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Piercing the Corporate Veil for Colorado LLCs

Protections for LLC Members and Managers in Colorado

In a previous post, we discussed a recent Colorado decision that helped strengthen LLC protection in Colorado. In Weinstein, et al. v. Colborne Foodbotics, LLC, the Colorado Supreme Court dealt with the issue of whether creditors of an LLC could personally sue the LLC members and managers. Specifically, the plaintiff creditor claimed the LLC managers authorized unlawful distributions to the LLC members that left the LLC insolvent and unable to pay the plaintiff creditor. The plaintiff creditor tried to “pierce the corporate veil”–meaning pierce through the “limited liability” of the LLC formation and make the members and managers personally liable.

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As we reviewed in our prior post, the Colorado Supreme Court held that the members would be liable to the LLC for unlawful distributions but not to the LLC’s creditors.

LLC Managers and Fiduciary Duties Under Colorado Law

However, the Weinstein decision also dealt with whether the LLC manager owed a fiduciary duty to the LLC’s creditors–similar to an insolvent corporation’s directors owing a fiduciary duty to a corporation’s creditors.  Put simply: a fiduciary duty is the strictest duty recognized in the United States whereby the fiduciary must act in another party’s best interest.

In a previous case from 2009, Sheffield Servs. Co. v. Trowbridge, a Colorado court of appeals held that an LLC manager did in fact owe fiduciary duties to the LLC creditors–similar to the director of a corporation to its creditors. However, in Weinstein, the Colorado Supreme Court disagreed, overturning Sheffield.

According to the Colorado Supreme Court’s decision, the Colorado’s LLC Act states that managers are not liable for the debts of the LLC and does not extend a fiduciary duty to an LLC’s creditors.  For this reason, the Court held that:

“…the court of appeals in Sheffield erred in extending the fiduciary duty an insolvent corporation’s directors owe its creditors to the managers of an LLC. To the extent that Sheffield holds that an LLC’s manager has a fiduciary duty to the LLC’s creditors, it is overruled. Having concluded that Sheffield was wrongly decided, we hold 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.”

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