Chipman Glasser, LLC

Colorado
  2000 South Colorado Blvd.
  Tower One, Suite 7500
  Denver, CO 80222
  Phone: 303.578.5780
  Fax: 303.578.5790

Arizona
  6263 North Scottsdale Road
  Suite 340
  Scottsdale, Arizona 85250
  Phone:602-344-0044
  Fax: 602-344-0048

Email: info@chipmanglasser.com

The Latest from Chipman Glasser

Read our latest blog posts below.

Thursday
Dec052013

Revisiting Fiduciary Duties of Members of Colorado LLCs

The law governing limited liability companies (“LLCs”) and their members is relatively undeveloped, and it continues to evolve.  One important question, for example, is whether the members of an LLC owe fiduciary duties to each other.

In a previous blog post, we explored the existing case law on this subject from the corporate and partnership context.  And that post concluded that majority or controlling members of LLCs owe fiduciary duties to minority members.  Although it remains uncertain in the LLC context, a recent decision from the Colorado Supreme Court seems to call that conclusion into question.

In Weinstein v. Colburn,[1] the Colorado Supreme Court addressed whether a creditor of an insolvent LLC could assert a common law claim for breach of fiduciary duty against the LLC’s manager for authorizing distributions by the LLC to its members.[2]  The lower court had applied common law applicable to insolvent corporations.  And that court determined that a manager of an insolvent LLC (which it analogized to a director of an insolvent corporation) owed a fiduciary duty to an LLC’s creditors.[3] 

The Supreme Court in Weinstein determined that the Court of Appeals had “erred in extending the fiduciary duty an insolvent corporation’s directors owe its creditors to the managers of an LLC.”[4]  The Court reasoned that if the legislature had intended corporate common law to apply to an LLC in the insolvency context, it would have explicitly extended that case law through the LLC Act.[5]  The Court so reasoned because the legislature had made a similar extension in the veil-piercing context through C.R.S. § 7-80-109.[6]  Some have argued that this analysis, as well as unpublished opinions from other courts,[7] means that corporate common law regarding fiduciary duties is now entirely inapplicable to LLCs.  But this interpretation of Weinstein oversimplifies the holding and is probably incorrect.

The Weinstein court reasoned that “[t]he rule that statutes in derogation of the common law are to be strictly construed shall have no application to [the LLC Act].”[8]  And this rule of statutory construction—according to the Weinstein court—shielded specific statutes promulgated by the legislature from application of corporate common law.[9]  Because the legislature, through the LLC Act, had specifically established the extent of liability for an insolvent LLC that makes distributions (in C.R.S. § 7-80-606), the Court would not rewrite what the legislature intended by overlaying corporate common law on that statute.[10]   Yet the Weinstein court said nothing about the application of common law in situations where the LLC Act is silent or where the LLC Act recognizes that the common law applies. 

For example, the LLC Act specifically states (in C.R.S. § 7-80-108(1.5)) that an LLC “member or manager . . . [may owe] duties, including, but not limited to, fiduciary duties, to . . . another member.”[11]  No section of the LLC Act, however, affirmatively imposes any fiduciary duties on members qua members.[12]  Because there are no statutory duties imposed on members of an LLC, the only duties to which section 108(1.5) could be referring are common law fiduciary duties.  Recognizing and applying such common law fiduciary duties in the LLC context is therefore in perfect harmony with Weinstein, where the Court ruled only that corporate common law could not rewrite the duties the legislature intended to apply.   Applying common-law fiduciary duties to majority or controlling members is necessary to give effect to the legislature's intentions set forth in the LLC Act.  

Furthermore, applying this common law to the LLC scenario also serves to protect minority LLC members.  Nothing in the LLC Act suggests that the LLC was intended to be a mechanism by which majority or controlling members of an LLC are licensed to take advantage of minority members of an LLC.  Providing this common law protection to minority LLC members is important to respect the legislature's intent with regard to LLCs. And, therefore, doing so comports with the Supreme Court's reasoning in Weinstein.

 


[1] 2013 CO 33 (Colo. 2013).

[2] Id. at ¶ 7. 

[3] Id. at ¶ 6. 

[4] Id. at ¶ 23. 

[5] Id. 

[6] Id. 

[7] In a blog post by Neal H. Bookspan, he tells of a bankruptcy judge in Arizona recently ruling that “there are no fiduciary duties between members of a LLC unless they are specifically provided for in an operating agreement.”  (http://businesslawguy.com/2013/08/22/are-there-fiduciary-duties-between-members-in-an-arizona-llc/).

[8] 2013 CO 33 at ¶ 11 (quoting C.R.S. § 7-80-109). 

[9] Id. ¶¶ 11, 23.  

