COLORADO SUPREME COURT RULES LLC MEMBERS NOT LIABLE TO CREDITORS FOR UNLAWFUL DISTRIBUTIONS AND LLC MANAGERS OWE NO FUDICIARY DUTIES TO CREDITORS

In the case of Weinstein v. Colborne Foodbotics, LLC, 302 P.3d 263 (Colo. 2013), the Colorado Supreme held that creditors of an LLC lack standing to sue LLC members for unlawful distributions under C.R.S. sec. 7-80-606 and also that LLC managers do not owe fiduciary duties to LLC creditors like those owed by director's of insolvent corporations.

The plaintiff in the Weinstein case, Colborne Foodbotics, LLC, was a judgment creditor of Boulder Partnership, LLC.  Following entry of the judgment, Boulder Partnership distributed its assets to its members, which the plaintiff alleged rendered Boulder Partnership insolvent and unable to pay the judgment.  The plaintiff file suit claiming that the members of Boulder Partnership violated C.R.S. sec. 7-80-606 by accepting distributions from the LLC that rendered the LLC insolvent and also claiming that the managers violated their common law fiduciary duties to the LLC's creditors by authorizing distributions that rendered the LLC insolvent.

As to the claimed violation of C.R.S. sec. 7-80-606, the Court, construing the statute as written and declining to apply common law applicable to corporations to LLCs, concluded that only the LLC itself has standing to sue a member of the LLC for receipt of an unlawful distribution.   C.R.S. sec. 7-80-606 provides, in pertinent part, that "[a] member who receives [an unlawful distribution] ... shall be liable to the limited liability company for the amount of the distribution."  Drawing a distinction between the statutes governing LLCs and corporations, and making reference to statements in the LLC Act(C.R.S. sec. 7-801-101 et seq.) manifesting the legislature's intent that corporation common law not apply to LLCs, the Court held "that absent express statutory authority, an LLC's creditor may not assert a claim against the members of the LLC for unlawful distributions."

Again declining to apply corporation common law and deferring to the plain language of the LLC Act, the Court held "that absent statutory, the manager of an insolvent LLC does not owe the LLC's creditors the same fiduciary duty that an insolvent corporation's directors owe the corporation's creditors."

On its face, this ruling would appear to create a legitimate way for an LLC to avoid its creditors by simply distributing the assets of the LLC to its members.  However, avoiding creditors is not as easy as this case makes it appear.  Similarly aggrieved creditors still have statutory fraudulent convenyance claims and other equitable claims, and also may be able to step into the shoes of the LLC and assert the unlawful distribution claim by obtaining an order from the court applying such claim to the judgment under C.R.C.P. 69 or, alternatively, obtaining the appointment of a receiver.

Posted By:  Brent W. Houston, Esq.