Wright v. Bayly Corp.

• Court: Colorado Court of Appeals
• Writing for the Court: KELLY
• Citation: Wright v. Bayly Corp., 587 P.2d 799, 41 Colo.App. 313 (Colo. App. 1978)
• Decision Date: 14 September 1978
• Docket Number: No. 77-830,77-830
• Parties: Philip N. WRIGHT and Marvin Spector, Trustee for and on behalf of The Joan T. Wright Trust, Plaintiffs-Appellants, v. BAYLY CORP., a Delaware Corporation, Defendant-Appellee. . II

Page 799

587 P.2d 799

41 Colo.App. 313

Philip N. WRIGHT and Marvin Spector, Trustee for and on behalf of The Joan T. Wright Trust, Plaintiffs-Appellants, v. BAYLY CORP., a Delaware Corporation, Defendant-Appellee.

No. 77-830.

Colorado Court of Appeals, Div. II.

Sept. 14, 1978.

Rehearing Denied Oct. 12, 1978.

Hoffman, McDermott & Hoffman, Gerald P. McDermott, Denver, for plaintiffs-appellants.

Ireland, Stapleton, Pryor & Holmes, P. C., Kenneth L. Starr, Ann Livedalen, Denver, for defendant-appellee.

KELLY, Judge.

The plaintiffs, who are owners of unregistered stock in the defendant corporation, appeal the trial court's entry of summary judgment for the defendant. The trial court ruled that the defendant had no duty to approve the transfer of the plaintiffs' stock prior to its sale, or, alternatively, that if there was such a duty, it was not breached in this case. We conclude that this case was erroneously disposed of on the motion for summary judgment, and reverse for a trial.

Philip and Joan Wright acquired their stock in the defendant corporation in 1969. The shares of stock were not registered with the Securities and Exchange Commission and bore the following restriction:

"The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares have been acquired for investment and may not be Offered, sold or otherwise transferred in the absence of an effective registration statement for the shares under the Securities Act of 1933 or a prior opinion of counsel, satisfactory to the issuer, that registration is not required under the Act." (emphasis supplied).

In 1972, the plaintiffs wanted to sell their Bayly Corp. stock. They were informed by the corporation's attorney that the stock could be sold pursuant to Securities and Exchange Commission Rule 144. That rule, 17 C.F.R. § 230.144, allows unregistered securities to be sold if: there is adequate public information concerning the issuer; the amount sold is not over 1% Of the outstanding shares in the issuing company; the sale is made in an ordinary broker's transaction; the SEC is notified of the sale; and the seller has held the stock for longer than two years.

The plaintiffs sent to the corporation the opinion of an attorney that the sale would comply with Rule 144. They also obtained a broker's assurance letter, and completed the Rule 144 forms. However, the corporation did not notify the plaintiffs that the sale of their stock would be approved, and the plaintiffs' stock was not sold, nor was it presented to the corporation's transfer agent.

The plaintiffs commenced this action seeking the difference between the price of the stock at the time they sought approval of the sale and price of stock at the time the action was commenced. The plaintiffs claimed that Bayly breached either a fiduciary duty or the duty to use reasonable care when it failed to give plaintiffs presale approval for the transfer of their unregistered shares.

The court erred in ruling that the defendant owed no duty to the plaintiffs. As a trustee for its stockholders, the corporation is bound to protect their interests, and occupies a fiduciary relationship with them. See Holly Sugar Corp. v. Wilson, 101 Colo. 511, 75 P.2d 149 (1937); Supply Ditch Co. v. Elliott, 10 Colo. 327, 15 P. 691 (1887). The directors of a corporation and its controlling stockholders also owe fiduciary duties to the remaining stockholders. See Security National Bank v. Peter, Writer & Christensen, Inc., Colo.App., 569 P.2d 875 (1977). One who stands in a fiduciary relationship to another is under a duty to act for the benefit of the other in matters within the scope of the relationship and may not profit at the expense of the other. Restatement (Second) of Trusts § 2, Comment b. The fiduciary duties owed by a corporation to its stockholders include the duty to deal with them in good faith.

In opposition to defendant's motion, plaintiffs submitted an affidavit from their stockbroker which stated that the usual, customary, and accepted practice in the industry with respect to the sale of restricted stock is that such stock will not be offered for...