Ficor, Inc. v. McHugh
| Decision Date | 04 January 1982 |
| Docket Number | No. 80SC54,80SC54 |
| Citation | 639 P.2d 385 |
| Parties | FICOR, INC., a corporation of the District of Columbia; John F. Forstmann; Vankirk E. Fehr; Bruce B. Brundage; Fourven Limited Partnership, a Colorado limited partnership; The Recreational Environmental Development Corporation; and Geoffrey W. Robertson, Petitioners, v. Jerome P. McHUGH; Jerome P. McHugh, as Trustee; Recreation Land Company; Dwight L. Johnson; and Denver Internal Medicine Associates, a professional company profit sharing trust; Herbert J. Rothenberg; H. Blair Carlson; Barry W. Frank; William E. Mann; Donald L. Patton; and all other trustees and beneficiaries of the Denver Internal Medicine Associates Profit Sharing Trust, Respondents. |
| Court | Colorado Supreme Court |
Davis, Graham & Stubbs, Thomas S. Nichols, Denver, for petitioners.
Roath & Brega, Roger P. Thomasch, Denver, for respondents.
We granted certiorari to review the decision of the Colorado Court of Appeals in McHugh v. Ficor, Inc., 43 Colo.App. 409, 611 P.2d 578 (1979), which upheld the judgment of the Denver District Court imposing joint and several liability upon the petitioners, who are the directors, officers, shareholders, and transferees of Ficor, Inc. (Ficor), because provisions were not made to protect the creditors of that corporation when it was dissolved. Also in dispute is the propriety of the trial court's ruling, upheld by the court of appeals, dismissing the petitioners' counterclaim for damages based on alleged fraud in the inducement of a contract by which Ficor agreed to purchase certain undeveloped mountain land. We affirm the decision of the court of appeals, with certain modifications which will be described.
This litigation arose out of events surrounding the financial failure of a land development project on 14.577 acres in Summit County, Colorado, near the town of Breckenridge. At the beginning of 1971 the respondents (McHugh group) were the owners of the undeveloped 14.577 acre parcel, which they had acquired in 1970 from Berry and Stark. The land was subject to the lien of a deed of trust securing the McHugh group's purchase money promissory note to Berry and Stark in the principal amount of $749,103.92.
The individual petitioners began negotiating with the McHugh group early in 1971 to purchase the land for the development of a lodge and a residential condominium ownership project. In July 1971 the individual petitioners formed Ficor, a District of Columbia corporation, to be used as a vehicle for acquiring the land. Ficor was to be a shell corporation without assets. 1 The negotiations resulted in a written sales agreement dated October 2, 1971, between the McHugh group 2 and Ficor, and on November 18, 1971, the transaction was closed. The purchase price was $825,466.36. Ficor assumed the obligations under the Berry and Stark note pursuant to its terms, which required nine annual installments in varying amounts, beginning November 25, 1971. The balance of the purchase price, in the approximate amount of $75,000, was paid in cash obtained from a loan made to Ficor by Security National Bank. The written assumption agreement reflecting Ficor's undertaking to pay the Berry and Stark note was secured by a deed of trust, junior to the Berry and Stark deed of trust, on the 14.577 acres. The McHugh group remained obligated on the Berry and Stark note.
The Berry and Stark deed of trust provided for partial release of one square foot of land for each $0.75 in principal payment. The same payments would earn a partial release of the identical parcel from the assumption agreement deed of trust. Thus, the release of the entire 14.577 acres could be obtained upon payment of only $476,230.59 3 toward the $749,103.92 principal obligation on the Berry and Stark note.
The individual petitioners held the following ownership interests and offices in Ficor:
Name Number of Shares Office
---- ---------------- ------
John F. Forstmann 36 shares President and Director
VanKirk E. Fehr 27 shares Vice President, Secretary
and Director
Bruce B. Brundage 32 shares Treasurer and Director
Geoffrey W. Robertson 5 shares None
---
Total: 100 shares (total issued)
The individuals paid nothing for their stock.
After the closing, Ficor and the individual petitioners sought legal advice on how to structure the development of the project to obtain the most advantageous income tax treatment. Based on the advice obtained, they decided to form a new corporation, Recreational Environmental Development Corporation (Redco), and a new limited partnership, Fourven, to take ownership of the property and develop it.
