August 31, 2015 – Kari T. Morrissey, as personal representative of the estate of Frances Fernandez, deceased v. William J. Krystopowicz, Silverstone Healthcare, Inc., and Silverstone Healthcare of Raton, LLC, No. 32,212

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IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number:

Filing Date: _August 31, 2015

NO. 32,212

KARI T. MORRISSEY, as personal representative
of the estate of FRANCES FERNANDEZ, deceased,

Plaintiff-A ppellant,
V.

WILLIAMJ. KRYSTOPOWICZ, SILVERSTONE HEALTHCARE, INC.,
and SILVERSTONE HEALTHCARE OF RATON, LLC,

Defendants-A ppellees.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Beatrice J. Brickhouse, District J udge

Paul Kennedy & Associates, P.C.

Paul J. Kennedy
Ame R. Leonard

Albuquerque, NM

for Appellant

Thomasson Law Firm, LLC
Richard E. Thomasson
Macon, GA

for Appellees

OPINION
BUSTAMANTE, Judge.
{1} 	Plaintiff Kari T. Morrissey (Plaintiff), personal representative of the estate of
Frances Fernandez, deceased, appeals the dismissal of her claims after a bench trial.
We consider whether the district court erred in refusing to pierce the corporate veil to
hold William J. Krystopowicz (Krystopowicz) liable for a default judgment against
two corporations of which he was the sole shareholder. We reverse.
BACKGROUND
{2} 	Although the present suit was filed after the death of Mrs. Fernandez in April
2006, the facts salient to the issues we resolve start with the formation and
management of two corporate defendants, Silverstone Healthcare, Inc. and Silverstone
Healthcare of Raton, LLC (collectively, the Silverstone Defendants), in 2003. Brian
Davidson approached Krystopowicz about acquiring nursing homes in New Mexico.
Davidson was barred from acquiring or operating nursing homes himself because of
pending bankruptcy proceedings as well as other “tax issues” and “legal problems”
which “precluded him from participating in the ownership or operation of licensed
nursing home facilities.” Krystopowicz knew that Davidson was so barred. He also
knew that Davidson was engaged in self-dealing in violation of his agency
relationship with another company. Despite this knowledge, Krystopowicz agreed to

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join with Davidson to acquire nursing homes in New Mexico and to treat Davidson
as fifty percent owner of a corporation formed to do so. Thus Krystopowicz became
the “front man” for the enterprise.
{3} 	Silverstone Healthcare, Inc. was incorporated in 2003 with Krystopowicz as the
sole shareholder. Silverstone Healthcare, Inc. became the owner of ten limited liability
companies—all created by Krystopowicz and Davidson—which in turn acquired ten
nursing homes in New Mexico. Krystopowicz did not perform any debt-equity
analysis for the facilities, review the operation of the facilities, determine budgetary
needs or working capital needs of the facilities, or review the patient census for the
facilities before they were acquired. All of the nursing home facilities were managed
and 	operated 	by 	Peak 	Medical 	NM 	Management 	Services, 	Inc. 	(Peak) 	and
Krystopowicz was never involved in day-to-day patient care issues at any of the
facilities.
{4} 	Silverstone Healthcare of Raton, LLC, doing business as Raton Nursing and
Rehabilitation Center (the Center)—where Mrs. Fernandez resided—was one of the
LLCs 	created 	by 	Krystopowicz 	and 	owned 	by 	Silverstone 	Healthcare, 	Inc.
Krystopowicz was the sole member and managing partner of Silverstone Healthcare
of Raton, LLC.

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{5} 	Revenue generated by the ten facilities in New Mexico, which amounted to over
$47 million annually, was transferred into a single “concentration account” to which
Krystopowicz and Peak had access. Although neither Davidson nor Krystopowicz
performed any services for the Silverstone Defendants between August 2003 and June
2005, Krystopowicz caused a “distribution” of $400,000 to be issued from the
concentration account in late June 2005. Of the $400,000 distribution, Krystopowicz
received $100,000 and Davidson received $200,000. The funds were channeled
through another corporation of which Krystopowicz was a shareholder in order to
obscure Davidson’s involvement with the Silverstone Defendants and the nursing
homes.
{6} 	As the facilities became profitable, Krystopowicz secured a $4 million line of
credit from GE Capital in September 2005. Although GE Capital prohibited
Krystopowicz from transferring fifty percent of his shares in Silverstone Healthcare,
Inc. to Davidson, Krystopowicz continued to treat Davidson as a fifty percent owner
of Silverstone Healthcare, Inc. Between July 2005 and March 2006, Krystopowicz
distributed at least six payments of $25,000 from the “concentration account” to
himself, Davidson, and others. Davidson received fifty percent of these payments.
{7} 	In January 2006, New Mexico Medicare officials banned admissions to the
Center. In addition, “[f]rom January through April 2006, the Silverstone [Defendants]

