Colorado § 7-108-405 - Liability of directors for unlawful distributions.

§ 7-108-405. Liability of directors for unlawful distributions.

(1) A director who votes for or assents to a distribution made in violation of section 7-106-401 or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating section 7-106-401 or the articles of incorporation if it is established that the director did not perform the director's duties in compliance with section 7-108-401. In any proceeding commenced under this section, a director has all of the defenses ordinarily available to a director.

(2) A director held liable under subsection (1) of this section for an unlawful distribution is entitled to contribution:

(a) From every other director who could be held liable under subsection (1) of this section for the unlawful distribution; and

(b) From each shareholder who accepted the distribution knowing the distribution was made in violation of section 7-106-401 or the articles of incorporation, the amount of the contribution from the shareholder being the amount of the distribution to that shareholder that exceeds what could have been distributed to that shareholder without violating section 7-106-401 or the articles of incorporation.

Source: L. 2019: Entire part amended with relocations, (SB 19-086), ch. 166, p. 1933, § 35, effective July 1, 2020.

Editor's note: This section is similar to former § 7-108-403 as it existed prior to 2020.

ANNOTATION

Law reviews. For article, "Phases of the Revenue Act of 1936", see 12 Dicta 29 (1936). For article, "Corporate Dividend Limitations", see 27 Dicta 99 (1950). For article, "One Year Review of Agency, Partnerships, and Corporations", see 39 Dicta 61 (1962). For article, "Continuing Liability for Unpaid Corporate Debts After a Corporation Ceases Business", see 14 Colo. Law. 40 (1985). For article, "The 1985 Proposed Revisions to the Colorado Corporation Code", see 14 Colo. Law. 34 (1985). For article, "Corporate Director Liability", see 65 Den. U. L. Rev. 59 (1988). For article, "Conflicts of Interest and the Director's Duty of Loyalty", see 17 Colo. Law. 1969 (1988). For article, "The Business Judgment Rule and Common Interest Communities", see 53 Colo. Law. 34 (June 2024).

Annotator's note. Since § 7-108-403 is similar to § 7-5-114 as it existed prior to the 1993 recodification of the "Colorado Business Corporation Act", articles 101 to 117 of title 7, cases construing that provision and its predecessors have been included in the annotations to this section.

Purpose behind subsection (1)(c) is the protection of creditors. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo. 1982).

Since the corporate existence is terminated, the only reason to permit recovery by the corporation is so that it may utilize the moneys to satisfy the unpaid creditors. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo. 1982).

Subsections (1) and (2) (now subsections (1)(a) and (1)(b)) are not penal in nature, and the one-year statute of limitations imposed by § 13-80-104 does not apply thereto. Sec. Nat'l Bank v. Peters, & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Where liability is created under this section, any creditor within its terms has a cause of action against the enumerated individuals. Fitzgerald v. Marshall, 161 F. Supp. 470 (D. Colo. 1958).

And the liability so created under this section is personal to the creditors and cannot be invoked by the corporation, does not become an asset of its estate in bankruptcy, and is not enforceable by its trustee. Fitzgerald v. Marshall, 161 F. Supp. 470 (D. Colo. 1958).

Stockholder's liability for breach of duty to corporation. Although it is generally the corporate officers and directors, and not the shareholders, who are charged with the duty of exercising the powers of a corporation and, thus, are the ones who usually incur personal liability for breach of that duty, a stockholder may subject himself to similar liability if, because of his actions as an individual, made possible by reason of his being a stockholder, the corporation acts improperly. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982).

Stockholder liability does not arise from mere knowledge of and acquiescence in corporate wrongdoing by a stockholder, but must be accompanied by an overt exercise of power, authority, or influence in directing, controlling, or managing the company. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982).

This section imposes civil liability on directors for payment of a dividend while insolvent. Guarantee Reserve Life Ins. Co. v. Holzwarth, 148 Colo. 366, 366 P.2d 377 (1961).

Section not inconsistent with provisions governing insurance companies. The provision of this section that directors who declare a dividend while corporation is insolvent shall be liable for debts of corporation and § 10-3-204 making it unlawful for directors of an insurance company to declare dividends except from surplus or profits and providing penalties therefor are not inconsistent; rather § 10-3-204 does not purport to afford any relief from the burdens imposed by this section but declares similar acts of directors of insurance companies to be "unlawful" and fixes the punishment of one "found guilty". Guarantee Reserve Life Ins. Co. v. Holzwarth, 148 Colo. 366, 366 P.2d 377 (1961).

Thus insurance company directors are also answerable under this section. The fact that a director of a corporation might be tried and punished for unlawful acts under § 10-3-204, providing for punishment for unlawful issuance of dividends by insurance companies, does not preclude his being answerable in a civil action under this section for the same acts though not designated as "unlawful". Guarantee Reserve Life Ins. Co. v. Holzwarth, 148 Colo. 366, 366 P.2d 377 (1961).

Corporation's directors cannot be assessed the interest paid by the corporation upon money borrowed to purchase its own stock where such purchase is not illegal. Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

Circumstances at time of wrongful dissolution determine directors' obligations. Where corporate assets are distributed following a dissolution in violation of the law, circumstances at the time the cause of action accrued determine the obligations of corporation's directors. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982).

Directors of liquidated corporation are trustees for creditors. The directors of a corporation which is being liquidated are trustees for the creditors of the corporation, and are personally liable to those creditors if they take corporate property for their own benefit rather than making provision for the payment of creditors. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo. 1982).

Directors are jointly and severally liable following wrongful dissolution. Where the directors of a corporation distributed the corporation's assets without making adequate provision for the satisfaction of corporate obligations, and where creditors were able to assert the rights that the corporation had even though the corporation was dissolved, directors of corporation were jointly and severally liable. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982); 1629 Joint Venture v. Dahlquist, 770 P.2d 1352 (Colo. App. 1989).

