On June 10, 2013, the Colorado Supreme Court released its opinion in Weinstein v. Colborne Foodbotics, LLC, 2010 WL 3213046. The Colorado Supreme Court agreed to review two questions is the Weinstein matter: 1) “Whether the creditors of a limited liability company (“LLC”) have standing to sue individual members of the LLC who have allegedly received an unlawful distribution under section 7-80-606, C.R.S. (2009), the Colorado Limited Liability Company Act (“LLC Act”)”; and 2) “Whether the court of appeals erred in extending the limited common law fiduciary duty which directors of insolvent corporations owe to an insolvent corporation's creditors to managers of LLCs.” Weinstein v. Colborne Corp., No. 10SC143, 2010 WL 3213046 (Colo. Aug. 16, 2010).
With regard to the first question, the Colorado Supreme Court ruled that while the LLC may, itself, bring claims its members and managers for improper distribution under the LLC Act, “absent express statutory authority, an LLC’s creditor may not assert a claim against the members of the LLC for unlawful distribution.” Weinstein v. Colborne Foodbiotics, LLC, No. 10SC143, at ¶19 (Colo. June. 10, 2013).
With regard to the second question, the Colorado Supreme Court ruled that the “LLC Act states that managers are not liable for debts of the LLC, and it extends no fiduciary duty to creditors.” Id. at ¶ 23. Petitioners, however, argued that in Sheffield Servs. Co. v. Trowbridge, 211 P.3d 714, 723–24 (Colo. App. 2009), the Colorado Court of Appeals extended the fiduciary duty corporate officers owe to an insolvent corporation to include LLC member/managers and the duties they owe to insolvent LLCs. The Colorado Supreme Court ruled that Sheffield was decided in error and overturned the decision, holding that “absent statutory authority, 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.” Weinstein at ¶ 23.
This ruling extends the protections offered to member / managers of LLCs. Potential creditors of LLCs should consider contractually protect themselves from any possible improper distributions that member / managers of LLCs might make rather than simply relying on common law fiduciary duties.
A full copy of the text of the Colorado Supreme Court's decision in Weinstein can be viewed on the Colorado Bar Association's Website, here.