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were knowingly overstating their accounts receivable, and by April 2006 [the]
Silverstone [Defendants] went into default on [their] line of credit from GE Capital.”
Earnings deteriorated because of the Center’s inability to accept new Medicare
patients. Krystopowicz then transferred the licenses for all ten New Mexico facilities
to Cathedral Rock Corporation for no compensation. Krystopowicz entered into a
personal contract with Cathedral Rock Corporation to help close the transaction. He
was paid $150,000 under the contract.
{8} 	Plaintiff filed suit in March 2009. Mrs. Fernandez had lived at the Center for
approximately one year before her death. Plaintiff named six corporate entities,
including the Silverstone Defendants, as well as Krystopowicz and other individuals.
The complaint alleged negligence resulting in wrongful death, violation of the New
Mexico Unfair Trade Practices Act, negligence per se, breach of contract, and civil
conspiracy. The complaint was later amended to include a claim for loss of consortium
by Mrs. Fernandez’s son.
{9} 	The Silverstone Defendants failed to answer the complaint and a default
judgment was entered against them. Consequently, the allegations in the complaint
were considered admitted. Chronister v. State Farm Mut. Auto. Ins. Co., 1963-NMSC-
093, ¶ 7, 72 N.M. 159, 381 P.2d 673 (stating that “by permitting the default judgments
to be entered against him, [the defendant] admitted all the allegations in said

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complaints”). After a two-day hearing, the district court awarded Plaintiff $4,828,300
in damages. After the other defendants were dismissed from suit, the case proceeded
to a bench trial against Krystopowicz only. Krystopowicz was the only witness at the
trial.
{10} 	Plaintiff argued two theories. First, she argued that the Silverstone Defendants’
corporate veil should be pierced so as to hold Krystopowicz personally liable for the
damages awarded against the Silverstone Defendants. Second, she argued that
Krystopowicz had engaged in a civil conspiracy with the other defendants and should
be held personally liable for the negligence of his co-conspirators, the Silverstone
Defendants.
{11} 	The district court ruled against Plaintiff on both theories. While the district
court agreed that Krystopowicz had satisfied some of the criteria for piercing the
corporate veil, the district court reaffirmed an earlier ruling that the corporate veil
could not be pierced to hold Krystopowicz liable for the Silverstone Defendants’
conduct because “Plaintiff[] had not shown . . . that [Mrs.] Fernandez suffered any
damages as a result of [Krystopowicz’s] domination of Silverstone [entities] for an
improper purpose.” Similarly, although the district court found that the Silverstone
Defendants 	“ha[d] 	admitted 	to 	participating 	in 	a 	civil 	conspiracy
with . . . Krystopowicz and others[,]” it concluded that the civil conspiracy claim

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against Krystopowicz failed as a matter of law because there was no evidence
“establishing a causal connection between . . . Krystopowicz[’s conduct] and the death
of [Mrs.] Fernandez.” Inherent to both of these rulings is the district court’s rejection
of Plaintiff’s argument that the allegations deemed admitted through the Silverstone
Defendants’ default judgment could be used against Krystopowicz. Additional facts
are provided as relevant to our discussion of Plaintiff’s arguments.
DISCUSSION
{12} 	The main issue on appeal is whether the district court erred by ruling that the
corporate veil could not be pierced to hold Krystopowicz personally liable for the
judgment against the Silverstone Defendants. Plaintiff makes a number of arguments
related to this issue, including (1) that the admissions of the Silverstone Defendants
should be imputed to Krystopowicz, (2) that the admissions are admissible against
Krystopowicz as a co-conspirator, and (3) that the district court erred in not holding
Krystopowicz liable for civil conspiracy. Because we conclude that the corporate veil
should be pierced, we need not address Plaintiff’s other arguments.
{13} 	“A basic proposition of corporate law is that a corporation will ordinarily be
treated as a legal entity separate from its shareholders.” Scott v. AZL Res., Inc., 1988-
NMSC-028, ¶ 6, 107 N.M. 118, 753 P.2d 897. Under this rule, individual shareholders
cannot be held personally liable for the corporation’s debt. Id. Under certain

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circumstances, however, courts may exercise their equitable power to “pierce the
corporate veil,” thereby requiring shareholders to answer for the corporation’s
liability. Id. (“Only under special circumstances will the courts disregard the corporate
entity to pierce the corporate veil [and] hold[] individual shareholders . . . liable.”);
London v. Bruskas, 1958-NMSC-020, ¶ 18, 64 N.M. 73, 324 P.2d 424 (stating that “in
a proper case equity would require the general rule [that corporations and their
shareholders are separate] to be discharged”). To do so, the district court must make
three findings. First, that “the subsidiary or other subservient corporation was operated
not in a legitimate fashion to serve the valid goals and purposes of that corporation
but . . . instead under the domination and control and for the purposes of some
dominant party.” Scott, 1988-NMSC-028, ¶ 7. This requirement is known as
“instrumentality,” “domination,” or, in New Mexico, as the “alter ego doctrine.” Id.
Second, 	that 	there 	is 	“[s]ome 	form 	of 	moral 	culpability 	attributable 	to 	the
[shareholder], such as use of the subsidiary to perpetrate a fraud.” Id. ¶ 9 (“[I]n
fairness to the [shareholder] and to support the policy of limited liability of a
corporation, improper purpose must be established before the [shareholder] can be
found liable.” (alterations, internal quotation marks, and citation omitted)). Third, the
court must find that “there [is] some reasonable relationship between the injury
suffered by the plaintiff and the actions of the defendant.” Cathy S. Krendl & James

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R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Denver L.J. 1, 27
(1978). This finding must demonstrate “some knowing or cooperative effort between
the related parties which results in unjust injury to the plaintiff, even though it may
not be possible to prove that the defendant’s control directly caused [the] plaintiff’s
injury.” Krendl, supra (footnote omitted), quoted in Garcia v. Coffman, 1997-NMCA-
092, ¶ 24, 124 N.M. 12, 946 P.2d 216. This requirement is referred to as “proximate
cause.” Garcia, 1997-NMCA-092, ¶ 10 (“The three requirements for piercing the
corporate veil are: (1) instrumentality or domination; (2) improper purpose; and (3)
proximate cause.”). “The burden of proof is upon the party seeking to impose
individual liability on the shareholder to demonstrate that the grounds for piercing the
corporate veil exist.” Nursing Home Grp. Rehab. Servs., Inc. v. Suncrest Health Care,
Inc., 162 Ohio App. 3d 577, 581, 2005-Ohio-3945, 834 N.E.2d 382, at ¶ 12
(alteration, internal quotation marks, and citation omitted).
{14} 	Here, the district court found in a letter decision that “Plaintiff presented
sufficient 	evidence 	that 	Krystopowicz 	exercised 	improper 	domination 	of 	the
Silverstone [D]efendants” and that “Krystopowicz used the Silverstone [D]efendants
for improper purposes.” Thus, the first two requirements for piercing the corporate
veil were established. The district court also found that
there was no evidence presented to the [district c]ourt that as a result of
Krystopowicz’s domination of the Silverstone [D]efendants for an

9
improper purpose . . . [Mrs.] Fernandez got less or substandard care . . .,
or that the distributions taken by Krystopowicz . . . adversely affected the
operations of the [Center] in any way.
{15} 	It concluded that “without any evidence to satisfy the causation prong,
Plaintiff’s [argument for piercing the corporate veil must] fail.” The district court’s
conclusions as to the lack of evidence of a link between Krystopowicz’s actions and
Mrs. Fernandez’s injury were included in the district court’s findings of fact and
conclusions of law accompanying the final written judgment. Because Krystopowicz
does not challenge the district court’s findings and conclusions as to the first two
prongs, our focus is on the narrow issue of whether there is a causal connection
between Krystopowicz’s misuse of the corporate form and injury to the Plaintiff.
{16} 	We do not disagree with the district court that Plaintiff failed to demonstrate a
direct causal link between Mrs. Fernandez’s death and Krystopowicz’s management
of the Silverstone Defendants. Although she argues that the evidence at trial was
sufficient to demonstrate such a link, Plaintiff does not direct us to evidence
suggesting that (1) the Center was underfunded; (2) any understaffing was the result
of lack of funds; (3) Krystopowicz’s distributions of funds to himself and others, or
any other misuse of the corporate form, led to any underfunding, staffing shortage, or
impairment of care at the Center; (4) Krystopowicz knew that the budget for the
Center was inadequate; or (5) Krystopowicz denied requests for changes in the

