Chapter 21 - § 21.4 • BREACHES OF FIDUCIARY DUTIES

• Jurisdiction: Colorado

§ 21.4 • BREACHES OF FIDUCIARY DUTIES

§ 21.4.1—Common Breaches by Directors

There are many ways in which directors can breach their fiduciary duties to the corporation. Some common breaches involve self-dealing, usurping business opportunities from the corporation, and not dealing in good faith with shareholders of the corporation.

For example, Colorado courts have held that it is not a legitimate corporate activity to give away corporate funds to directors without any lawful reason. Polk v. Hergert Land & Cattle Co., 5 P.3d 402, 405 (Colo. App. 2000). Therefore, a director breaches his or her fiduciary duty to the corporation to refrain from self-dealing when he or she uses corporate funds for personal benefit without providing repayment of those funds to the corporation. Id.

Where a plaintiff establishes that the corporation had a corporate interest and expectancy in a corporate opportunity, a director has a duty to refrain from the usurpation of that corporate opportunity. Collie v. Becknell, 762 P.2d 727, 731 (Colo. App. 1988). If a director usurps a corporate opportunity, courts have deemed that director to be holding the usurped property in constructive trust for the corporation. Id. at 731. A director also breaches his or her fiduciary duty not to usurp a corporate opportunity when engaging or participating in an enterprise that directly competes against the corporation in which he or she is a director and when such conduct has an injurious or detrimental effect on the corporation's business. Astarte, Inc. v. Pacific Indus. Systems, Inc., 865 F. Supp. 693, 707 (D. Colo. 1994).

Additionally, when dealing with shareholders of the corporation, a director has a duty to act with an "extreme measure of candor, unselfishness, and good faith." River Mgmt. Corp. v. Lodge Props. Inc., 829 P.2d 398, 404 (Colo. App. 1991). Therefore, a director breaches his or her fiduciary duty, and shareholders may bring a derivative suit for fraud, if he or she gives inadequate compensation for minority shareholders' share of company stock. Id.

However, Colorado law does not impose a duty upon directors of a corporation for other directors' misconduct. Holland v. American Founders Life Ins., 376 P.2d 162, 166 (Colo. 1962). Therefore, a director is liable for his or her own misconduct only, unless he or she assisted another director in the wrong. Id.

§ 21.4.2—Defenses

Under Colorado law, a claim for breach of fiduciary duty has three elements: a plaintiff must allege (1) that...