Micciche v. Billings
| Decision Date | 03 November 1986 |
| Docket Number | No. 84SC341,84SC341 |
| Citation | 727 P.2d 367 |
| Parties | Joe MICCICHE, Petitioner, v. David BILLINGS and the Industrial Commission of the State of Colorado, Respondents. |
| Court | Colorado Supreme Court |
Gunther & Westlund, P.C., Dennis H. Gunther, Terry Ehrlich, Wheat Ridge, for petitioner.
James A. May, Denver, for petitioner David Billings.
Duane Woodard, Atty. Gen., Charles B. Howe, Chief Deputy Atty. Gen., Richard H. Forman, Sol. Gen., Mary Karen Maldonado, Asst. Atty. Gen., Denver, for respondent Industrial Commission.
We granted certiorari to review the decision of the court of appeals in Billings v. Micciche, 691 P.2d 1155 (Colo.App.1984), concerning the effect of section 7-3-104, 3 C.R.S. (1973), of the Colorado Corporation Code 1 on the personal liability of a corporate officer for corporate debts and liabilities incurred during a period when the corporation had been suspended from transacting business in Colorado as a result of its failure to file the corporate report required by section 7-10-102(1), 3 C.R.S. (1979 Supp.). The court of appeals construed section 7-3-104 to impose joint and several liability upon the petitioner, Joe Micciche, a vice president and one of three shareholders of Mountain States Welding and Sheetmetal, Inc. (Mountain States), a Colorado corporation, for work-related injuries sustained by the respondent, David Billings, in the course of his employment with Mountain States. We reverse the judgment of the court of appeals and remand the case for further proceedings.
David Billings was employed by Mountain States as a welder and sheet metal worker. On August 21, 1980, Billings sustained a fracture of both knees when a stack of sheet metal fell on him in the course of his employment. He filed a claim for workmen's compensation on October 31, 1980.
Prior to Billings' accident, the secretary of state in 1979 had suspended Mountain States from transacting business as a Colorado corporation due to its failure to file the corporate report required by section 7-10-102. For a time, however, Mountain States continued to transact business in the state without seeking reinstatement of its corporate status under section 7-10-109(4), 3 C.R.S. (1979 Supp.). 2
On December 4, 1980, a hearing officer of the Department of Labor entered a workmen's compensation award in favor of Billings for his medical expenses and disability benefits and also assessed statutory penalties against Mountain States for its failure to timely admit or deny liability and for its failure to carry workmen's compensation insurance. On February 10, 1981, Billings moved to reopen his claim and sought to impose liability on Joe Micciche and two other officer-shareholders of Mountain States, alleging that Mountain States did not exist as a corporation. Billings' claim against the other two officers was subsequently settled.
After several hearings, the hearing officer ruled that the suspended status of Mountain States rendered Micciche, as vice president of the corporation, personally liable for workmen's compensation benefits to Billings. The Industrial Commission reversed the ruling of the hearing officer, concluding that a suspension for failing to file a corporate report did not extinguish the corporate entity and that corporate officers, including Micciche, were not liable for corporate debts. The commission, however, remanded the case to the hearing officer for the purpose of determining whether the corporate entity should be disregarded and liability imposed on Micciche under the equitable doctrine of "piercing the corporate veil."
Both Micciche and Billings appealed the decision of the commission to the court of appeals. The court of appeals held that under section 7-3-104, 3 C.R.S. (1973), Mountain States' transaction of business while under suspension rendered Micciche, as an officer of the suspended corporation, personally liable for the corporation's obligation to Billings. We thereafter granted Micciche's petition for certiorari to consider whether the court of appeals erred in holding that section 7-3-104 authorized the imposition of personal liability for corporate obligations on a corporate officer solely because he was an officer when the obligation was incurred. We conclude that the court of appeals erred in its construction of section 7-3-104, and we accordingly reverse the judgment and remand the case for further proceedings on the unresolved issue of whether personal liability might be appropriately imposed on Micciche by "piercing the corporate veil."