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Center’s budget or ignored reports of inadequate staffing or care. While Krystopowicz
testified that he reviewed monthly profit and loss statements for the facilities, and that
those statements included “analysis of census [and] operational issues,” there was no
evidence that he modified the Center’s operations based on that information. Finally,
there was no evidence presented related to industry standards for staffing levels,
minimum capital or cash flow requirements, or the impact of “profit siphoning” on
nursing homes generally. See generally Mark R. Kosieradzki & Joel E. Smith, Direct
Participant Liability in Causes of Action for Corporate Negligence, 5 Litigating Tort
Cases § 63:37.50 (2014) (discussing both direct and indirect liability, including
corporate veil, theories). Nor did Plaintiff propose findings of fact related to these
issues.
{17} 	However, a direct causal link to the tort-related acts is not required. The
question is not whether there is a direct link between Krystopowicz’s conduct and
Mrs. Fernandez’s death but rather whether Krystopowicz’s abuse of the corporate
form caused some injury to Plaintiff. Garcia, 1997-NMCA-092, ¶ 24 (“It is sufficient
to show some knowing or cooperative effort between the related parties which results
in unjust injury to the plaintiff, even though it may not be possible to prove that the
defendant’s control directly caused the plaintiff's injury.” (alterations, internal
quotation marks, and citation omitted)). We explain by starting with an example.

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{18} 	In Mobius Management Systems, Inc. v. West Physician Search, L.L.C., the
Missouri Court of Appeals considered whether the district court correctly denied the
plaintiff’s efforts to pierce the corporate veil where a consent judgment against the
defendant company had been entered. 175 S.W.3d 186, 187 (Mo. Ct. App. 2005). The
case arose out of the defendant company’s failure to pay rent to the plaintiff. Id. The
plaintiff sued under a Missouri statute to recover past and future rent, attorney fees,
and possession of the property. Id. The parties entered into a consent judgment, which
was signed by the defendant company’s managing member. Id. When the plaintiff was
unsuccessful in collecting the judgment from the defendant company, it filed a motion
to pierce the corporate veil to hold the managing member accountable. Id. The district
court dismissed the motion. Id. at 188.
{19} 	On appeal, the appellate court reversed. Id. at 189. The court determined that
the plaintiff had sufficiently shown that the first two requirements for piercing the
corporate veil—alter ego/control and breach of a duty/improper purpose—were met.
Id. The appellate court concluded that “[the managing member] circumvented [the
defendant company’s] legal obligations by operating an undercapitalized shell
corporation—and therefore used his control over [the defendant company] to avoid
its obligations to [the plaintiff].” Id.

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{20} 	As to the third prong, it held that, like in New Mexico, “the plaintiff must show
that the control and breach of duty proximately caused the injury or unjust loss.” Id.
It concluded, “Clearly, [the plaintiff] has suffered an injury—an unpaid $175,000
Judgment—and this injury was proximately caused by [the defendant company’s]
conduct. The only reason [the plaintiff] has not been paid the money it is legally owed
is because [the defendant company] lacks the necessary capital to satisfy this
judgment.” Id. Thus, the managing member in Mobius was liable for the corporation’s
debts because he had intentionally manipulated the corporation so as to avoid having
to pay any judgment. See Rice v. Oriental Fireworks Co., 707 P.2d 1250, 1255-56
(1985) (framing the proximate cause prong as whether “the shareholder’s improper
conduct . . . caused [the] plaintiff’s inability to obtain an adequate remedy from the
corporation” and holding that “there can be no doubt that [the shareholder’s] failure
adequately to capitalize or obtain insurance coverage for [the defendant corporation]
has caused [the] plaintiff to have an inadequate remedy against the corporation”).
{21} 	We recognize that generally insolvency of a corporation alone is not a
justification for piercing the corporate veil. O’Neal & Thompson’s 	2 Close
Corporations and LLCs: Law and Practice § 8:20 (Rev. 3d ed. 2015) (stating that “if
a corporation has ‘adequate’ capital and if proper formalities have been observed,
shareholders are not liable for the corporation’s torts, even if corporate assets prove

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to be insufficient to pay the tort claimants”); Scott, 1988-NMSC-028, ¶ 10 (“Mere
proof that the corporation is now insolvent is insufficient.”). However, “[i]t is
inequitable to allow shareholders to set up a flimsy organization just to escape
personal liability.” Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491, 504, 840
N.E.2d 767, 779 (2005); see Scott, 1988-NMSC-028, ¶ 10 (“[A] party seeking to
pierce the corporate veil must show that the financial setup of the corporation is a
sham and causes an injustice.”); cf. Mobius, 175 S.W.3d at 189 (“Inadequate
capitalization is circumstantial evidence of an improper purpose or reckless disregard
for the rights of others.”).
{22} 	We conclude that, similar to Mobius, Krystopowicz’s abuse of the corporate
form resulted in a sham corporation leading to Plaintiff’s inability to recover for her
injury. Together with the district court’s findings that Krystopowicz used the
Silverstone Defendants in order to obscure Davidson’s involvement with the nursing
homes and to funnel funds from the “concentration account” to himself and Davidson,
the district court’s other findings indicate that Krystopowicz failed to manage the
Silverstone Defendants in good faith to meet their legal obligations. See Hammett v.
Atcheson, 438 S.W.3d 452, 461 (Mo. Ct. App. 2014) (“Where a corporation [or an
LLC] is used for an improper purpose and to perpetuate injustice by which it avoids
its legal obligations, equity will step in, pierce the corporate veil and grant appropriate

