Satisfying Creditor Claims Against Colorado Llcs, Members, and Managers

• Publication year: 2007
• Pages: 23
• Citation: Vol. 36 No. 1 Pg. 23

36 Colo.Law. 23 Colorado Lawyer 2007.

2007, January, Pg. 23. Satisfying Creditor Claims Against Colorado LLCs, Members, and Managers

The Colorado Lawyer
January 2007
Vol. 36, No. 1 [Page 23]

Articles
The Civil Litigator
Satisfying Creditor Claims Against Colorado LLCs Members, and Managers
by Brandon R. Ceglian

The Civil Litigator articles address issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.

Article Editors:

Don Kelso, Denver, of Holme Roberts & Owen LLP - (303) 861-7000, donald.kelso@hro.com; Eric Bentley, Colorado Springs, of Holme Roberts & Owen LLP - (719) 473-3800 eric.bentley@hro.com

About the Author:

Brandon R. Ceglian is an Associate with the law firm of Anest & Brown, P.C. in Parker, Colorado - bceglian@parkerlawyers.com. Licensed in Colorado and South Dakota, he practices in the areas of commercial litigation commercial collections, construction law, family law, and criminal law. The author thanks Anthony Van Westrum, of the Statutory Drafting Committee of the Business Law Section of the Colorado Bar Association, and Susan Bernhardt, of the Colorado Trial Lawyers Association, for their assistance in analyzing the changes implemented by S.B. 06-187.

This article provides an outline of the various legal theories and practical tools for creditors seeking to obtain satisfaction of claims against Colorado limited liability companies and their members and managers.

Since the adoption of the Colorado Limited Liability Company Act,(fn1) the use of the limited liability company (LLC) has continued to grow in popularity.(fn2) Even in good times, however, LLCs, members, and managers do not always pay their creditors.

This article provides an overview of legal remedies available to a client who is considering pursuit of a claim against an LLC or members or managers of an LLC, including issues related to dissolved LLCs and insolvent members and managers. A discussion of litigation strategies for obtaining judgments and satisfying creditor claims against an LLC, its members, or managers also is provided. The same considerations may prove useful to planners of LLCs, as well.

Judicial Dissolution Proceedings

If the LLC is still active, a Colorado creditor may bring a proceeding against the LLC for judicial dissolution.(fn3) Colorado's dissolution and receivership statutes are among the strongest in the nation, providing creditors with a panoply of remedies.(fn4) It is not necessary to make LLC members parties to a judicial proceeding to dissolve an LLC, unless relief is sought against them individually.(fn5)

The creditor can force a judicial dissolution in two circumstances: (1) where the creditor's claim has been reduced to judgment, execution on such judgment has been returned unsatisfied, and the LLC is insolvent; or (2) where the LLC is insolvent and has admitted in writing that the creditor's claim is due and owing.(fn6) After entering the decree of dissolution, the court directs the winding up and liquidation of the LLC's business and affairs, in accordance with CRS § 7-80-803, and the giving of notice to claimants, in accordance with CRS §§ 7-90-911 and -912.(fn7) The court in a judicial proceeding brought to dissolve an LLC also may issue injunctions; appoint a receiver or custodian pendente lite with all powers and duties the court directs; take other action required to preserve the LLC's assets, wherever located; and carry on the business of the LLC until a full hearing can be held.(fn8)

The court may appoint one or more receivers to wind up and liquidate the LLC's business, or may appoint one or more custodians to continue to manage the business and affairs of the LLC. The court holds a hearing, after giving notice to all parties to the proceeding and any interested persons designated by the court, before appointing a receiver or custodian for these purposes.(fn9) The receiver or custodian may be an individual, a domestic entity, or a foreign entity authorized to transact business or conduct activities in Colorado.(fn10) The court may require the receiver or custodian to post bond, with or without sureties, in an amount the court directs.(fn11)

