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, 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. 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.
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.” 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. The Court so reasoned because the legislature had made a similar extension in the veil-piercing context through C.R.S. § 7-80-109. Some have argued that this analysis, as well as unpublished opinions from other courts,means that corporate common law regarding fiduciary duties is now entirely inapplicable to LLCs.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].” And this rule of statutory construction—according to the Weinstein court—shielded specific statutes promulgated by the legislature from application of corporate common law. 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. 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.” No section of the LLC Act, however, affirmatively imposes any fiduciary duties on members qua members. 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.