“LLCs combine the limited personal liability of a corporation with the single-tier tax treatment of a partnership.” (Opinion). Here, the Court interpreted the Colorado Limited Liability Company Act, CRS 7-80-606 (Act), and concluded that a judgment Creditor of the LLC could not bring suit against either the Managers or the Members of the LLC. The Managers were companies owned by the Members (natural persons). Creditor obtained a judgment against the LLC. Managers then induced the LLC to distribute its assets to the Members. Creditor sued the Members under the Act for an unlawful distribution, and sued the Managers for a common law breach of fiduciary duty claim. The Court concluded that under the express terms of the Act, only an LLC can sue its members for unlawful distributions. And, Act does not extend corporation common law to an LLC in any instance except a veil-piercing claim.
Tag Archives: LLC
Michael Weinstein; Kenneth Major; Manymajors Managements, Inc.; and Business Mechanic, Inc., v. Colborne Foodbotics, LLC 2013CO33 (June 10, 2013)
You are not defined by what you do – nor is your LLC. An LLC created for the purpose of developing a property suffers major financial problems. The sole member and manager loaned his own funds to the company. The LLC fails anyway. An excavation company doing work for the LLC does not get paid in full and sues. By the time of trial, the member was the the last defendant standing. Excavator claimed the funds loaned to the LLC should have been held in trust under the Construction Trust Fund Statute – CRS 38-22-127. The Court disagreed. The loan was made for general operations, not specific construction activities. There is a distinction between the contractor (here, the LLC) and the project. Examining the totality of the circumstances, the Court concluded the loaned funds were not funds disbursed “on a construction project.” Thus, the manager was not liable for not holding the funds in trust.
When one member of a two member LLC decides that a derivative action by the other member is not in the best interest of the LLC, is that decision the product of an independent and adequate inquiry? Here, the trial court said “yes” and dismissed the plaintiff’s derivative claims before discovery. The court of appeals reversed, in part, holding that business, personal, or familial relationships may raise factual questions about whether the decision-maker is “independent” under section 7-80-716, C.R.S. 2011. Although plaintiffs have the burden to prove lack of independence, defendants must also have some evidence that the member(s) had sufficient information to make a good-faith decision that maintenance of the derivative action was not in the LLCs’ best interest. In this case, plaintiff was entitled to discovery; therefore, the appeals court reversed dismissal of the derivative claims.
National Farmers Union Property and Casualty Company v. Garfinkel, et. al. 2012COA46 (March 15, 2012)
With wildfires burning, this Homeowner’s Insurance coverage case is timely. The Insurer brought a coverage action disclaiming liability under a Homeowner’s policy for a wildfire started on property owned by a LLC operated by the homeowners. The trial granted summary judgment for the insureds, holding 2 exclusions did not apply, and coverage existed. The court of appeals disagreed in part. First, under the “Business Pursuits” exclusion, it held the test is 1) continuity or regularity of the activity, and 2) profit motive. Applying that test, the court reversed. Leasing a farm to homeowners may be a “business pursuit,” but is a question of fact requiring a trial. Second, the policy excluded uninsured property “owned” but not “controlled” by the insured. But it applies only where the insured is the title owner. Here title was in the LLC, so the exclusion did not apply to the homeowners.
In this case, attorneys clash over piercing the corporate veil. An LLC’s veil failed to shield a shareholder from being personally responsible for attorneys’ fees incurred in a veil-piercing lawsuit, following an arbitration award. Swinerton won an arbitration award against Beauvallon, an LLC owned by Nassi. Swinerton then brought a lawsuit to pierce Beauvallon’s veil to collect the arbitration award against Nassi. The trial court ruled for Swinerton, who then sought to recover attorneys’ fees incurred in the veil-piercing litigation, which the trial court denied. The Court of Appeals reversed, and held that when an LLC’s corporate veil is pierced, shareholders are liable for all the LLC’s contractual obligations. Therefore, Swinerton could enforce the contract’s attorney-fee shifting provision to recover fees against Nassi on the veil-piercing action.