Fiduciary Duties of Members in Colorado Limited Liability Companies

In disputes within limited liability companies (LLCs), commercial litigation practitioners commonly blur lines concerning which duties are owed to whom. A litigator without a full understanding of the duties in play risks pleading claims incorrectly and potentially attorney fee awards against his or her client. One area where I see consistent confusion is with respect to the duties of LLC members. Indeed and as discussed below, even the courts have exhibited confusion on this point. While applicable statutory language seems clear enough, some language used by Colorado courts in considering fiduciary duties of members in manager-managed LLCs muddies the waters. An argument exists that some existing precedent is incorrectly decided under the applicable statute. A main reason for electing to form a manager-managed LLC is for the members to take more passive role in their venture. Despite this reality, LLC disputes often feature direct claims between members for breaching fiduciary duties. So, what duties do the members actually owe?

Basic LLC Management and Ownership Structure

A quick review of the structure of an LLC helps frame the discussion. An LLC is made up of members and, if the LLC so elects, managers. Members are the owners of interests in the LLC. C.R.S. § 7-80-102(9). Managers are tasked with the management of the LLC. C.R.S. § 7-80-102(8). An LLC may be either member-managed or manager-managed, an election made in the publicly available articles of organization filed with the Colorado Secretary of State. C.R.S. § 7-80-204(1)(e). Members or managers may be natural persons or corporate entities. Further, a person or entity may be both a member and a manager of an LLC. Whether an LLC is member-managed or manager-managed can be crucial to the type of claims available in a member dispute. Make sure to look this up on the Colorado Secretary of State website at the outset. The various duties of LLC members are grounded in statute, contract and tort. In the context of LLC disputes, the tort duties at issue are generally fiduciary duties—this post is primarily focused on fiduciary duties.

The Colorado Limited Liability Company Act

In the absence of an operating agreement, the powers and duties of managers and members of LLCs and LLC’s affairs are governed by the Colorado Limited Liability Act (the “LLC Act”).1 Many multiple-member LLCs have operating agreements, establish the contractual duties owed between members, managers (in a manager-managed LLC), and the company. With limited exceptions, if the operating agreement conflicts with the Act, the operating agreement controls.2 Be advised that Colorado law supports the imposition of a fiduciary duty via contract.3 Make sure to review the operating agreement for any express imposition of fiduciary duties. Here, however, we assume no such contractually imposed fiduciary obligations. The basis for judicially recognized duties of members in LLCs is C.R.S. § 7-80-404. In each of its subsections, this section addresses the duties of “each member in a limited liability company in which management is vested in the members and . . . each manager . . . owe[d] to the limited liability company” This certainly suggests that the fiduciary duties contained therein only apply to members in the context of member-managed LLCs and, even then, that such duties are owed to the limited liability company and not directly among the members. In 2012, the Colorado Court of Appeals offered a holding that does not quite match up with the language of the LLC Act.

LaFond v. Sweeney Finds Direct Fiduciary Duties Between Members of LLCs

Citing C.R.S. § 7-80-404 and comparing the affairs of LLCs to partnerships under the Colorado Uniform Partnership Act (“Partnership Act”), LaFond v. Sweeney4 broadly held that “members of [LLCs] owe each other fiduciary duties.” This case was decided in the context of a member-managed LLC, yet the LaFond opinion did not make that distinction in setting forth a blanket duty. LaFond’s holding is questionable in three respects:
    • First, while relying on the LLC Act for the source of this duty, the court fails to the language thereof. The LLC Act only provides that members of member-managed LLCs owe the duties provided therein to the LLC, not directly to other members.
    • Second, LaFond reasons, “[t]he duties owed to each other by members of a member-managed LLC are nearly identical to those owed by partners.”5 Based on the LLC Act and the Partnership Act language, this is not true. The Partnership Act provision cited by the LaFond court explicitly provides that the duties discussed therein are owed by partners “to the partnership and the other partners.” The LLC Act provides only that the members in a member-managed LLC owe such duties to the LLC.
    • Third, LaFond does not included language limiting its holding to member-managed LLCs. The very purpose of a manager-managed LLC is to vest the discretionary duties in the hands of a manager and allow members to act as more passive participants. Such members should not be so readily compared to partners in a general partnership.
1 See C.R.S. § 7-80-101, et seq. ↩
2 C.R.S. § 7-80-108(1)(a). ↩
3 See Casey v. Colo. Higher Educ. Ins. Benefits Alliance Trust, 310 P.3d 196, 204 (Colo. App. 2012); see also Gerber v. Enterprise Prods. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013) (expressly recognizing a contractually created fiduciary duty of good faith). ↩
4 345 P.3d 932, 939 (Colo. App. 2012). ↩
5 Id. at 939-40 (citing C.R.S. § 7-80-404 and § 7-64-404). ↩
Thus, it can be argued in Colorado that LaFond’s holding is based on an incorrect reading of the LLC Act and members in an LLC—whether member-managed or manager-managed—do not owe one another direct fiduciary duties.

Weinstein v. Colborne Foodbotics, LLC Further Calls into Question the LaFond Holding

In 2013, the Colorado Supreme Court decided Weinstein v. Colborne Foodbotics, LLC.6 In Weinstein, the Court applied the LLC act narrowly and declined to find that managers could owe fiduciary duties to creditors of an LLC absent some statutory authority.7 The Weinstein holding therefore supports the proposition that fiduciary duties arising from the LLC Act will not be recognized unless specifically imposed therein.

What Duties Are Owed and to Whom?

Despite seemingly clear language in the LLC Act, the Lafond case has complicated this question. Absent contractually imposed fiduciary duties, the LLC Act provides that members’ duties flow only to the LLC and not directly to one another. This means that LLC member litigants must pay close attention to whether they bring breach of fiduciary duty claims directly against one another, or derivatively through the LLC. When litigating LLC disputes, make sure to carefully parse the contract and tort-based duties to ensure you are not at risk of having claims dismissed.   By: Jay Hermele 
DISCLAIMER: This is for general informational purposes only and not furnished for purposes of offering legal advice. Every case is different—the best source for information about yours is consulting an attorney.
1 See C.R.S. § 7-80-101, et seq. ↩
2 C.R.S. § 7-80-108(1)(a). ↩
3 See Casey v. Colo. Higher Educ. Ins. Benefits Alliance Trust, 310 P.3d 196, 204 (Colo. App. 2012); see also Gerber v. Enterprise Prods. Holdings, LLC, 67 A.3d 400, 418 (Del. 2013) (expressly recognizing a contractually created fiduciary duty of good faith). ↩
4 345 P.3d 932, 939 (Colo. App. 2012). ↩
5 Id. at 939-40 (citing C.R.S. § 7-80-404 and § 7-64-404). ↩
6 302 P.3d 263 (Colo. 2013). ↩
7 Id. ↩