Under Colorado law, an LLC’s members and managers are not liable to the LLC’s creditors for an unlawful distribution

In Weinstein v. Colborne Foodbotics, LLC, Case No. 10SC143 (decided June 10, 2013) the Colorado Supreme Court held that members of a limited liability corporation (LLC) are not liable to the LLC’s creditors, and managers of an LLC do not owe fiduciary duties to the LLC’s creditors. 

After the managers of an LLC issued distributions to their members, a creditor of the LLC sued the managers and members seeking to recover on a judgment owed by the LLC.  Overruling the Court of Appeals’ prior decision in Sheffield Servs. Co. v. Trowbridge, 211 P.3d 714 (Colo. App. 2009), the Supreme Court held that the creditor lacked standing to sue because the Colorado LLC Act does not provide statutory authority for creditors to sue an LLC’s members for unlawful distribution, and the managers did not owe fiduciary duties to the LLC’s creditors. 

The Court’s opinion focuses on the nature of an LLC and the differences between the statutes which govern an LLC, and those which govern corporations, noting in particular that:

• Under the LLC structure, neither members nor managers are personally liable for the entity’s debts.

•  Colorado’s LLC Act allows an LLC’s operating agreement to override the LLC Act’s provisions in all but a few instances, while the Colorado Corporation Act does not allow a corporation’s articles of incorporation to control over its provisions.

•  The Colorado Legislature intended that the LLC Act, and not corporate common law, would govern LLCs in all but one limited circumstance (i.e., the circumstances in which the “entity veil” will be pierced to provide personal liability of the members when the entity is a sham).

The Court held that under the LLC Act, only the LLC may assert a claim against its members for an unlawful distribution absent express statutory authority.  With respect to the LLC’s managers, the Court held that the limited fiduciary duty owed by a director of an insolvent corporation to the corporation’s creditors that requires officers and directors to avoid favoring their own interests over creditors’ claims do not apply to an LLC’s managers.

You can read the Court’s opinion here.

Lee Katherine Goldstein is an appellate lawyer with the Denver law firm of Fairfield and Woods, PC. 

Disclaimer: the author makes no representation about the application of law referenced in this post to your particular case.  No attorney client relationship is created or intended by this post or by any comment posted by this author.