Chapter 6 - § 6.6 • CONCLUSIONS REGARDING POST-DEBT COLLECTION

• Jurisdiction: Colorado

§ 6.6 • CONCLUSIONS REGARDING POST-DEBT COLLECTION

Whether or not the entity has adopted Article 8 or the ownership interest is a certificated or uncertificated security, any creditor seeking to take a security interest in an LLC membership interest or a partnership interest owned by the debtor should enter into a control agreement with the issuer. The control agreement should be written to accomplish the secured party's goals, after consideration of the operating agreement or partnership agreement and applicable law. If the control agreement may impact the rights of other LLC members or partnership partners, they too should become parties to the control agreement for the protection of the creditor's interests.¹⁵¹

These authors believe that membership interests in Colorado LLCs and interests in Colorado partnerships are generally unsatisfactory collateral for a creditor unless during the pre-debt negotiation the creditor obtains an acceptable control agreement to which the issuer and any other potentially affected members are parties. Creditors in a post-debt collection face a much bleaker situation and, where there are other members of the LLC or partners, foreclosure against a membership interest or partnership interest may provide the creditor little value unless a creditor can make and prove arguments under a piercing the veil theory, a wrongful distribution theory, or a claim under CUFTA.¹⁵²

Where a member attempts to use the protections of Delaware, Kansas, Nevada, or Wyoming law to protect assets in an LLC from the member's activities in another state, a creditor who seeks to apply the remedies available in the forum state should be prepared for a constitutional challenge by those who may believe that Delaware, Nevada, Wyoming, or Kansas law protecting the owners rather than the creditors should not apply.¹⁵³

In Martin v. Freeman,¹⁵⁴ a Colorado trial court noted that the LLC in question was formed under Delaware law and then proceeded to ignore that fact and apply Colorado law, including Colorado law governing distributions from the LLC. It appears that this issue was not argued to the court of appeals, as the court did not address the fact of Delaware formation in applying § 7-80-606 of the LLC Act and Colorado veil-piercing case law. This is consistent with what commentators Carter G. Bishop and Daniel S. Kleinberger said:

One of the cardinal maxims of transactional law is that "pigs get fat; hogs get slaughtered." For a business principally

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