By Reid J. Allred and Maral Shoaei
The Colorado Supreme Court, in a recent opinion, LaFond v. Sweeney, addressed the duties of a manager or member of a limited liability company (“LLC”) under Colorado law upon dissolution and winding up of an LLC. At first glance, LaFond appears to provide some needed clarity to the common-law fiduciary duties owed by LLC members to fellow members. But a closer look reveals that the opinion adds little to the existing body of law—except to highlight the need for further statutory or case-law developments in this still-murky area of LLC law.
Affirming the decision of the appellate court below, the LaFond Court held that, under the “unfinished-business rule,” an LLC continues to exist after it has been dissolved in order to wind up its business affairs. And pending contingency-fee cases are considered to be part of the LLC’s business. The Court noted that members and managers of an LLC owe fiduciary duties during the winding-up process. As such, all profits from contingency-fee cases resolved during the wind-up period belong to the LLC, should be held for the LLC by the member or manager involved in the winding-up process, and are to be distributed in accordance with the LLC’s profit-sharing agreement. The Court’s analysis hinged on statutory fiduciary duties of members and managers upon dissolution of an LLC. Under the Colorado Limited Liability Company Act (the “LLC Act”), “[m]embers and managers of an LLC have a duty to . . . [a]ccount to the [LLC] and hold as trustee for it any property, profit, or benefit derived by the member or manager in the conduct or winding up of the [LLC] business . . . .” But this statutory duty is limited to the actions of managers or member-managers during the winding-up process.
Our previous blog posts have discussed the undeveloped law concerning whether common-law fiduciary duties apply to an LLC. Particularly, these posts have analyzed whether a majority or controlling member of an LLC owes a fiduciary duty to a minority member similar to the common-law duty imposed in the context of partnerships or closely-held corporations. We have also examined the LLC Act and noted that it is silent as to whether LLC members owe these common-law fiduciary duties to one another.
Although LaFond does not answer this still-open question, it does not foreclose the argument that majority members of an LLC owe a duty to the minority members based on common-law principles applicable to partnerships and closely-held corporations under Colorado law. In fact, LaFond recognizes that a member may owe “duties, including, but not limited to, fiduciary duties . . . to another member,” despite the absence of any such express duties in the LLC Act. And LaFond also recognizes that such duties may be affirmatively eliminated through an operating agreement if members decide to do so.
Until the Court issues a future opinion that squarely addresses this question, members of LLCs in Colorado should rely on the common-law principles applicable to partnerships and closely-held corporations, which continue to provide guidance in determining whether LLC members owe fiduciary duties to minority members.
1) 2015 CO 3 (Colo. Jan. 20, 2015).
2) Id. at P22.
3) Id. at P23.
4) Id. at P36.
5) Id. at P23-25.
6) Id. at P16 (quoting C.R.S. § 7-80-404(1)(a)-(b)).
8) LaFond, 2015 CO 3 at P18 (quoting C.R.S. § 7-80-108(1.5)) see also http://chipmanglasser.wpengine.com/blog/2013/12/5/revisiting-fiduciary-duties-of-members-of-colorado-llcs.html (“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.”).
9) Id. at P33.