil of corporations – but it does not say that the veil protecting the owners of an LLC is a “corporate veil.” It is not, and courts and the litigators presenting cases to the courts should not mischaracterize the nature of the LLC – it is an unincorporated entity.

  4. The Supreme Court’s opinion uses other language inappropriately when it cites the trial court in stating: “Specifically, the trial court found that Ellsworth was the sole managing partner of Seawatch, which he owned with his wife and two adult children.” Please – an LLC does not have a managing partner or any partner at all. The owners are “members” and in this case of a manager-managed LLC, the manager is a manager.

  5. The Court’s opinion also refers to Ellsworth as Seawatch’s “managing member” in several places. Under Wyoming law Seawatch was a manager-managed LLC and the articles of organization filed with the Wyoming Secretary of State named Ellsworth as the manager – not a “managing member.”

Words are important, and the courts in Colorado and the litigators who present cases to the courts should use the words correctly. The jurisdiction of organization of the entity is equally important, and litigators should argue, and courts should apply, the “internal affairs” doctrine properly. [The internal affairs doctrine was not discussed, and the Delaware organization of the LLC in question was ignored, in Martin v. Freeman as I discussed in an earlier newsletter.]

A failure to consider the correct law and to use the correct terminology can only confuse transactional lawyers and litigators looking at these cases for precedent.

In this case, however and notwithstanding the inappropriate use of words and the failure to consider the applicability of Wyoming law, the entity veil of Seawatch was in my opinion properly pierced based on the findings of fact made by the trial court and restated by the Supreme Court. The facts cited above confirm the conclusion of the trial court and recited by the Supreme Court that “[t]he only respect in which Ellsworth has treated Seawatch as a corporate [sic] entity, independent of him personally, is as a barrier to liability.” Seawatch had no bank account or separate accounting, and it was clear from the facts as determined by the trial court that Ellsworth used Seawatch to operate a fraud on the California heirs and XTO.

Was Ellsworth Properly A Party?

Of course, if the trial court did not have jurisdiction over Ellsworth, he never would have been liable for damages as a result of the court’s piercing the entity veil. For that reason, he should have stopped at the Court of Appeals decision reversing the trial court and accepting his argument that he did not have personal liability because of a lack of jurisdiction. Whether the California heirs would have appealed that decision is unknown; perhaps they were just relieved that the matter was over. Ellsworth’s efforts to seek a $200,000,000 vindication on a pro se basis backfired on him.

In its opinion, the Supreme Court acknowledged “that a person is not bound by a judgment if he was not ‘designated as a party or . . .  made a party by service of process,” citing Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 110 (1969). Considering the facts, however, the Court concluded “that Ellsworth was a party to the post-judgment proceedings” based on the Court’s interpretation of the City of Aurora case. In City of Aurora, after the trial court entered its order of dismissal following an eight-week trial, the prevailing party sought attorneys’ fees and costs under C.R.S. §13-17-102(4). The prevailing party moved to join Aurora solely “for purposes of collecting attorney fees and costs.” The court granted joinder, and the Supreme Court affirmed. The Court explained the City of Aurora decision as follows [citations omitted]:

Parties may be dropped or added by order of the court on motion of any party . . . at any stage of the action and on such terms as are just.”  . . . (quoting C.R.C.P. 21).  Rules 20 and 21, which should be “liberally construed,” specifically “authorize joinder in situations where one party seeks to join a person who may be liable for the same debt or conduct that is already before the court.”  . . . These rules “indicate clearly a general policy to disregard narrow technicalities and to bring about the final determination of justiciable controversies without undue delay.”  . . . Thus, we held, joinder of Aurora was not an abuse of discretion, even though the court had already entered judgment on the merits, “[b]ecause C.R.C.P. 20 allows joinder at any stage of the proceedings and because C.R.C.P. 21 anticipates joinder where there are joint liabilities, as well as common questions of law and fact,” and Aurora “was potentially liable for conduct that was already before the court.”

The Supreme Court concluded “that Ellsworth, who was properly joined to the post-judgment proceedings, had notice and opportunity to contest his individual liability.”


Stockdale v. Ellsworth is an interesting case from several angles, factual, legal and procedural. It was properly decided under Colorado law and, I suggest, even under Wyoming law had the Colorado courts properly considered the Colorado internal affairs doctrine. We can only ask that, when applying entity legal principles, the courts, and the attorneys practicing before the courts, choose their words, and applicable law, more carefully. Doing so will avoid confusion and problems for practitioners and their clients.

Help Wanted for Amendments to the Colorado Business Corporation Act

A group of lawyers associated with the Business Law Section worked diligently in 2009 through 2013/4 to propose some amendments to the Colorado Business Corporation Act (C.R.S. §§ 7-101-101 et seq.) and related amendments to the Colorado Corporations and Associations Act (C.R.S. §§ 7-90-101 et seq.). Several of us have taken up the mantle of determining whether the amendments should be proposed, and in what form, and whether additional changes suggested by the 2016 Model Business Corporation Act and amendments to the Delaware General Corporation Law should be considered.

We would like to hear from all persons interested in participating in this effort, the goal of which is to have a bill to submit to the 2019 Colorado General Assembly for consideration.  We will be holding a meeting on February 5, 2018, at 3:00 pm in the CLE in Colorado classroom on the third floor of 1900 Grant Street, Denver, CO. Well before the meeting we will post and make accessible to all interested parties, the changes to date (incorporating the earlier work and some of the MBCA changes), and other related documents.