No recovery allowed against directors for attorney fees properly authorized in behalf of corporation. Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

Acceptance of indemnifying note not making of "loan". Where the corporation had settled a claim on which it was primarily liable, and, pursuant to company policy, the corporate officer had indemnified the corporation, part of which indemnification was in the form of a note, this acceptance of the note did not constitute the making of a "loan" within the meaning of the statute. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Accommodation loan to corporation officer found to be proper. Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972).

Damages are based directly upon injuries suffered by the corporation, as opposed to a liquidated measure without regard to injury. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Value of assets to be considered in determining amount of judgment against corporate directors for wrongfully distributing corporate assets upon dissolution is the market value of the assets less the amount of the liens against them. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982).

When claim against directors must be commenced. Under § 13-80-114, a claim under this section must be commenced within five years of the improper purchase. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Any claim against directors based upon an improper dividend payment must be commenced within five years of such payment. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Only the corporation may sue under subsection (3) (now subsection (1)(c)). Rosebud Corp. v. Boggio, 39 Colo. App. 84, 561 P.2d 367 (1977).

But remedy may be asserted by creditors as a group. All creditors of a corporation, as a group, may assert the remedy in subsection (1)(c) on behalf of the corporation for their own benefit. Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo. 1982).

Creditors may not sue directors personally under subsection (1)(c). By the express terms of subsection (3)(now subsection (1)(c)) the directors' liability runs only to the corporation itself. It therefore follows that creditors may not sue directors personally under the statute. Rosebud Corp. v. Boggio, 39 Colo. App. 84, 561 P.2d 367 (1977).

But may sue them personally in appropriate cases. Creditors are not precluded from suing directors and having them held personally liable for corporation obligations in appropriate cases. Former subsection (9) stated that the liabilities imposed on directors by virtue of this section were in addition to "any other liabilities imposed by law on directors of a corporation", and it follows that if a creditor establishes the breach of a common-law duty owed to him, for which directors may be held personally liable, dismissal of the claim would be improper. Rosebud Corp. v. Boggio, 39 Colo. App. 84, 561 P.2d 367 (1977).

Corporate entity may be disregarded and directors held personally liable if equity so requires, i.e. adherence to the corporate fiction would promote injustice, protect fraud, defeat a legitimate claim, or defend crime. La Fond v. Basham, 683 P.2d 367 (Colo. App. 1984); Ward v. Cooper, 685 P.2d 1382 (Colo. App. 1984); Micciche v. Billings, 727 P.2d 367 (Colo. 1986).

Since directors of an insolvent corporation are deemed to be trustees for it and its creditors, they owe a duty to the corporate creditors not to divest corporate property for their own benefit and thus defeat a creditor's claim. If the duty is breached, the creditors may sue the directors and hold them personally liable. Collie v. Becknell, 762 P.2d 727 (Colo. App. 1988).

A director is personally liable to the corporation only for that portion of the distribution that makes the corporation insolvent. Paratransit Risk Retention Group Ins. Co. v. Kamins, 160 P.3d 307 (Colo. App. 2007).

Judgment creditors may enforce any cause of action belonging to corporation. Although only the damaged corporation has a cause of action under subsection (3)(now subsection (1)(c)), judgment creditors of a corporation are entitled to enforce their judgments by enforcing any cause of action belonging to the corporation notwithstanding the fact that the corporation has been dissolved. McHugh v. Ficor, Inc., 43 Colo. App. 409, 611 P.2d 578 (1979), aff'd, 639 P.2d 385 (Colo. 1982).

Liability imposed by subsection (1)(d). Subsection (4)(now subsection (1)(d)) and §§ 7-3-102 and 7-5-110 expressly make directors personally liable to the corporation. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Such liability is absolute. Liability under subsection (4)(now subsection (1)(d)) and §§ 7-3-102 and 7-5-110 is absolute save for the statutory defenses set forth in subsection (6)(now § 7-5-101 (2)). Sec. Nat'l Bank v. Peters, & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

A showing of fraud is not required to impose liability under subsection (4)(now subsection (1)(d)) and §§ 7-3-102 and 7-5-110. Sec. Nat'l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (1977).

Subsection (1)(c) does not impose a fiduciary duty within the meaning of 11 U.S.C.A. § 523 (a)(4) of the bankruptcy code. In re Anzman, 73 B.R. 156 (Bankr. D. Colo. 1986).

Although a director owes no general duty to use or pledge his personal funds to enable the corporation to take advantage of a business opportunity, he owes a duty to refrain from intentional activity aimed at allowing the corporation to become insolvent and thereby usurp a corporate opportunity for his own benefit. Collie v. Becknell, 762 P.2d 727 (Colo. App. 1988).

If a director usurps a corporate opportunity, he will be deemed to hold the usurped property in constructive trust for the corporation and he will be required to account to the corporation for any profit made on the transaction. Collie v. Becknell, 762 P.2d 727 (Colo. App. 1988).

Satisfaction by one releases all. Where obligation is joint and several, payment by one obligor discharges obligations of others who might have been jointly liable on the same claim. 1629 Joint Venture v. Dahlquist, 770 P.2d 1352 (Colo. App. 1989).

A cause of action under this section runs to the corporation itself for its own benefit or for the benefit of creditors. Thus, a garnishment is an appropriate proceeding in which to litigate issues arising under this section. Walk-In Med. Ctrs., Inc. v. Breuer Capital Corp., 778 F. Supp. 1116 (D. Colo. 1991).

PART 5

DIRECTOR - CONFLICTS OF INTEREST