- Colorado Supreme Court Finds Narrow Duty to Corporate Creditors by Corporate Officer Resulting in Reversal of Aiding and Abetting Breach of Fiduciary Duty Verdict Against Attorneys
- April 10, 2007
- Law Firm: Hinshaw & Culbertson LLP - Chicago Office
- Hugh Alexander, et al. v. Glen Anstine, a
Bankruptcy Trustee for Builders Home Warranty, Inc.___P.3d___, 2007 WL 509741 (Col. Sup. Ct. 2007) U.S.
The Colorado Supreme Court held that lawyers who had assisted a corporation and its president in alleged breaches of duty owed to the corporation could not be held liable on an aiding and abetting theory absent proof that the lawyers had allegedly assisted the president in furthering his own interests as distinct from attempting to serve the interests of the corporation.
Builder’s Home Warranty (“BHW”) sold warranties for new home construction. When it discovered that the insurance policies it purchased on the warranties were fraudulent, it hired attorneys Hugh Alexander, Kevin M. Kuznicki and the Alexander Law Firm, P.C. (collectively “Alexander”). Alexander advised that BHW had two options: it could file bankruptcy or “warehouse” its customers’ premiums by putting them in a escrow account while searching for replacement insurance.
at *1. Alexander also advised the corporate president that warehousing would be illegal if the corporation continued to issue warranties to new customers. The president chose to warehouse the premiums. Id.
Alexander then assisted in creating the account by drafting the escrow agreement with another law firm hired by BHW. When a competitor discovered the warehousing scheme and sought an injunction, Alexander advised the president to file bankruptcy but he chose to continue with the transfer of the escrow funds to an offshore trust company, which set up an unlicensed insurance company to issue policies that did not comply with state insurance requirements. When the federal court enjoined BHW from selling the uninsured warranties, BHW filed for Chapter 7 bankruptcy.
at *2. Id.
The bankruptcy trustee for BHW, Glen Anstine sued the president of BHW for breach of fiduciary duty and sued Alexander for legal malpractice and aiding and abetting the president’s breach of fiduciary duties. Mr. Anstine alleged that the president breached his duty by transferring assets to the offshore company without fair consideration, transferring assets offshore so payment of creditors’ obligations were delayed, and committing corporate waste by failing to protect corporate assets to be used for proper corporate purposes.
at *5. The trial court returned a verdict of $2 million against the defendants, holding the president 99 percent at fault and Alexander 1 percent at fault. The trial court amended the verdict to hold the defendants jointly liable. Alexander appealed and the appellate court affirmed the verdict. Id.
The Colorado Supreme Court accepted the appeal in order to address two issues: whether Mr. Anstine had standing under section 544(a) of the Bankruptcy Code to sue the debtor’s lawyers for aiding and abetting a breach of fiduciary duty, and whether or not Alexander could be liable to a non-client for such a breach.
The court found the appellate court had misinterpreted the narrow holding in Ficor, Inc v. McHugh, 639 P.2d 385 (Colo. 1982) as concluding that a judgment lien creditor has the right to pursue all claims available to a debtor corporation before bankruptcy is declared. The decision in Ficor was based on a specific statute to protect creditors’ interests during dissolution. The Ficor decision was not “broad enough to reach claims brought outside of that statutory realm” and it did not give general standing to creditors to bring claims belonging to the insolvent corporation. 2007 WL 509471 at *4. If there was no allegation a statutory duty was breached, then only a common law duty could create such liability.
Under common law, the court noted there is a limited duty that requires officers and directors to avoid favoring their own interests over creditor’s claims. See
v. Green, 365 P.2d 230 (1961). The court noted it had “never recognized a duty to creditors broader than this and have not defined the duty owed to creditors as fiduciary in the usual sense.” 2007 WL 509741 at *5. Because Mr. Anstine did not allege that the president’s warehousing scheme was set up to favor the president’s interest and defeat creditors’ claims, Mr. Anstine failed to allege a breach of the limited fiduciary duty to BHW’s creditors. For this reason, the claim against Alexander for aiding and abetting the breach of fiduciary duty failed for lack of standing. Crowley at *5. The court chose to leave “for another day” the question of whether or when attorneys in Alexander’s position could be held liable on an aiding and abetting theory if there had been an underlying and self-interested breach of fiduciary duty owed to creditors. Id. at *1. Id.
Significance of Case
The court’s holding that the duties owed by corporate management to corporate creditors in such situations are limited to self-interest situations will obviously benefit lawyers who assist corporate management. To the extent, however, that the plaintiff-creditors in such cases can make self-interest claims, this benefit may be of limited scope.