## Facts

- Peters, Writer & Christensen, Inc. (PWC) had common and preferred shares; plaintiffs were preferred shareholders, and individual defendants were directors who controlled a majority of the common stock.
- PWC’s articles of incorporation required that, upon liquidation or dissolution, preferred shares be redeemed or retired before any distribution to common shareholders.
- The directors and common shareholders adopted a plan to liquidate and dissolve PWC without giving notice to the preferred shareholders.
- PWC owned a substantial block of Atlantic Improvement Corporation stock, a corporate asset that could have been sold during liquidation to generate sufficient funds to redeem the preferred shares.
- The directors decided not to sell the Atlantic stock, expected it to appreciate, did not communicate that decision to the preferred shareholders, and proceeded in a manner that left the preferred shares unredeemed while the directors retained the benefit of the asset as common shareholders.
- Preferred shareholders sued asserting a derivative claim under Colorado civil procedure and a class claim alleging misconduct by the directors.
- After a bench trial, the trial court treated the claims as requiring proof of actual fraud and dismissed for lack of evidence of intentional fraud.

## Issues

1. Whether directors breach fiduciary duties to preferred shareholders by liquidating without notice and withholding an asset that could redeem preferred shares, while retaining the asset for common shareholders in violation of the articles.
2. Whether preferred shareholders must prove actual fraud to obtain relief, or whether breach of fiduciary duty/constructive fraud and violation of the articles suffices.
3. Whether the trial court erred by recharacterizing the pleadings and proof as only actual-fraud claims and dismissing on that basis.

## Decision

- The court reversed the dismissal in relevant part and remanded.
- The directors’ conduct (no notice to preferred shareholders, failure to redeem despite available assets, and retention of the Atlantic stock for common shareholders) constituted a breach of fiduciary duty and a violation of the articles of incorporation.
- Proof of actual fraud was not required; liability could rest on breach of fiduciary duty and constructive/equitable fraud principles.
- Further proceedings were required to determine appropriate relief consistent with the preferred shareholders’ liquidation rights.

## Legal Principles

- Directors owe fiduciary duties to all shareholders, including preferred shareholders, and must act in good faith during liquidation and dissolution.
- Preferred stock liquidation preferences stated in the articles of incorporation are enforceable contractual rights binding on the corporation and its directors.
- Directors who are controlling common shareholders may not use liquidation decisions to divert corporate assets to themselves in conflict with preferred shareholders’ contractual priority.
- Relief may be granted for breach of fiduciary duty and constructive/equitable fraud without proving the elements of intentional misrepresentation required for actual fraud.
- When directors wrongfully withhold assets that should satisfy preferred preferences, equitable remedies and damages may be available, including an accounting for asset value needed to honor the preference.

## Conclusion

The court held that directors who controlled the common stock breached fiduciary duties by liquidating the corporation in a manner that violated the preferred shareholders’ contractual liquidation priority, and that the preferred shareholders were not required to prove actual fraud to obtain relief; the case was remanded for determination of an appropriate remedy.


Sec. Nat’l Bank v. Peters, Writer & Christensen, Inc., 39 Colo. App. 344, 569 P.2d 875 (Colo. Ct. App. 1977)