Chapter 13 - § 13.13 • LIABILITY

• Jurisdiction: Colorado

§ 13.13 • LIABILITY⁵⁵⁶

§ 13.13.1—The Corporation

The Nonprofit Corporation Act provides that any civil action permitted under Colorado law may be brought against any nonprofit corporation, and the assets of any nonprofit corporation that would otherwise be immune from levy and execution on any judgment will be subject to levy and execution to the extent that the corporation would be reimbursed by proceeds of liability insurance policies carried by it were judgment levied and executed against its assets.⁵⁵⁷

Because a cooperative corporation owns the entire building, including the individual units or apartments, the corporation may be considered an "owner" with potential liability when someone is injured while performing work in an individual apartment.⁵⁵⁸ For that reason, attorneys representing cooperative corporations need to discuss with their clients means for protecting the corporation from liability, including indemnification provisions in the documents, alteration agreements that address liability, and requirements that residents only hire service providers that carry the appropriate insurance.

§ 13.13.2—Directors and Officers Generally⁵⁵⁹

The Nonprofit Corporation Act states the general proposition with regard to the liability of officers and directors: they are not personally liable for the acts, debts, liabilities, or obligations of the corporation by mere virtue of holding office.⁵⁶⁰ However, liability may be incurred for unauthorized use of corporate powers,⁵⁶¹ and the Act provides that those purporting to act as or on behalf of a nonprofit corporation without authority to do so and without good faith belief that they have that authority are jointly and severally liable for all liabilities incurred or arising as a result.⁵⁶² In general, however, actions taken in good faith in an emergency may not be the basis for imposing liability on directors or officers on the ground that the action was not authorized corporate action.⁵⁶³

The CCIOA sets out the basic parameters of officer and director liability. It establishes that, in general, a director or officer who is not appointed by the declarant is not liable for actions taken or omissions made in the performance of his or her duties except for wanton and willful acts or omissions.⁵⁶⁴ There is an exception for investment of reserve funds,⁵⁶⁵ in which case the CCIOA specifically makes a particular section of the Nonprofit Corporation Act applicable.⁵⁶⁶ That statute requires directors and officers⁵⁶⁷ to discharge their duties in good faith,⁵⁶⁸ with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the director or officer reasonably believes to be in the best interests of the corporation.⁵⁶⁹ Directors and officers may rely on the information, opinions, reports, or statements (including financial statements and other financial data) prepared or presented by certain enumerated experts, including attorneys and accountants.⁵⁷⁰ However, if a director or officer has knowledge about the matter in question that makes reliance unwarranted, he or she is, by statute, not acting in good faith.⁵⁷¹ The Nonprofit Corporation Act also provides that a director or officer is not liable to the corporation or to its members for any action taken or omitted if, in connection with that action or omission, he or she performed the duties of the position in compliance with the statute on general standards of conduct,⁵⁷² and also that directors are not deemed trustees with respect to the corporation or any property held or administered by the corporation.⁵⁷³

The CCIOA also explicitly adopts the conflicting interest transaction statute of the Nonprofit Corporation Act⁵⁷⁴ and applies it to directors.⁵⁷⁵ Under the statute, a conflicting interest transaction⁵⁷⁶ may not, however, give rise to an award of damages or other sanctions in a proceeding by a member or by or in the right of the corporation solely because the conflicting interest transaction involves a director or a party related to a director or an entity in which a director of the corporation is a director or officer or has a financial interest or solely because the director is present at or participates in the meeting of the cooperative corporation's board of directors or a board committee that authorizes, approves, or ratifies the conflicting interest transaction or solely because that director's vote is counted for that purpose if the conflicting interest is disclosed to and accepted by the disinterested directors,⁵⁷⁷ the conflicting interest is disclosed to and accepted by the members of the cooperative entitled to vote on the matter,⁵⁷⁸ or the transaction is fair for the corporation.⁵⁷⁹

The CCIOA requires associations to carry commercial general liability insurance covering the governing board, the association, the management agent, and their respective employees, agents, and all persons acting as agents.⁵⁸⁰ In a cooperative, the coverage must include individual owners and the policy must cover claims of one or more insured parties against other insured parties. Fidelity insurance is also required if there are 30 or more units in the cooperative and any unit owner or association employee controls or disburses funds.⁵⁸¹

§ 13.13.3—Declarant-appointed Directors and Officers

Directors and officers appointed by the declarant must exercise the care of fiduciaries of the owners.⁵⁸² The Nonprofit Corporation Act, however, allows the articles of incorporation to eliminate or limit personal liability of a director to the corporation or its members for monetary damages for breach of fiduciary duty as a director.⁵⁸³ There are several exceptions that apply when

• There is a breach of a director's duty of loyalty to the corporation or to its members;
• There are acts or omissions not in good faith;
• There are acts or omissions that involve intentional misconduct or knowing violation of law;
• A director votes for, or assents to, an unlawful distribution;⁵⁸⁴
• A director assents to, or participates in, making of a loan to a director;⁵⁸⁵
• There is any transaction from which the director directly or indirectly derives an "improper" personal benefit; or
• There is an act or omission that occurs before the effective date of a provision limiting or eliminating liability.

§ 13.13.4—Indemnification of Directors and Officers

The CCIOA provides that an association has the power, without specific authorization in the declaration, to provide for indemnification of officers and directors.⁵⁸⁶ The Nonprofit Corporation Act addresses the topic of indemnification extensively. In general, nonprofit corporations may indemnify against liability a current or prior director who is made a party⁵⁸⁷ to a proceeding⁵⁸⁸ because he or she is or was a director,⁵⁸⁹ providing the person's conduct was in good faith and he or she reasonably believed the conduct at issue was in the corporation's best interests where that conduct is in an "official capacity"⁵⁹⁰ and, in all other cases, the conduct was at least not opposed to the corporation's best interests, and the person had no reasonable cause to believe the conduct was unlawful where the proceeding is a criminal one.⁵⁹¹ Indemnification in connection with a proceeding by, or in the right of the corporation, is limited to reasonable expenses incurred in connection with the proceeding.⁵⁹² The Act also allows the corporation, when prescribed conditions are met, to pay for or reimburse reasonable expenses incurred by a director who is a party to a proceeding in advance of the final disposition.⁵⁹³ The Act requires a formal determination that indemnification is permissible.⁵⁹⁴ Also, if a corporation indemnifies or advances expenses to a director in connection with a proceeding by the corporation or in the right of the corporation, it must give written notice to the voting members with or before notice of the next members' meeting.⁵⁹⁵

Termination of a proceeding by judgment, order, settlement, or conviction or on a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet...