Chipman Glasser partner, Reid Allred, will be giving a presentation for the Colorado Microbusiness Alliance on two nights next week—September 8, 2015 in Parker, Colorado and September 9, 2015 at Westminster, Colorado. Mr. Allred will be speaking about how business owners can effectively structure their businesses to avoid personal liability and minimize taxes. The presentation will include real-life experiences to illustrate the principles discussed. To attend one of the presentations, please sign up at http://www.coloradomicrobusinessalliance.com/events/how-to-minimize-your-taxes-personal-liability-as-a-microbusiness-owner/ and http://www.coloradomicrobusinessalliance.com/events/how-to-minimize-your-taxes-personal-liability-as-a-microbusiness-owner-2/.
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By Reid J. Allred and Maral Shoaei
The Colorado Supreme Court, in a recent opinion, LaFond v. Sweeney, addressed the duties of a manager or member of a limited liability company (“LLC”) under Colorado law upon dissolution and winding up of an LLC. At first glance, LaFond appears to provide some needed clarity to the common-law fiduciary duties owed by LLC members to fellow members. But a closer look reveals that the opinion adds little to the existing body of law—except to highlight the need for further statutory or case-law developments in this still-murky area of LLC law.
Affirming the decision of the appellate court below, the LaFond Court held that, under the “unfinished-business rule,” an LLC continues to exist after it has been dissolved in order to wind up its business affairs. And pending contingency-fee cases are considered to be part of the LLC’s business. The Court noted that members and managers of an LLC owe fiduciary duties during the winding-up process. As such, all profits from contingency-fee cases resolved during the wind-up period belong to the LLC, should be held for the LLC by the member or manager involved in the winding-up process, and are to be distributed in accordance with the LLC’s profit-sharing agreement. The Court’s analysis hinged on statutory fiduciary duties of members and managers upon dissolution of an LLC. Under the Colorado Limited Liability Company Act (the “LLC Act”), “[m]embers and managers of an LLC have a duty to . . . [a]ccount to the [LLC] and hold as trustee for it any property, profit, or benefit derived by the member or manager in the conduct or winding up of the [LLC] business . . . .” But this statutory duty is limited to the actions of managers or member-managers during the winding-up process.
Our previous blog posts have discussed the undeveloped law concerning whether common-law fiduciary duties apply to an LLC. Particularly, these posts have analyzed whether a majority or controlling member of an LLC owes a fiduciary duty to a minority member similar to the common-law duty imposed in the context of partnerships or closely-held corporations. We have also examined the LLC Act and noted that it is silent as to whether LLC members owe these common-law fiduciary duties to one another.
Although LaFond does not answer this still-open question, it does not foreclose the argument that majority members of an LLC owe a duty to the minority members based on common-law principles applicable to partnerships and closely-held corporations under Colorado law. In fact, LaFond recognizes that a member may owe “duties, including, but not limited to, fiduciary duties . . . to another member,” despite the absence of any such express duties in the LLC Act. And LaFond also recognizes that such duties may be affirmatively eliminated through an operating agreement if members decide to do so.
Until the Court issues a future opinion that squarely addresses this question, members of LLCs in Colorado should rely on the common-law principles applicable to partnerships and closely-held corporations, which continue to provide guidance in determining whether LLC members owe fiduciary duties to minority members.
1) 2015 CO 3 (Colo. Jan. 20, 2015).
2) Id. at P22.
3) Id. at P23.
4) Id. at P36.
5) Id. at P23-25.
6) Id. at P16 (quoting C.R.S. § 7-80-404(1)(a)-(b)).
8) LaFond, 2015 CO 3 at P18 (quoting C.R.S. § 7-80-108(1.5)) see also http://www.chipmanglasser.com/blog/2013/12/5/revisiting-fiduciary-duties-of-members-of-colorado-llcs.html (“No section of the LLC Act, however, affirmatively imposes any fiduciary duties on members qua members. Because there are no statutory duties imposed on members of an LLC, the only duties to which section 108(1.5) could be referring are common law fiduciary duties.”).
9) Id. at P33.
By E. Job Seese
The following is the first in a forthcoming series of blog posts looking at the CAPP Rules and their practical impact on litigation strategy.
Effective January 2012, the Colorado Supreme Court authorized a pilot program to test a new set of pretrial procedures for civil business cases. The pilot program—known as CAPP (Colorado Civil Access Pilot Project)—was implemented in state district courts for five counties in the Metro Denver area (Denver, Adams, Jefferson, Arapahoe and Gilpin Counties). CAPP’s modified rules automatically apply to certain business and medical malpractice cases including cases involving the following: breach of contract, business torts, commercial real property, and transactions with financial institutions.
The CAPP modifications are part of a broader attempt by certain states, primarily Western jurisdictions, to experiment with procedures designed to increase access to the justice system by reducing costs and delays. CAPP’s guiding objective is—through innovations to the procedures governing pleadings, disclosures, discovery, and case management—to flush out all relevant information at the earliest possible juncture in the litigation, to increase judicial monitoring of cases at an early point in time, and to limit the pleading and discovery abuses that tend to create delays and escalate costs. As explained in the CAPP Rules themselves (also known as the Pilot Project Rules or “PPR”), their aim is “assure that the process and the costs are proportionate to the needs of the case.” (PPR 1.2).
INITIAL CAPP RESULTS
In October 2014, IAALS (Institute for the Advancement of the American Legal System at the University of Denver), which has independently overseen implementation of the new rules, issued a report evaluating the results of CAPP over the first two years of its implementation, 2012-2013. The report—titled “Momentum for Change: The Impact of the Colorado Civil Access Pilot Project” (“IAALS Report”) was based on a systematic data collection using three separate inputs: (1) a docket study assessing 840 cases, (2) a practitioner survey evaluating 693 responses from attorneys in closed cases, and (3) a judge survey evaluating responses from 86 pilot court judges.
Among other conclusions, the IAALS Report found that CAPP, as hoped, reduces the time it takes for a case to reach resolution as well as reduces motions practice. The IAALS Report’s further findings will be addressed in more detail below and in future posts on this blog.
PPR 4.1 AND MOTIONS TO DISMISS
Among the changes introduced by CAPP is PPR 4.1, which significantly alters the interplay of the timing of a defendant’s motion to dismiss and his Answer. Specifically, PPR 4.1 provides, “[u]nless otherwise prohibited by statute, the filing of a motion to dismiss shall not disrupt or interfere with the pleading and disclosure requirements of PPR 3 and the scheduling of the initial case management conference under PPR 7.” The practical effect of PPR 4.1 is that a motion to dismiss no longer stays a defendant’s deadline to answer or his initial disclosure and case management obligations. See CRCP 12(a). (Also, less significantly, the CAPP Rules shorten by six days the time for filing a motion to dismiss, or other responsive pleading).
Consistent with CAPP’s broader objective of streamlining litigation, PPR 4.1’s purpose was twofold: (1) reduce unmeritorious motions to dismiss by eliminating the incentive to file such motions simply to toll the deadline for filing an answer, and (2) even when a motion to dismiss (meritorious or not) is filed, permit other deadlines to proceed as if no motion were filed. Under the traditional rules, a motion to dismiss frequently delayed a lawsuit’s progress for the several months that are usually required for the parties to brief, and the court to resolve, a motion to dismiss. PPR 4.1, by requiring defendants to answer even if they are filing a motion to dismiss, is thus in line with CAPP’s objective of speeding up the pleading phase and eliminating the incentive to use motions to dismiss as solely as a stalling tactic.
The IAALS Report provides only limited insight into whether PPR 4.1 is proving effective in advancing these objectives. With respect to the first aim—reducing the number of motions to dismiss—PPR 4.1 does not appear to have “had a measurable effect on the number of motions to dismiss filed during the pleadings stage.” IAALS Report at 1. As for the second objective—streamlining litigation, the IAALS Report found that, “applying the CAPP rules increases the probability of an earlier resolution by 69% over the standard procedure.” (Id. at 12). While the IAALS Report does not identify the specific CAPP modifications contributing to this expedited resolution process, it is likely that at least some of the result is attributable to PPR 4.1’s elimination of the months-long delay consistently caused by the filing of a motion to dismiss.
Despite PPR 4.1’s laudable goals, some practitioners—including this author—have encountered unintended consequences. For example, under CAPP, defendants with meritorious grounds for immediate dismissal are put to the considerable expense of filing an otherwise unnecessary Answer. Under the traditional rules, such a defendant would simply file a motion to dismiss and could await the court’s order thereon until being forced to participate further in the litigation.
Under CAPP, however, even a defendant with meritorious grounds for dismissal is forced to litigate while his motion to dismiss is pending, a process that frequently lasts for months. In the meantime—unless the court quickly rules on the motion—such a defendant is not only required to file his Answer, but also to make his initial disclosures under PPR 3.3 (due within 21 days of plaintiff serving his own initial disclosures under PPR 3.1), to participate in the initial case management conference required by PPR 7.1, and to assist in drafting the case management joint report required by PPR 7.1.
Our firm recently defended a party who was belatedly brought into a CAPP case as a third-party plaintiff. The lawsuit involves parties and alleged conduct spanning four continents, and our client, a Swiss businessman with no connection whatsoever to Colorado, filed a motion to dismiss for lack of personal jurisdiction. Thanks to PPR 4.1, the client was required to file his Answers (there were two parallel complaints naming him as a defendant) and his initial disclosures, resulting substantial defense costs that a similarly-situated defendant would not incur under the pre-existing rules.
Theoretically, should the client prevail (his motion to dismiss is pending), he will be entitled to mandatory attorney’s fees under C.R.S. § 13-17-201, since the allegations against him include tort claims. But this potential recovery of attorney’s fees provides faint hope for this client, or any similarly-situated defendant, as there is always the inevitable fight over the reasonableness of the fees incurred and the possibility of recovering far less than actual fees and costs incurred, whether due to judicial reduction or due to collectability issues. This client’s situation illustrates one of the unfortunate consequences of the CAPP rules.
The law governing limited liability companies (“LLCs”) and their members is relatively undeveloped, and it continues to evolve. One important question, for example, is whether the members of an LLC owe fiduciary duties to each other.
In a previous blog post, we explored the existing case law on this subject from the corporate and partnership context. And that post concluded that majority or controlling members of LLCs owe fiduciary duties to minority members. Although it remains uncertain in the LLC context, a recent decision from the Colorado Supreme Court seems to call that conclusion into question.
In Weinstein v. Colburn, the Colorado Supreme Court addressed whether a creditor of an insolvent LLC could assert a common law claim for breach of fiduciary duty against the LLC’s manager for authorizing distributions by the LLC to its members. The lower court had applied common law applicable to insolvent corporations. And that court determined that a manager of an insolvent LLC (which it analogized to a director of an insolvent corporation) owed a fiduciary duty to an LLC’s creditors.
The Supreme Court in Weinstein determined that the Court of Appeals had “erred in extending the fiduciary duty an insolvent corporation’s directors owe its creditors to the managers of an LLC.” The Court reasoned that if the legislature had intended corporate common law to apply to an LLC in the insolvency context, it would have explicitly extended that case law through the LLC Act. The Court so reasoned because the legislature had made a similar extension in the veil-piercing context through C.R.S. § 7-80-109. Some have argued that this analysis, as well as unpublished opinions from other courts, means that corporate common law regarding fiduciary duties is now entirely inapplicable to LLCs. But this interpretation of Weinstein oversimplifies the holding and is probably incorrect.
The Weinstein court reasoned that “[t]he rule that statutes in derogation of the common law are to be strictly construed shall have no application to [the LLC Act].” And this rule of statutory construction—according to the Weinstein court—shielded specific statutes promulgated by the legislature from application of corporate common law. Because the legislature, through the LLC Act, had specifically established the extent of liability for an insolvent LLC that makes distributions (in C.R.S. § 7-80-606), the Court would not rewrite what the legislature intended by overlaying corporate common law on that statute. Yet the Weinstein court said nothing about the application of common law in situations where the LLC Act is silent or where the LLC Act recognizes that the common law applies.