Redco was formed in January 1972. The stock ownership in Redco was identical to that in Ficor. Forstmann, Fehr, Brundage, and Robertson were officers and directors of Redco. Fourven was formed on March 1, 1972, with Forstmann, Fehr, Brundage, and Robertson as general partners. The record does not reflect whether there were any limited partners.
To accomplish the ownership change, Ficor was dissolved on March 1, 1972, and all its assets were distributed to its shareholders in proportion to their stock ownership. These assets consisted of $38,728 in cash and the 14.577 acres of land. The individuals then contributed the assets to Redco and Fourven in return for their respective interests in those new entities. Redco received the 3.545 acre parcel upon which the initial construction was planned and all but $2,000 of the cash. 4 Fourven received the 11.032 acres not planned for immediate development. The corporate existence of Ficor was then terminated. 5
At the time of its dissolution, Ficor had made one payment on the Berry and Stark note, in the amount of $118,189.78. Based on that payment, the 3.545 acre parcel had been released from the liens securing the Berry and Stark note and the assumption agreement. The 3.545 acre parcel was then subjected to a deed of trust for the benefit of Security National Bank to secure a $250,000 loan from that bank to Ficor. Consequently, as of March 1, 1972, Ficor was obligated for the principal and outstanding interest of the Berry and Stark note and the $250,000 principal plus accrued interest of the Security National Bank loan. Ficor's obligation on the Berry and Stark note was secured by the assumption agreement deed of trust on the 11.032 acres ultimately transferred to Fourven. Ficor's obligation to Security National Bank was secured by a lien on the 3.545 acre parcel. When Ficor was dissolved no provision was made for the payment of its obligations on the Berry and Stark promissory note. Ficor did not advise the McHugh group of the dissolution.
All the money for the purchase and development of the land was obtained by borrowing. It is not necessary to describe the loans in detail. It suffices to say that following the original loan of $250,000 and the dissolution of Ficor, successive loans of $2,500,000, 6 $240,000, and $150,000 were made to Ficor's successors in ownership by Security National Bank for land payments and construction financing. The individual petitioners became personally liable for each loan.
In August and November of 1972, following the dissolution of Ficor, additional payments of principal and interest totalling $149,934 were made by the petitioners in satisfaction of the November 1972 installment on the Berry and Stark note. Based on these payments, parcels of 2.951 acres and 0.442 acres were released from the liens of the Berry and Stark deed of trust and the assumption agreement deed of trust. Each of the released parcels ultimately was subjected to a deed of trust for the benefit of Security National Bank to secure the outstanding bank loans.
A general contractor was engaged to build the planned improvements on the 3.545 acre parcel. The construction work fell behind schedule, and disputes about the contractor's performance arose. As one result, the Ficor group 7 was unable to make required payments on the bank loans and did not make the November 1973 payment on the Berry and Stark note. The members of the Ficor group settled their resulting disputes with Security National Bank and the contractor and, as part of that settlement, the bank accepted from Redco and Fourven deeds in lieu of foreclosure to the 3.545 acres, the 2.951 acres, and the 0.442 acres, all of which had been previously released from the liens of the Berry and Stark deed of trust and the assumption agreement deed of trust. In return, the bank loans, upon which the individual petitioners were personally liable, were satisfied.
The McHugh group foreclosed the assumption agreement deed of trust and, by bidding $413,000 at the foreclosure sale, acquired the entire 7.639 acres still subject to that lien and to the lien of the Berry and Stark deed of trust. The McHugh group then brought this action in Denver District Court, seeking recovery against Ficor, Fourven, Redco, and the individual petitioners for the amount remaining unpaid on the Berry and Stark note. The claim against Ficor was predicated on the assumption agreement. The claims against the individuals were based upon the alleged impropriety of the distribution of Ficor's assets to the individual shareholders on liquidation of Ficor and the action of the individual directors in authorizing that dissolution. Redco and Fourven were alleged to have received Ficor's assets with knowledge of the assertedly improper distributions. 8 The petitioners counterclaimed, averring that they had been induced to execute the contract for purchase of the 14.577 acre parcel by fraudulent representations made by the McHugh group.
After a trial to the court, judgment was entered against all the petitioners except Ficor, jointly and severally, in the amount of...
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