We do not know whether remote participation will be available. If you are interested in participating, please RSVP to And show up.

Your acting committee chairs:

Mark J Loewenstein
Monfort Professor of Commercial Law
University of Colorado Law School

Herrick K. Lidstone, Jr
Burns, Figa & Will, P.C.

Venture Law Summit

Registration is now open for the Venture Law Summit being held at Denver Law on Thursday, February 8, 2018 from 1 – 7 p.m. The Summit is focused on corporate transactional law, start-up law, and venture capital deals. Registration is free for students, $25 for non-CLE attendance, and $50 for CLE attendance. You can register using the link found on the venture law society’s home page.

Business Law Section Activities

Bankruptcy Subsection

Save the Date – Spring Bankruptcy Case Law Update
Wednesday, April 11, 2018, from 4 to 6 p.m.
CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

This update will be presented by the Hon. Judge Kimberley H. Tyson (U.S. Bankruptcy Court), and two local practitioners.

Submitted for 2 general CLE credits. Complementary networking reception to follow.

Financial Institutions Subsection Programs

Save the Date: Financial Institutions Subsection Luncheon Program
Wednesday, Feb. 21, noon – 1 p.m.
CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

M&A Subsection Programs

Save the Date: The M&A World in 2017 and 2018:
What Did Your Colorado Investment Bankers See in 2017 and What Do They Expect in 2018

Live Program & Live Webcast
Tuesday, Feb. 6, from 8 a.m. to 1 p.m.

Join us for this annual event as investment bankers from three of Denver’s investment banking firms discuss their thoughts on what they expected to see in the M&A world in 2017, what they actually saw in 2017, and what they expect to see in 2018. The panel will provide their insights on the M&A market, trends in structuring and negotiating M&A transactions, legal issues arising in M&A transactions, particular trends in the Colorado M&A market, trends with strategic and financial buyers, and expectations.

Offered for 2 general CLE credits. Registration info coming soon.

CBA-CLE Upcoming Programs

2018 Cannabis Symposium: Standing at the Intersection of Business, the Law and Regulatory Enforcement
Live Program & Live Webcast
Wednesday, February 21, 2018
CBA-CLE Classroom, 1900 Grant St, Ste 300, Denver, CO
Offered for 7 general CLE credits

Program highlights:

  • The Challenges and Evolving Landscape of Being a Successful Enterprise in the Colorado Cannabis Industry from the CEO, Chief Legal Strategist and CFO of LivWell.
  • Navigating Cannabis, Politics, and the Law at the Intersection of Social Justice and Business from Wanda James, the first African-American woman in Colorado to own a dispensary.
  • Recent Regulatory Developments
  • Appraisal Issues and Working with CPAs in the Cannabis Industry
  • Recent Cannabis Cases
  • Closing Keynote Presentation: The Federal Enforcement Landscape and Perspective – Presented by Robert Troyer, Esq., Interim United States Attorney for the District of Colorado

2018 Business Document Drafting Series — Back by Popular Demand!
Co-sponsored by the CBA Business Law Section - New Lawyers Subsection
Six programs: Begins Wednesday, March 14
All live, webcast and video replay programs run from 8 – 9:40 a.m. CBA-CLE, 1900 Grant St., 3rd Floor, Denver, CO 80203

Attend this program to acquire practical, immediately-useful drafting skills; better understand agreements that you are regularly hired to draft; receive the expert advice of experienced business law and writing experts; add useful tools to your business document toolbox.

Program 1. Introduction to Transactional Document Drafting
Program 2. First Money In: Considerations for Drafting Early-Stage Financing Documents
Program 3. Drafting LLC Agreements
Program 4. Drafting Business Acquisition Documents and Other Related Documents
Program 5. Drafting Compensation and Other Employment Agreements
Program 6. Five Things You Must Know Before Drafting (i) Intellectual Property, (ii) Privacy, and (iii) Data Security Provisions

You can sign up for any individual program, or sign up for the majority of or entire series to save with our series package discount. Registration opens soon! Look for more info.

Submitted for 6 general CLE credits, including 3 ethics credits.

CBA-CLE Business Law Publication

Practitioner’s Guide to CO Business Organizations, 3rd Ed.
All your Ethics credits in one day!
Managing Editors: Allen E.F. Rozansky and E. Lee Reichert
Format: loose-leaf, three volumes, includes PDF e-Book.

About the Book:
The Practitioner’s Guide to Colorado Business Organizations was conceived and organized to offer a valuable resource for business law practitioners. The guide’s third edition has been reorganized; existing chapters updated, and four new chapters added:

  • Corporate Governance and Fiduciary Duties
  • Insurance Coverage
  • Maintenance, Ongoing Review, and Conducting Business Reviews
  • Non-competition, Nonsolicitation, and Confidentiality Agreements
Learn More

CBA-CLE Business Law Homestudies

2017 Business Law InstituteLearn more
Practitioner’s Guide to Colorado Business Organizations: Advanced Topics Learn more
Winter Bankruptcy Case Law Update Learn more
2017 Cannabis SymposiumLearn more
Limited Liability Companies in ColoradoLearn more

View our complete catalog of CLE Homestudies on our website and search by practice area or credits!

View Homestudies

Contributions for future newsletters are welcome.
Contact Ed Naylor at, 303-292-2900.
This newsletter is for information only and does not provide legal advice.

Colorado Bar Association
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