O'Malley v. Casey, 78-194

Decision Date11 January 1979
Docket NumberNo. 78-194,78-194
Citation589 P.2d 1388,42 Colo.App. 85
PartiesRobert J. O'MALLEY, Individually, and on behalf of himself and all other stockholders of Leigh Barron, Inc., a Colorado Corporation, Plaintiff-Appellee, v. Jack E. CASEY, Individually, and as an officer and director of Leigh Barron, Inc., d/b/a Leigh Barron Four Mile House, a Colorado Corporation, Defendant-Appellant, Leigh Barron, Inc., d/b/a Leigh Barron Four Mile House, a Colorado Corporation, and Rayma Sue Cummins, Individually, and as an officer and director of said corporation, Defendants. . I
CourtColorado Court of Appeals

Thomas & Esperti, P.C., James R. Martin, Denver, for plaintiff-appellee.

David Burnell Smith, Littleton, for defendant-appellant.

No appearance for defendants.

RULAND, Judge.

This is a stockholder's derivative action initiated pursuant to C.R.C.P. 23.1 by plaintiff, Robert J. O'Malley. Defendant Jack E. Casey appeals from a judgment awarded to defendant Leigh Barron, Inc., to compensate the corporation for salary paid to Casey. We remand the cause for additional proceedings.

The pertinent facts are not in dispute. Casey owned 65% Of the outstanding shares of the corporation and plaintiff Robert J O'Malley owned 35%. A Board of Directors consisting of three members was elected pursuant to the articles of incorporation. At all times relevant here the board members consisted of Casey, O'Malley, and Rayma Sue Cummins. The disputed salary was approved for Casey as General Manager of the corporation by a two to one vote. O'Malley voted against the proposed salary.

Casey first contends that the award to the corporation was improper because the corporation asserted no cross-claim against him. This contention lacks merit.

The purpose of a derivative action is to recover sums owed the corporation and such was the relief requested in O'Malley's complaint. See C.R.C.P. 23.1; Bell v. Arnold, 175 Colo. 277, 487 P.2d 545 (1971). Hence, entry of a judgment in favor of a corporation is proper.

Casey next contends that the trial court erred in setting aside the salary. The court reasoned that the Board's approval of the salary must be set aside because Casey voted in favor thereof and because his vote was necessary to obtain a majority.

We recognize that, absent provisions in the articles of incorporation to the contrary, a Board member may not vote to approve a salary for his services as an employee of the corporation. Steele v. Gold Fissure Gold Mining Co., 42 Colo. 529, 95 P. 349 (1908); See also Colorado Management Corp. v. American Founders Life Insurance Co., 145 Colo. 413, 359 P.2d 665 (1961). 1 However, it has long been recognized that: "In a closely held corporation where the directors are officers and majority stockholders, self dealing on salary questions may be inevitable as a practical matter . . . ." 5 O. Smith, Fletcher Cyclopedia of the Law of Private Corporations § 2129 (1976 rev. vol.); See also H. Friedman & H. Schlagman, Corporate Management Guide § 12.09 (1967). As a consequence, some courts have reasoned that the salary approved by the directors in such circumstances is not void, but is voidable only if the salary is unreasonable. See e. g., Herald Co. v. Seawell, 472 F.2d 1081 (10th Cir. 1972); Murphy v. Washington American League Base Ball Club, Inc., 116 U.S.App.D.C. 362, 324 F.2d 394 (1963).

We find that view especially persuasive where, as here, the articles of incorporation specifically sanction a salary agreement between a director and the corporation. See Adams v. Mid-West Chevrolet Corp., 198 Okl. 461, 179 P.2d 147 (1946); Coleman v. Plantation Golf Club, Inc., 212 So.2d 806 (Fla.Dist.Ct.App.1968). The articles of...

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5 cases
  • Lussier v. Mau-Van Development, Inc.
    • United States
    • Hawaii Court of Appeals
    • July 21, 1983
    ...the board's action is not void but voidable by the corporation if the salary is unreasonable or fraud is involved. O'Malley v. Casey, 42 Colo.App. 85, 589 P.2d 1388 (1979); 5 Fletcher, supra, § 2129. The burden is on the director-officer to show the reasonableness of such salary. In re Trus......
  • Combs v. Pricewaterhousecoopers Llp
    • United States
    • U.S. Court of Appeals — Tenth Circuit
    • September 8, 2004
    ...action, even in close corporations having but one minority shareholder. River Mgmt. Corp., 829 P.2d at 404; see also O'Malley v. Casey, 42 Colo.App. 85, 589 P.2d 1388 (1979) (filing of derivative action is proper for claims regarding excessive salaries); Ireland v. Wynkoop, 36 Colo.App. 205......
  • Haines Pipeline Const., Inc. v. Montana Power Co., 90-281
    • United States
    • Montana Supreme Court
    • March 4, 1992
    ...Sec. 1936 Appeal and Error. Where issues are 'inextricably intertwined', the pleadings may be amended on remand. O'Malley v. Casey (1979) 42 Colo.App. 85, 589 P.2d 1388. The issues of fraud and the breach of the covenant of good faith and fair dealing as applied in this case are inextricabl......
  • Kapushion v. Colorado West Packers, Inc., 82CA1079
    • United States
    • Colorado Court of Appeals
    • January 24, 1985
    ...Co., 157 Colo. 136, 403 P.2d 762 (1965). See Swafford v. Berry, 152 Colo. 493, 382 P.2d 999 (1963); see also O'Malley v. Casey, 42 Colo.App. 85, 589 P.2d 1388 (1979). Here, Packers was a small and closely held corporation, the articles of incorporation expressly sanctioned contracts between......
  • Request a trial to view additional results
3 books & journal articles
  • Chapter 6 - § 6.11 • LITIGATION AND STANDING
    • United States
    • Colorado Bar Association Colorado Community Association Law: Condominiums; Cooperatives; and Homeowners Associations (CBA) Chapter 6 The Association
    • Invalid date
    ...plaintiffs must fairly represent).[369] Bell v. Arnold, 487 P.2d 545 (Colo. 1971).[370] C.R.S. § 7-126-401(1). See O'Malley v. Casey, 589 P.2d 1388 (Colo. App. 1979) (purpose of derivative action is to recover sums owed corporation and, hence, entry of judgment in favor of corporation is pr......
  • Rule 23.1 DERIVATIVE ACTIONS BY SHAREHOLDERS.
    • United States
    • Colorado Bar Association Colorado Rules of Civil and Appellate Procedure (CBA)
    • Invalid date
    ...175 Colo. 277, 487 P.2d 545 (1971). The purpose of a derivative action is to recover sums owed the corporation. O'Malley v. Casey, 42 Colo. App. 85, 589 P.2d 1388 (1979). The fact that a shareholder is a judgment creditor of the corporation does not automatically render such shareholder ine......
  • Considerations for Attorneys Serving as Directors of Corporate Clients
    • United States
    • Colorado Bar Association Colorado Lawyer No. 12-12, December 1983
    • Invalid date
    ...Co. v. Bonfils, 315 F.Supp. 497, 498 (D.Colo. 1970). 8. Klockner v. Keser, 29 Colo.App. 476, 488 P.2d 1135 (1971). 9. O'Malley v. Casey, 42 Colo.App. 85, 589 P.2d 1388 (1979). 10. 283 F.Supp. 643 (S.D.N.Y. 1968). 11. Feit v. Leasco Data Processing Equipment Corp., 332 F.Supp. 544 (E.D.N.Y. ......

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