Pertinent provisions of the Colorado Corporation Code and applicable case law provide the legal context for our resolution of the issue before us. Under the Colorado Corporation Code, which was originally enacted as the Colorado Corporation Act of 1958, ch. 32, sec. 1-149, 1958 Colo.Sess.Laws 119-203, corporate existence begins when the certificate of incorporation is issued. § 7-2-104, 3 C.R.S. (1973). Incorporation results in the creation of a new legal entity with an identity separate and apart from the shareholders. H. Henn & J. Alexander, Laws of Corporations 144-46 (3d ed. 1983). Since a validly formed corporation has an independent legal identity, the corporation itself is legally responsible for its own activities, and adverse economic consequences to the shareholders based on obligations are generally "limited to what the shareholder has invested in the corporation." Id. at 130.
Section 7-3-104, 3 C.R.S. (1973), which is central to this case, was originally enacted as part of the Colorado Corporation Act of 1958 and provides as follows:
All persons who assume to act as a corporation without authority to do so shall be jointly and severally liable for all debts and liabilities occurring or arising as a result thereof.
Ch. 32, sec. 140, 1958 Colo.Sess.Laws 119, 202. This statute is identical to section 139 of the 1950 Model Business Corporation Act, which was designed to impose personal liability in those situations in which persons hold themselves out and improperly act as a corporation without having made any good faith effort to achieve corporate status under state law. A 1969 revision of the Model Act renumbered section 139 as section 146. Although the statutory text was not changed in the 1969 revision, the comments were rewritten to indicate that the intention underlying section 139 was to make the issuance of a certificate of incorporation the sole determinant of corporate existence, thereby eliminating the doctrine of de facto incorporation. See 1 Model Business Corp. Act Annot. § 2.04 comment at 135-36 (3d ed. 1985). Because courts, however, continued to permit limited liability in situations where individuals reasonably but erroneously believed that they had authority to act as a corporation, see, e.g., Cranson v. International Business Machines Corp., 234 Md. 477, 200 A.2d 33 (1964); Cantor v. Sunshine Greenery, Inc., 165 N.J.Super. 411, 398 A.2d 571 (1979), the drafters of the Model Act amended section 146 in 1985 in order to reflect the more flexible standard expressed in case law. 1 Model Business Corp. Act Annot. § 2.04 comment at 130-33. The current provision, renumbered section 2.04 and entitled Liability for Preincorporation Transactions, reads: "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting." The effect of the 1985 version of section 2.04 is to impose liability only on persons who act as or on behalf of a corporation "knowing" that no corporation exists. Id. 3
The Colorado Corporation Code requires a corporation to file a biennial report with the secretary of state setting forth various matters, including the character of the business in which the corporation is engaged, the names and addresses of corporate directors and officers, and a statement regarding the nature and extent of authorized and issued corporate stock. § 7-10-101, 3 C.R.S. (1973 & 1979 Supp.). If a corporation fails to file the report, the secretary of state, pursuant to section 7-10-109(1), 3 C.R.S. (1979 Supp.), must give written notice to the corporation of its failure to file, and unless the report is filed within thirty days after such notice, the corporation shall be suspended. Section 7-10-109(2), 3 C.R.S. (1979 Supp.), states:
Any domestic corporation which is suspended ... shall be inoperative and no longer competent to transact business in this state; but the shareholders of such corporation may hold their annual or special meetings of shareholders for the election of directors, and such corporation may hold or continue to hold, encumber, sell, or convey real estate and make such reports as are required by the laws of the United States and this state and elect corporate officers. The suspension of such corporation shall not take away any remedy given against such corporation, its shareholders, or its officers for any liability incurred prior thereto.
A suspended corporation may be reinstated by paying a reinstatement fee of fifty dollars, filing a corporate report and paying the fee due upon such filing for the year in which the corporation is to be reinstated, paying a late penalty of twenty-five dollars for a current year's report filed after May 1, and paying a fee of seventy dollars for each year that a corporate report was not filed. § 7-10-109(4), 3 C.R.S. (1979 Supp.). The effect of section 7-10-109 is not to dissolve a corporation. Rather, the obvious effect of the statute is to render a corporation incompetent to transact business while it is in default of its statutory obligations. People v. Zimbelman, 194 Colo. 384, 387-88, 572 P.2d 830, 833 (1977). Although several sections of the Colorado Corporation Code deal specifically with penalties imposed upon corporations, officers, and directors for various forms of conduct, §§ 7-10-111 and...
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