[10] Id. at ¶ 16.

[11] The Supreme Court also recognized this statutory provision in Weinstein.  Id. ¶ 10 n.5 (citing C.R.S. § 7-80-108(1.5)).  

[12] See, e.g., C.R.S. § 7-80-404. 

Friday
Mar082013

Fee Awards Are Only Non-Dischargeable Only if the Applicable Statute Proscribes Conduct that Violates § 523

Citation:

Kaplan v. Wasko, Case No. CC-12-1118-PaMkBe (9th Cir. B.A.P. Mar. 6, 2013) (unpublished).

Ruling:

The Ninth Circuit B.A.P. remanded this case and directed the bankruptcy court to apply the issue preclusion factors identified in Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). In applying those factors to the state court’s attorney fee award, the Ninth Circuit B.A.P. found that the underlying discovery sanction could only be excepted from discharge if the statute at issue proscribes conduct that violates one of the provision of 11 U.S.C. § 523(a).

Procedural context:

Appeal from the bankruptcy court for the Central District of California, which denied a creditor’s motion to amend summary judgment and determined that the state court’s fee award was not exempt from discharge because it found that issue preclusion did not apply to the state court’s fee award. The bankruptcy court order was reviewed de novo.

Facts:

Kaplan invested in the Debtors’ failed night club. And he sued the Debtors in California state court alleging eleven causes of action, including fraud and breach of fiduciary duty. The state court was permitted to adjudicate the claims post-petition and entered a judgment in Kaplan’s favor. Thereafter, Kaplan filed a motion in the state court proceedings seeking discovery sanctions available pursuant to a California statute. The state court entered an order granting the motion and imposing sanctions. Kaplan brought an adversary proceeding in the bankruptcy case and argued that the state court judgment and sanction order were non-dischargeable. With respect to the underlying debt, the bankruptcy court granted summary judgment and held that it could not be discharged. With respect to the fee award, however, the bankruptcy court declined to find those sums non-dischargeable because public policy did not support the application of issue preclusion. The Ninth Circuit B.A.P. articulated the standards that must be applied in deciding issue preclusion and remanded the case for that purpose. In addition, the Ninth Circuit B.A.P. clarified that the fee award could only be non-dischargeable if the California statute proscribed conduct that violates one of the provisions of 11 U.S.C. § 523(a).

Judge(s):

Pappas, Markell and Beesley

» Article Source

Thursday
Aug232012

Restoration Construction: Navigating the New Rules in Colorado

On June 6, 2012, Colorado fundamentally altered the rules that apply to roofers and restoration contractors handling losses on residential property.  Governor Hickenlooper signed into law a bill1 that, at first blush, appears aimed at unscrupulous “storm chasers.”  The impact of the new statute, however, reaches far beyond its presumptive target.  And the law is rife with unintended consequences for everyone within its reach.  

The new rules arguably affect virtually every restoration contractor doing business in Colorado, regardless of whether that contractor’s primary business involves roof repairs.   According to the statute, the term “Roofing Contractor” includes any “firm, partnership, corporation, association, business trust, limited liability company, or other legal entity that performs or offers to perform roofing work in [Colorado] on residential property for compensation.”2  Contractors in the restoration industry invariably assume the role of general contractor, and in doing so, they take on responsibility for all of their subcontracted trades.  As a result, every residential restoration project that involves roofing work – no matter how minor – likely requires compliance with the statute.  That includes fire losses in which the roof is damaged.  And it includes water losses that are caused by high wind and roof damage (i.e., tornado, microburst, etc.).  Indeed, the list of property losses that necessitate some degree of roofing work is virtually endless.

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Friday
Jul132012

Buyer Beware: The Utility of Acquired Claims May be Limited by the Purity of the Buyer's Motive

The American Bankruptcy Institute recently published Mr. Glasser's summary of a recent decision by the Ninth Circuit BAP. Click here to view the original article.

Citation:

Beal Bank USA v. Windmill Durango Office, LLC, US Trustee, DP Air Corp., BAP No. NV-11-1728-DKiPa, NV-11-1737-DKiPa (Related appeals) (B.A.P. 9th Cir. July 6, 2012)

Ruling:

The bankruptcy court did not abuse its discretion by denying a secured creditor's Rule 3018(a) motion. That motion sought to amend...

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Tuesday
May292012

Fiduciary Duties of Members of Colorado LLCs

The limited liability company (LLC) enabling statutes in some states expressly set forth affirmative duties that LLC members owe to one another. Other state LLC enabling statutes expressly negate such duties. The Colorado Limited Liability Company Act is silent as to whether LLC members owe a fiduciary duty to one another. No published Colorado opinion has yet addressed this issue.

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