Chapter 7 - § 7.13 • DIRECTOR LIABILITY

• Jurisdiction: Colorado

§ 7.13 • DIRECTOR LIABILITY

§ 7.13.1—Generally

Generally, corporate decision-making is governed by the "business judgment rule," although Colorado courts have not extensively discussed the rule in relation to common interest communities.¹⁶³ Under the CCIOA, directors who are not appointed by the declarant are not liable for actions taken or omissions made in performance of their duties except for wanton and willful acts or omissions.¹⁶⁴ Additionally, neither the association nor any unit owner, other than the declarant, is liable for any cause of action based on that declarant's acts or omissions in connection with any part of the common interest community the declarant has the responsibility to maintain, but otherwise, any action alleging an act or omission by the association must be brought against the association and not against any unit owner.¹⁶⁵

The Nonprofit Corporation Act addresses liability more extensively. It provides that directors and officers are not liable to the corporation or to its members for any action taken or omitted if, in connection with that action or omission, the director performed the duties of the position in compliance with the statute on general standards of conduct.¹⁶⁶ A director, regardless of title, is not deemed a trustee with respect to the corporation or any property held or administered by the corporation, including, without limitation, property that may be subject to restrictions imposed by the donor or transferor of the property.¹⁶⁷ The Act says that no one is liable in contract or tort merely by reason of being a director, officer, or member of a corporation that was suspended, declared defunct, administratively dissolved, or dissolved by operation of law, the business or activities of which have been continued, with or without knowledge of the suspension, declaration, or dissolution, and the business and activities of which have not been wound up.¹⁶⁸

The Nonprofit Corporation Act also says that, if provided for in the articles of incorporation, the corporation must eliminate or limit directors' personal liability to the corporation or its members for monetary damages for breach of fiduciary duty as a director, but that such a provision may not eliminate or limit a director's liability for monetary damages for a breach of the duty of loyalty to the corporation or its members, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, statutory liability for unlawful distributions,¹⁶⁹ statutory liability for loans made by a corporation to its directors or officers,¹⁷⁰ or any transaction from which the director directly or indirectly derived an improper personal benefit.¹⁷¹ Finally, no director is personally liable for any injury to persons or property arising out of a tort committed by an employee unless the director was personally involved in the situation giving rise to the litigation or committed a criminal offense in connection with that situation.¹⁷²

§ 7.13.2—Reliance on Advice of Counsel or Other Professionals

The Nonprofit Corporation Act allows directors and officers to rely, in discharging their duties, 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.¹⁷³ 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.¹⁷⁴

§ 7.13.3—Directors and Officers Insurance and Indemnification

The CCIOA requires associations to carry commercial general liability insurance covering, among others, the board.¹⁷⁵ The CCIOA empowers associations to provide, without specific authorization in the declaration, directors and officers liability insurance.¹⁷⁶ Fidelity insurance is required if there are 30 or more units and any unit owner or association employee controls or disburses funds.¹⁷⁷

The CCIOA provides that an association has the power, without specific authorization in the declaration, to provide for indemnification of directors.¹⁷⁸ 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 party¹⁷⁹ to a proceeding¹⁸⁰ because he or she is or was a director,¹⁸¹ 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"¹⁸² and, in all other cases, the conduct was at least not opposed to the corporation's best interests, and the person had...