Chapter 6 - § 6.17 • TERMINATION OF THE ASSOCIATION AND DISSOLUTION OF THE CORPORATION

• Jurisdiction: Colorado

§ 6.17 • TERMINATION OF THE ASSOCIATION AND DISSOLUTION OF THE CORPORATION

Termination and dissolution might seem to be synonymous, and they are to the extent they both describe discontinuation of an entity, but they are addressed to different entities and under different laws. The Nonprofit Corporation Act uses "dissolution" to refer to ending the existence of a corporation. The CCIOA uses "termination" to refer to ending the existence of a common interest community.

Common interest communities are rarely terminated, but when they are it is usually because:

• The property has been severely damaged or totally destroyed — either by fire or a natural disaster — and the owners decide to sell the property rather than rebuild.
• The property is being converted from one form of common interest ownership to another.
• The property is being taken by eminent domain.
• In the case of a cooperative, there is a foreclosure against the entire property of a security interest that has priority over the declaration.⁴⁸²
• An investor acquires the property to redevelop it.
• The community is no longer economically viable and the owners decide to sell it for redevelopment.

Corporations are organized and dissolved every day. Dissolution occurs for one of four reasons:

• A voluntary act of the corporation.
• Judicial dissolution.⁴⁸³
• Expiration of the period of duration.⁴⁸⁴
• "Administrative" termination.⁴⁸⁵

While it may often be the case that termination of the common interest community and dissolution of its corporation occur simultaneously, or at least sequentially in close proximity as part of an predetermined plan, it is possible for the corporation to be dissolved without the common interest community being terminated, or vice versa.⁴⁸⁶ The CCIOA requires common interest community associations to be organized as nonprofit corporations, not-for-profit corporations, for-profit corporations, or limited liability companies, but provides that an association's failure to incorporate or organize as a limited liability company does not adversely affect either the existence of the community or the rights of persons acting in reliance on its existence.⁴⁸⁷ It would seem that the result should not change if a corporation is formed and then dissolved.

One case in which an association was dissolved is Ski Time Square Condominium Ass'n v. Ski Time Square Enterprises.⁴⁸⁸ The association was organized as a nonprofit corporation. The Colorado Secretary of State initiated administrative dissolution proceedings against the association for failure to file a corporate report and then administratively dissolved the association. After the dissolution, there was a violation of a restrictive covenant prohibiting buildings or structures without the association's consent. The association successfully obtained reinstatement of its corporate status and then filed an action to enforce the covenant. The defendant pointed out that the covenants terminated automatically should the association "legally dissolve" or the declaration was terminated according to its terms and argued that the association's administrative dissolution, therefore, automatically terminated the covenant. The phrase "legally dissolve" was not defined. The association observed that when the agreement was executed, the term "dissolution" was not used to describe an administrative sanction imposed for failure to follow statutory requirements and that the parties could neither have contemplated nor intended that a temporary suspension would automatically terminate the covenants. The appellate court agreed with the trial judge that "legally dissolve" was ambiguous and that the association should prevail. The appellate court also concluded that the parties intended the covenants to terminate only when the condominium owners agreed, or when the covenants were no longer needed, in other words, when there were no longer owners to protect. Therefore, "legal dissolution" of the association would trigger automatic termination of the covenants only if the association permanently ceased to exist as a result of the dissolution. Indeed, the court found the defendant's position that the phrase "legally dissolve" referred to a temporary dissolution of the association to be incongruous since the parties did not intend that, absent consent, the protection of the covenants would disappear while the condominium community and its association continued to exist.

The procedure for voluntary dissolution of a nonprofit corporation is governed by statute, unless the bylaws provide otherwise.⁴⁸⁹ The statute provides that for a proposal to dissolve to be authorized, the board of directors must adopt one — with any conditions, if it so chooses⁴⁹⁰ — and recommend it to the members entitled to vote,⁴⁹¹ unless the board determines that, because of conflict of interest or other special circumstances, it should make no recommendation and communicates the basis for its determination to the members. The members entitled to vote on the proposal must then approve it.⁴⁹² After dissolution has been authorized, the corporation dissolves by delivering articles of dissolution to the secretary of state.⁴⁹³ The corporation is dissolved on the effective date of those articles.⁴⁹⁴ A dissolved corporation actually continues in existence, but its activities are limited by statute.⁴⁹⁵ The activities in which it may engage are those appropriate to winding up and liquidating its affairs, including: collecting its assets; returning, transferring, or conveying its assets on a condition requiring return, transfer, or conveyance, which condition occurs by reason of the dissolution, in accordance with that condition; transferring, subject to any contractual or legal requirements, assets as provided in or authorized by the articles of incorporation or bylaws; discharging or making provision for discharging liabilities; and doing every other act necessary to wind up and liquidate the corporation's assets and affairs. Dissolution does not transfer title to the corporation's property; subject its directors or officers to standards of conduct different from those otherwise prescribed;⁴⁹⁶ change the quorum or voting requirements for the board or members; change provisions for selection, resignation, or removal of directors or officers; change provisions for amending bylaws or articles of incorporation; prevent initiation of a proceeding by or against it in its entity name; or abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution.⁴⁹⁷

The Nonprofit Corporation Act also says that the plan of dissolution must indicate to whom the assets owned or held by the corporation will be distributed after all creditors have been paid.⁴⁹⁸ The plan may do that, but for a community organized under the CCIOA, distribution of assets is governed by that Act. Dissolution does not terminate the common interest community or remove it from governance by the CCIOA, which prescribes the allocation of interests in the property.⁴⁹⁹ That allocation should supersede any directive to distribute assets in a plan of dissolution. If the common interest community is terminated, then the CCIOA will determine the distribution of assets.

The CCIOA termination statute provides that a common interest community may only be terminated by agreement of owners of units to which at least 67 percent of the votes in the association are allocated.⁵⁰⁰ The declaration may specify a larger percentage or, if all the units are restricted exclusively to nonresidential uses, a smaller percentage. In adopting a 67 percent vote for termination, Colorado departed from the Uniform Act on which it is based. The Uniform Act requires an 80 percent vote, and a commentary notes that unanimous consent — required by some statutes or common interest community documents — is all but impossible to secure,⁵⁰¹ but that a vote of the stockholders of a corporation under state corporate law may not adequately protect the interests of a minority.⁵⁰² Many would contend that the 67 percent figure adopted by Colorado is too low a threshold for an action that has such a dramatic impact on individual property rights. Lenders, in particular, may object...