Security Nat. Bank v. Peters, Writer & Christensen, Inc.

Decision Date26 May 1977
Docket NumberNo. 75-810,75-810
Citation39 Colo.App. 344,569 P.2d 875
PartiesSECURITY NATIONAL BANK as Executor of the Estate of George W. Brower, Deceased, (by substitution), Mrs. Mary I. White, Mrs. Helen Bingham Salzer as Trustee under the Last Will and Testament of Addie Ludlow Bingham, Deceased, Robert E. Stewardson and Rosemary Stewardson, and Dr. Earl A. Engle, Individually, and as preferred shareholders of Peters, Writer, and Christensen, Inc., Plaintiffs-Appellants, v. PETERS, WRITER AND CHRISTENSEN, INC., a Colorado Corporation, George S. Writer, John F. Coughenour, Jr., and Allan R. Hickerson, Jr., Defendants and Third-Party Plaintiffs-Appellees, v. Thomas P. OWEN, Third-Party Defendant. . III
CourtColorado Court of Appeals

Gorsuch, Kirgis, Campbell, Walker & Grover, C. E. Eckerman, Kerry R. Brittain, Denver, for plaintiffs-appellants.

Roath & Brega, P.C., Jay W. Enyart, Denver, for defendants and third-party plaintiffs-appellees.

Clanahan, Tanner, Downing & Knowlton, Thomas C. McKee, Denver, for third-party defendant.

BERMAN, Judge.

Plaintiffs, preferred shareholders of Peters, Writer and Christensen, Inc., (PWC) instituted this action on October 16, 1972, asserting two claims for relief against the directors of PWC. The first was a derivative claim under C.R.C.P. 23.1 for certain violations of the Colorado Corporation Code, and the second was a class action claim alleging fraud and breach of fiduciary duty. The defendants joined Thomas P. Owen as a third-party defendant on an indemnification theory. At the conclusion of a nonjury trial, the court held that plaintiffs' claims for relief were both based upon theories of fraud, and that the evidence presented would not sustain such a finding. Accordingly, a judgment of dismissal was entered in favor of defendants and the third-party defendant. The plaintiffs appeal from the judgment in favor of defendants, but no appeal was taken against the third-party defendant. We reverse.

PWC is a Colorado corporation and the individual defendants were directors and officers of PWC, each of whom held 16,000 of the 96,000 common Class A shares of PWC outstanding. The only voting shares of PWC were the common Class A shares.

In August 1963, a meeting of the directors and common shareholders of the company was held, at which time a plan was approved to sell the principal part of the business, its assets and property, and to liquidate and dissolve the company completely. Though the articles of incorporation required that the preferred shares be redeemed upon dissolution of the company, the preferred shareholders were not notified of the above meeting and were neither given an opportunity to vote at the meeting, nor an opportunity to file written objections or demands for the payment of the fair value of their shares as required by C.R.S.1963, 31-5-13 (now § 7-5-113, C.R.S.1973). Several of the defendants testified that they did not give the preferred shareholders notice of the above meeting on advice of counsel. Notice was not deemed necessary since the directors had adopted a plan to redeem the preferred shares within 12 months; however, notice of the planned redemption was never given to the preferred shareholders and the plan was never carried out. On the basis of these facts, the trial court held that the directors had violated both the articles of incorporation and C.R.S.1963, 31-5-13.

In conformity with the dissolution plan, PWC sold substantially all of its assets, retaining only the common and preferred shares it held in the Atlantic Improvement Corporation. The Atlantic stock was initially restricted and could not be sold by PWC, but in March 1965, PWC received a "no action" letter from the SEC and thereafter the Atlantic stock could have been registered and sold. Until 1971, the value of the Atlantic stock was such that all preferred shares of PWC could have been fully redeemed; however, such a sale would not have generated sufficient monies to pay the common shareholders fully.

Several of the defendants testified that they did not sell the Atlantic stock because substantially all of the assets of Atlantic, which consisted of realty, had been condemned by the City of New York, and that it was their belief that the court award in the Atlantic condemnation suit would enable PWC to receive substantially more than the market value of its Atlantic shareholdings.

In 1964 and 1965, PWC did not pay five consecutive quarterly dividends to its preferred shareholders. The defendants testified that this action was taken on the advice of counsel for the purpose of preserving cash for the settlement of claims against the company. After failing to pay the above five dividends, the defendants were informed by the company bookkeeper that the preferred shareholders, pursuant to their stock subscription agreement, were entitled to assume control of the company if six dividends were missed. In an "Estimate of Potential Liquidation Value," prepared by the bookkeeper, he wrote the defendants: "NOTHING HAS BEEN DONE. THE PREFERRED STOCKHOLDERS GET THE COMPANY 6/1/65 UNLESS SOMETHING IS DONE." Thereafter, defendants resumed paying dividends to the preferred shareholders, thereby preventing takeover of the company by the preferred shareholders.

