COLO. CT. OF APPEALS RULES ON RIGHTS OF CREDITORS AGAINST MANAGERS AND MEMBERS OF INSOLVENT LLCS

In Colborne Corp. v. Weinstein, 09CA0724 (Colo. App. Jan. 21, 2010), the Colorado Court of Appeals ruled that creditors of a Colorado limited liability company (LLC) had standing to sue the LLC's managers who authorized and its members who accepted unlawful distributions from the insolvent LLC.

Under the Colorado Business Corporation Act, C.R.S. sec. 7-101-101 et seq., and Colorado case law, corporate directors are liable to the corporation for unlawful distributions, and officers and directors of insolvent corporations have limited fiduciary duties to the corporation's creditors. Pursuant to this statutory and common law, Colorado courts have recognized that corporate creditors have the right to sue directors for distributions authorized while the corporation was insolvent or that render the corporation insolvent.

In Colborne Corp., the Court determined that the judicial decisions permitting corporate creditors to sue directors for unlawful distributions should be applied to LLCs. Following those decisions, the Court ruled that managers of an LLC have limited fiduciary duties to the LLC's creditors when the LLC is insolvent. These limited fiduciary duties only require the managers to avoid favoring their own interests over those of the creditors. The Court further ruled that creditors of an LLC could recover from the members for unlawful distributions received by them.

Posted By: Brent W. Houston, Esq.