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relief.” (internal quotation marks and citation omitted)). Krystopowicz does not
challenge the following findings; consequently, they are binding on appeal. Stueber
v. Pickard, 1991-NMSC-082, ¶ 9, 112 NM 489, 816 P.2d 1111. The district court
found that the total initial capitalization of Silverstone Healthcare, Inc. and Silverstone
Healthcare of Raton, LLC was $2,000 and $100, respectively. It found that the “initial
working capital for Silverstone Healthcare, Inc.” also included a line of credit of
$1,900,000 that was “apportioned equally among [ten] underlying LLC[]s, including
Silverstone Healthcare of Raton[, LLC].” It found that the ten nursing home facilities
together generated over $47 million in annual revenue. In addition, it found that
Krystopowicz “intentionally failed to perform any debt-equity analysis for the
[nursing home] facilities, to check operations at the facilities, to determine the
budgetary needs of the facilities, to determine working capital needs of the facilities,
or to review the patient ‘census’ for the facilities.” The district court found that
“[a]lthough he was contractually obligated to make good faith attempts to secure
insurance coverage for the Silverstone entities, . . . Krystopowicz failed to secure any
such insurance and he failed to verify or even inquire as to whether or not any such
insurance coverage existed.” See Joseph E. Casson & Julia MacMillen, Protecting
Nursing Home Companies: Limiting Liability Through Corporate Restructuring, 36
J. Health L. 577, 603 (2003) (stating that nursing home companies should “[m]aintain

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adequate insurance according to state-law and industry standards” in order to avoid
corporate veil piercing). The district court also found that Krystopowicz caused
“distributions” of approximately $550,000 to be made to him and others from the
“concentration account.” Id. (stating that nursing home companies should “[a]void
even 	the 	appearance 	of 	siphoning 	revenues 	to 	related 	entities 	or
shareholders/members” to prevent corporate veil piercing). And, when the enterprise
collapsed, Krystopowicz conveyed all of Silverstone Healthcare, Inc.’s assets for no
consideration to the corporation. Instead, he personally profited from the failure.
Finally, it found that “[a]s of October 17, 2011, the Silverstone [D]efendants have an
outstanding liability to the Internal Revenue Service for $1,000,000 in . . . taxes and
penalties.”
{23} 	In addition to these findings regarding Krystopowicz’s management of the
Silverstone Defendants, the district court made several findings as to Krystopowicz’s
conduct in the current suit. It found that “[a]lthough he was the sole shareholder,
officer, and director of . . . Silverstone Healthcare, Inc. and the manager of . . .
Silverstone Healthcare of Raton, LLC[], . . . Krystopowicz took no action to assure
that the interests of these corporate entities were defended in the current litigation, and
he intentionally declined to engage counsel to represent these entities in the current
litigation.” It further found that “Krystopowicz has intentionally failed to verify or

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determine if either of the two Silverstone [D]efendants maintained insurance coverage
which could have provided for a defense in the current litigation.”
{24} 	The 	inability 	to 	recover 	for 	her 	injuries 	is 	itself 	a 	harm 	caused 	by
Krystopowicz’s misuse and abuse of the corporate form. There can be no question
about the causal relationship between Krystopowicz’s dominance and control of the
Silverstone Defendants for an improper purpose and the corporations’ inability to
answer for their obligations.
{25} 	We hold that the corporate veil should be pierced and that Krystopowicz should
be accountable for the Silverstone Defendants’ default judgment. Given this
disposition, we need not address Plaintiff’s other arguments.
CONCLUSION
{26} 	We hold that the unchallenged findings and conclusions meet the requirements
for piercing the corporate veil of the Silverstone Defendants such that Krystopowicz
can be held liable for the default judgment against those entities. The district court’s
concept of injury was too narrow. The district court therefore erred in dismissing
Plaintiff’s claims against Krystopowicz. We reverse and remand for entry of an order
consistent with this Opinion.
{27} 	IT IS SO ORDERED.
__________________________________
MICHAEL D. BUSTAMANTE, Judge

WE CONCUR:

RODERICK T. KENNEDY, J udge

M. MONICA ZAMORA, Judge

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