For example, the LLC Act specifically states (in C.R.S. § 7-80-108(1.5)) that an LLC “member or manager . . . [may owe] duties, including, but not limited to, fiduciary duties, to . . . another member.” No section of the LLC Act, however, affirmatively imposes any fiduciary duties on members qua members. Because there are no statutory duties imposed on members of an LLC, the only duties to which section 108(1.5) could be referring are common law fiduciary duties. Recognizing and applying such common law fiduciary duties in the LLC context is therefore in perfect harmony with Weinstein, where the Court ruled only that corporate common law could not rewrite the duties the legislature intended to apply. Applying common-law fiduciary duties to majority or controlling members is necessary to give effect to the legislature's intentions set forth in the LLC Act.
Furthermore, applying this common law to the LLC scenario also serves to protect minority LLC members. Nothing in the LLC Act suggests that the LLC was intended to be a mechanism by which majority or controlling members of an LLC are licensed to take advantage of minority members of an LLC. Providing this common law protection to minority LLC members is important to respect the legislature's intent with regard to LLCs. And, therefore, doing so comports with the Supreme Court's reasoning in Weinstein.
 2013 CO 33 (Colo. 2013).
 Id. at ¶ 7.
 Id. at ¶ 6.
 Id. at ¶ 23.
 In a blog post by Neal H. Bookspan, he tells of a bankruptcy judge in Arizona recently ruling that “there are no fiduciary duties between members of a LLC unless they are specifically provided for in an operating agreement.” (http://businesslawguy.com/2013/08/22/are-there-fiduciary-duties-between-members-in-an-arizona-llc/).
 2013 CO 33 at ¶ 11 (quoting C.R.S. § 7-80-109).
 Id. ¶¶ 11, 23.
 Id. at ¶ 16.
 The Supreme Court also recognized this statutory provision in Weinstein. Id. ¶ 10 n.5 (citing C.R.S. § 7-80-108(1.5)).
 See, e.g., C.R.S. § 7-80-404.
Fee Awards Are Only Non-Dischargeable Only if the Applicable Statute Proscribes Conduct that Violates § 523
Kaplan v. Wasko, Case No. CC-12-1118-PaMkBe (9th Cir. B.A.P. Mar. 6, 2013) (unpublished).
The Ninth Circuit B.A.P. remanded this case and directed the bankruptcy court to apply the issue preclusion factors identified in Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). In applying those factors to the state court’s attorney fee award, the Ninth Circuit B.A.P. found that the underlying discovery sanction could only be excepted from discharge if the statute at issue proscribes conduct that violates one of the provision of 11 U.S.C. § 523(a).
Appeal from the bankruptcy court for the Central District of California, which denied a creditor’s motion to amend summary judgment and determined that the state court’s fee award was not exempt from discharge because it found that issue preclusion did not apply to the state court’s fee award. The bankruptcy court order was reviewed de novo.
Kaplan invested in the Debtors’ failed night club. And he sued the Debtors in California state court alleging eleven causes of action, including fraud and breach of fiduciary duty. The state court was permitted to adjudicate the claims post-petition and entered a judgment in Kaplan’s favor. Thereafter, Kaplan filed a motion in the state court proceedings seeking discovery sanctions available pursuant to a California statute. The state court entered an order granting the motion and imposing sanctions. Kaplan brought an adversary proceeding in the bankruptcy case and argued that the state court judgment and sanction order were non-dischargeable. With respect to the underlying debt, the bankruptcy court granted summary judgment and held that it could not be discharged. With respect to the fee award, however, the bankruptcy court declined to find those sums non-dischargeable because public policy did not support the application of issue preclusion. The Ninth Circuit B.A.P. articulated the standards that must be applied in deciding issue preclusion and remanded the case for that purpose. In addition, the Ninth Circuit B.A.P. clarified that the fee award could only be non-dischargeable if the California statute proscribed conduct that violates one of the provisions of 11 U.S.C. § 523(a).
Pappas, Markell and Beesley