The receiver or custodian has exclusive jurisdiction over the LLC and all its property, wherever located.(fn12) The receiver may be vested by the court with the power to dispose of any or all the LLC's property at a public or private sale and to represent the LLC in court.(fn13) The receiver also may sue and defend in the receiver's own name as receiver of the LLC in all courts.(fn14)

A court-appointed custodian may exercise all powers of the LLC, through or in place of its board of directors or officers, to the extent necessary to manage the LLC's affairs in the best interests of its members and creditors.(fn15) The court also may designate the custodian as a receiver, or designate the receiver as a custodian, if it deems that to be in the best interests of the LLC, as well as its members and creditors.(fn16)

Satisfying Claims Against Dissolved LLCs

Obtaining satisfaction of a creditor's claim against a dissolved LLC can seem daunting.(fn17) However, even if the LLC has been dissolved and its assets have been distributed, the creditor still may have remedies to pursue.(fn18)

Dissolution itself has no effect on the LLC's existing debts, because the LLC continues after dissolution precisely for the purpose of paying those debts.(fn19) The procedure in Colorado for enforcement of claims against any assets of a dissolved LLC is set forth at CRS § 7-90-913.

If the LLC refuses to pay a claim and there are assets of the LLC that have not been distributed, the creditor may bring an action to pursue those assets.(fn20) The creditor also may bring a proceeding to wind up and liquidate the LLC's business and affairs under judicial supervision, if the creditor establishes the grounds for dissolution set forth in CRS § 7-80-803(2).(fn21) If the assets already have been distributed in liquidation, the creditor may enforce the claim against any member personally, but only to the extent of the member's distribution.(fn22)

When an LLC winds up and liquidates, it first must discharge or make provisions to discharge its liabilities. Only then may it distribute the "remaining" property to the members.(fn23) Thus, a creditor might claim that the LLC manager(s) breached a fiduciary duty owed to the creditor when the LLC became insolvent, or that the LLC made a fraudulent distribution after it had notice of a "liability."(fn24) Consequently, it is important for litigators and clients to provide the LLC with written notice of the claim if they have reason to suspect that the LLC is insolvent or may dissolve, or if they have knowledge that it recently dissolved.

If the LLC knows about the liability, it "may" dispose of the known claim by following a list of procedures described in CRS § 7-90-911.(fn25) Prior to statutory amendments, effective July 1, 2006, the notice provisions were mandatory. Among other things, the notification informs the creditor that any claim not already barred by another statute of limitations will be barred if not enforced in two years.(fn26) Certified mail or personal service to the registered agent and management is probably advisable, however, because the two-year limitations period applies only if the creditor "delivers" notice.(fn27) The LLC also "may" publish its dissolution one time in a newspaper and obtain a five-year statute of limitations on all possible claims, whether founded on contract, tort, or other theory.(fn28)

A different approach will be necessary if the dissolved LLC has been taken over by a separate entity. The creditor may seek a novation, or a substitution of the new entity as obligor of the debt owed to the creditor.(fn29) If no agreement can be reached, a creditor may argue that the new entity is liable as a continuation of the prior entity or entities.(fn30)

In some cases, the dissolved LLC may claim insolvency, but there remains a member(s) who has not made required financial or asset contributions. In such a case, the creditor can force the member to make those contributions to the LLC, and attempt to execute on those LLC assets.(fn31)

Obtaining Members' Interest in Distributions

Judgment creditors have specific procedures for executing on their judgment claims against LLC members. If the LLC is insolvent or has dissolved, but has not yet made its final distributions to members, the judgment creditor can obtain a "charging order" to obtain members' distributions or their share of profits.(fn32) The charging order generally is the exclusive mechanism to obtain members' interest in the LLC.(fn33) After obtaining the charging order, the judgment creditor has the rights of an assignee of the membership interest.(fn34) The assignee, however, has no rights to the members' management interest without unanimous consent of the members of the LLC.(fn35)

The court may appoint a receiver of the members' share of profits or distributions, or any other money due or to become due to the members from the LLC.(fn36) The court also can make all...