In Colborne Corporation v. Weinstein, 2010 WL 185416 (Colo. App. 2010), the plaintiff creditor in this case brought suit against two members of the LLC debtor pursuant to the Colorado LLC Act, alleging that the members authorized and received a distribution that rendered the LLC insolvent, thereby frustrating the plaintiff’s efforts to collect.
The Colorado LLC Act, like Iowa’s, barred LLCs from making distributions to members if the LLC is insolvent or if the distribution will make the LLC insolvent. The Colorado Act set forth that a member who knowingly receives a distribution in violation of the Act is liable to the LLC to return the distribution, but does not explicitly state that there is any liability for the same to the creditor themselves. The court in noted that when the LLC members who authorize the distribution are the same members who receive the distribution, they have no interest in suing themselves to “recover”, and thus the creditors of the LLC are possessed with the right to sue the members directly for the return of the improper distribution. The court further ruled that managers of LLCs owe a limited fiduciary duty to creditors of the LLC and accordingly are prohibited from favoring their own interests over those of the creditors.
The court found a statutory remedy for LLC creditors, even though the language of the statute only obligates the members to return unlawful distributions to the LLC. The Colorado Supreme Court granted certiorari for further review of this ruling so stay tuned.
-Ben Bruner, Dickinson associate