At trial, plaintiffs asserted that these dividend payments were made while the capital of PWC was impaired in violation of C.R.S.1963, 31-5-10 (now § 7-5-110, C.R.S.1973), but the trial court failed to rule on this matter, as will be discussed more fully below.

It is also relevant to note that in 1965, 1967, and 1970, PWC purchased shares of its preferred stock from three shareholders.

I.

Plaintiffs first allege that the court erred in dismissing their first claim for relief, the derivative claim brought to enforce the rights of PWC against the defendant officers and directors. It was based upon three allegations: (1) That the directors caused the company to purchase treasury shares while the capital of the company was impaired, in violation of C.R.S.1963, 31-2-2 (now § 7-3-102, C.R.S.1973); (2) that the directors caused the company to loan another officer certain monies in violation of C.R.S.1963, 31-5-14(4) (now § 7-5- 114(4), C.R.S.1973); and (3) that the directors caused the company to pay dividends out of capital while the company's stated capital was impaired, in violation of C.R.S.1963, 31-5-10 (now § 7-5-110, C.R.S.1973). It was asserted that the directors were personally liable to the corporation for the above three violations, pursuant to C.R.S.1963, 31-5-14 (now § 7-5-114, C.R.S.1973). Further, as to each of the above claims, it was alleged that "(t)he matters complained of . . . were fraudulently done by the defendant officers and directors in their own interest and in violation of their fiduciary duty to the Defendant Corporation and its shareholders . . . . Therefore, the three-year State of Limitations provided by Colo.Rev.Stats.1963, § 87-1-10 (now § 13-80-109, C.R.S.1973) did not begin to run until the time of the discovery of the matters complained of . . . ."

At the conclusion of plaintiffs' case, the defendants moved to dismiss, at which time the court granted the motion as to plaintiffs' claim premised upon the alleged improper loan to a corporate officer. Thereafter, at the close of all the evidence, the court dismissed the remainder of the derivative claim, holding that the various allegations had been pled and tried on a theory of fraud, and that fraud had not been proved.

It is not clear from the trial court's holding whether it determined that fraud was required to impose liability under the statutes, or whether fraud was the only issue pled and tried, thus precluding a ruling on the alleged statutory violations. In either event, the court erred.

Plaintiffs' complaint sets forth specific sections of the Colorado Corporation Code which were allegedly violated, and specific sections of the Code granting relief therefrom. The additional paragraphs referring to fraud were obviously for the purpose of avoiding the application of C.R.S.1963, 87-1-10 (now § 13-80-109, C.R.S.1973), which statute of limitations allegedly could otherwise have been invoked as a bar to some of the claims premised on statutory violations. Moreover, the evidence at trial was, in part, clearly directed to whether the capital of the company was impaired at the time dividends were paid or the treasury stock purchased, which evidence related solely to whether statutory violations occurred. Accordingly, the case was not tried solely on the basis of fraud.

And, a showing of fraud is not required to impose liability under the statutes allegedly violated. McGill's Administratrix v. Phillips, 243 Ky. 768, 49 S.W.2d 1025 (Ct.App.1932); see Aiken v. Insull, 122 F.2d 746 (7th Cir. 1941), cert. denied, 315 U.S. 806, 62 S.Ct. 638, 86 L.Ed. 1205. The statutes in question expressly make directors personally liable to the corporation, see Rosebud Corporation v. Boggio, Colo.App., 561 P.2d 367; Sears v. Weissman, 6 Ill.App.3d 827, 286 N.E.2d 777 (1972), for assenting to or voting for the payment of illegal dividends, for the wrongful purchase of treasury shares, or, in certain cases, for making a loan to an officer or director. Further, such liability is absolute save for the statutory defenses set forth in C.R.S.1963, 31-5-14(6) (now § 7-5-114(6), C.R.S.1973). See Southern California Home Builders v. Young, 45 Cal.App. 679, 188 P. 586 (1920); Quintal v. Greenstein, 142 Misc. 854, 256 N.Y.S. 462, aff'd without opinion, 236 App.Div. 719, 257 N.Y.S. 1034 (1932); see generally 3A W. Fletcher, Cyclopedia of Corporations § 1197; 19 C.J.S. Corporations § 876. Accordingly, the court erred in dismissing plaintiffs' two claims for relief premised on the purchase of treasury shares and on the payment of dividends out of capital and a new trial is required as to those claims.

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