It’s time for the Colorado legislature to amend its corporations law

Bad faith foreign actors are establishing difficult-to-dissolve fraudulent entities
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Over the past several years, Colorado corporate dissolution law has enabled bad actors to easily establish sham companies and then use those entities for improper and illegal purposes, such as filing fraudulent trademark applications overseas, and selling counterfeit goods here and abroad.

These bogus entities often have the same or similar names to legitimate companies, causing brand confusion, dilution and tarnishment. Moreover, these fraudsters use addresses of homeowners that have no affiliation with the incorporated entity, causing innocent Coloradans to be overwhelmed with unwanted mail and packages.

The Colorado General Assembly can remedy this problem by amending Colorado corporations law to allow for administrative dissolution of corporations, rather than continuing to require the attorney general to file a lawsuit for judicial dissolution if an entity obtains its articles of incorporation through fraud.

State corporations statutes typically allow for dissolution voluntarily by the entity’s officers and directors, administratively by the agency responsible for corporate filings, usually the secretary of state, or judicially, i.e., through a shareholder, creditor or state attorney general bringing an action in court.

Colorado currently only allows for voluntary dissolution by incorporators, members or directors; and judicial dissolution by shareholders and creditors under certain circumstances, or the attorney general if (1) the corporation obtained its articles of incorporation through fraud or (2) the corporation has continued to exceed or abuse the authority conferred upon it by law.

Colorado previously allowed for administrative dissolution by the secretary of state’s office, but that provision was repealed in 2005 and replaced with provisions addressing delinquency. These provisions allow for an entity to be declared delinquent for not paying requisite fees, not complying with reporting requirements, or not providing for registered agents or service of process.

However, delinquency does not terminate the authority of a registered agent, and the existence of a domestic entity continues despite its delinquency. A delinquent entity may cure its delinquency, but if it does not, it cannot be dissolved until three years of delinquency have passed.

Bogus Colorado Corporations

The lack of an administrative option for corporate dissolution has led to the proliferation of sham corporations in Colorado. These companies are either entirely fictitious, using a random Colorado address on their incorporation paperwork, or will incorporate using the name of a legitimate company (or a close version of the name) with a Colorado address.

In 2018, the Colorado attorney general’s office filed four lawsuits in an attempt to judicially dissolve a number of these bogus companies. One lawsuit noted that a single Colorado resident had over 200 companies incorporated at his address, none of which were affiliated with the resident. Another lawsuit sought dissolution of a fake company that had been selling counterfeit water heaters in China under a name similar to a legitimate water heater manufacturer.

While these cases ended with the defendants failing to appear and eventual dissolution, these actions did not stem the tide of fraudulent incorporations in Colorado.

Earlier this year, a single registered agent registered dozens of apparently fraudulent entities, many under the names of well-known brands. One targeted entity was Granite Gear LLC, a high-end outdoor gear manufacturer registered in Delaware and based in Minnesota, which discovered that a Colorado entity also calling itself Granite Gear had filed numerous trademark applications for Granite Gear’s brand in China.

Granite Gear CEO Bryan Kinsley commented, “It’s disheartening that this could happen to a 30-year old, established brand, particularly in such a great outdoor State.” Companies have no recourse against these entities that are capitalizing on and degrading recognized brands, other than to complain to the attorney general’s office.

Short of the attorney general going through the significant time and expense to prepare and file a lawsuit to dissolve every bogus corporation, the proliferation of fraudulent Colorado companies will continue, facilitating brand squatting, the sale of counterfeit goods here and abroad, and possibly other nefarious objectives.

A Better Solution

Colorado need not continue to operate as a haven for would-be counterfeiters and bad actors. Several states allow for administrative dissolution, including when a corporation knowingly fails or refuses to answer truthfully and fully an inquiry from an attorney general or secretary of state.

Similar language in Colorado would allow the secretary of state or attorney general to send a suspected bogus entity’s registered agent an inquiry as to the company’s status and, if the inquiry went unanswered, would enable the secretary of state to dissolve the entity. Additionally, the entity could be listed as “inactive” on the secretary of state’s website, signaling to others that it is not a legitimate business.

It’s time to close this loophole in Colorado corporations law, which allows bad actors to freely incorporate fraudulent entities in Colorado for improper and illegal purposes, and makes the dissolution of such entities difficult, time-consuming and costly.

Amending Colorado corporations law to permit administrative dissolution of sham companies will: (a) protect brand owners and legitimate business, (b) protect Colorado citizens from being forced to be a mail drop for sham businesses, (c) protect members of the public from counterfeiting, fraud and other bad acts perpetuated by such scammers, and (d) save the Colorado attorney general’s office valuable time and resources that could better be devoted to protecting consumers.

Gardenswartz.alissa 2x3 Alissa Gardenswartz is a shareholder at Brownstein and is the former Colorado Deputy Attorney General for Consumer Protection.

Rodrigues.airina 2x3 Airina Rodrigues is also a shareholder at Brownstein and is an IP and brand management attorney.

Categories: Economy/Politics, Industry Trends