BOULDER, Colo., June 17, 2013 (GLOBE NEWSWIRE) -- Last week, the Colorado Supreme Court handed down a landmark ruling which establishes that owners and managers of limited liability companies (known as "LLCs") have limited exposure to personal liability for the company's debts. The Court also ruled that LLC managers do not owe creditors of the company a fiduciary duty when the company is insolvent. The case, argued by Boulder-based law firm, Berg Hill Greenleaf & Ruscitti LLP (BHGR), not only protects company owners and managers from personal liability against creditors, but also makes Colorado a more attractive jurisdiction in which to form an LLC and serves as precedent for other states.
"Up until this ruling, 'limited liability' was an oxymoron in the state of Colorado relative to personal liability to creditors when the company was in the zone of insolvency," said BHGR partner Giovanni Ruscitti. "With this ruling, owners and managers of an LLC no longer need to fear personal attacks from creditors. This is a tremendous win for Colorado and the companies that choose to organize in the state."
LLCs are a relatively new and popular form of business entity which allow for pass-through taxation and offer tremendous flexibility in terms of ownership and management structure. "LLCs are in many ways a hybrid between traditional corporations, partnerships, and sole proprietorships, but are primarily governed by the state's LLC Act and the LLC's operating agreement," said Ruscitti. Consequently, courts across the country are being asked to determine how LLCs should be treated under the common law—like corporations, partnerships or something entirely new.
In the unanimous Weinstein v. Colborne Foodbotics opinion issued last week, the Colorado Supreme Court has answered that question for Colorado—LLCs are unique and are to be governed by the LLC Act, not by the law applicable to corporations or partnerships or any other type of entity. As a result, the Court ruled that a LLC's members and managers are only personally liable to the LLC's creditors if the LLC Act says they are liable. Chief Justice Bender delivered the clarifying opinion:
"members are liable to the LLC but not the LLC's creditors. We also conclude that the manager of an insolvent LLC does not owe the LLC's creditors the same fiduciary duty that an insolvent corporation's directors owe a corporation's creditors. Here, the plaintiff, as a creditor of the LLC, may not assert a claim for either unlawful distribution against the defendant members or a common law breach of fiduciary duty against the defendant managers absent express statutory authority."
"This was a blind spot in the Colorado LLC statute," said Heidi Potter, partner at BHGR. "Now, companies can confidently organize in the state of Colorado, knowing that their owners and managers can operate free from fear of personal suit except in the most egregious of cases. This will encourage entrepreneurs and business owners to continue to organize and locate their businesses in Colorado."
While the Weinstein case involved issues relating to an insolvent LLC, Ruscitti said that a major concern for lawyers and entrepreneurs using the LLC structure was whether state courts would expand the Colorado Court of Appeals' previous ruling in Weinstein to situations where the LLC was solvent. "This would have essentially killed the LLC entity structure in Colorado and we would have urged all clients to organize their LLCs elsewhere."
About Berg Hill Greenleaf and Ruscitti
BHGR offers the expertise and sophistication of a national law firm with the service and responsiveness of a boutique firm. Their approach is simple - their clients receive hands-on attention and the practical expertise of experienced lawyers who place a premium on delivering the highest quality legal advice in the most efficient and cost-effective manner as possible. BHGR lawyers are committed to excellence, creating long-standing personal relationships, accessibility, integrity, and providing pragmatic solutions to difficult problems. Company partners take pride in the close relationships that they develop with their clients, this approach has made BHGR stand out among contemporary law firms. For more information, visit bhgrlaw.com.