Fiduciary Duty Claims Between Colorado LLC Members

Most disputes among the owners of a closely held LLC begin with the same type of accusation: someone is running the company for his own benefit. Specific examples include a managing member paying herself more than she should, sending work to a business she owns, lending money to the company on terms that favor her, or taking a deal the company should have had.

Clients often wonder if facts like these can support a claim for breach of fiduciary duty. They can. But in Colorado, a breach of fiduciary duty claim is not built from general ideas about how business partners ought to treat one another. Rather, a breach of fiduciary duty case arises from the plain language of the Colorado Limited Liability Company Act (the “LLC Act”) and the company’s governing documents. The specifics of how to assert that claim in court are subsequently governed by considerations of who may sue and on whose behalf the suit must be brought, along with the Colorado Rules of Civil Procedure (“C.R.C.P.”), which govern how the procedure required to assert derivative suits.

The LLC Act and the Importance of Management Structure

The LLC Act is codified at Title 7, Article 80, and contains provisions for definitions and application of the LLC Act; LLC formation; registered agents, service of process, and annual reports; management; finance; distributions and resignations; members; dissolution; and foreign limited liability companies.

When evaluating a claim for breach of fiduciary duty, the Colorado Supreme Court has been clear that the statute comes first because an LLC is a statutorily created entity distinct from a corporation. The General Assembly intended the LLC Act—not corporate common law—to govern LLCs. Weinstein v. Colborne Foodbotics, LLC, 2013 CO 33, ¶ 11. The only place the LLC Act imports corporate common law relates to the standard for piercing the corporate veil. Id.

Section 7-80-404 of the LLC Act imposes fiduciary duties on two groups: (1) each member of an LLC in which management is vested in the members, and (2) each manager. § 7-80-404(1)–(2), C.R.S. This is important because it has implications for whether a fiduciary duty is owed. A member of a manager-managed LLC who is not also a manager owes no fiduciary duty under the LLC Act. Rather, that member’s only statutory obligation is the “contractual obligation of good faith and fair dealing,” which applies to every member and every manager regardless of how the company is managed. § 7-80-404(3), C.R.S.

This means that if a passive investor in a manager-managed LLC opens a competing business, the statutory duty not to compete does not reach him, and any claim must come from the operating agreement or another contract. Operating agreements, as discussed further below, fill that gap by explicitly imposing a fiduciary relationship on members, even in a manager-managed LLC. Thus, the first two documents to review in any LLC dispute are the articles of organization on file with the Colorado Secretary of State, which state whether the company is member-managed or manager-managed, and every version of the operating agreement.

It is also important to understand to whom the duties are owed. The statute describes them as duties owed “to the limited liability company.” § 7-80-404(1)–(2), C.R.S. At times, depending on how the management structure created, LLC members may owe fiduciary duties to one another. See Gagne v. Gagne, 2019 COA 42, ¶ 26 (hereinafter “Gagne II”); Long v. Cordain, 2014 COA 177, ¶ 26. The statute’s focus on the company, though, is the reason most mismanagement claims belong to the LLC and must be brought derivatively, as discussed below. Of note, the LLC Act creates no fiduciary duty to the company’s creditors, even when the company is insolvent. Weinstein, 2013 CO 33, ¶¶ 3, 23.

The Duties the Statute Imposes

The LLC Act provides for three specific duties owed to the company imposed on members in member-managed LLCs and managers: (1) the duty of loyalty; (2) the duty of care; and (3) the duty of good faith and fair dealing. Although related, there are distinct differences between the duties.

The duty of loyalty, found in section 7-80-404(1), has three parts. A member of a member-managed LLC, or a manager of any LLC, must:

• “[a]ccount to the limited liability company and hold as trustee for it any property, profit, or benefit derived” in the conduct or winding up of the company’s business or from the use of company property, “including the appropriation of an opportunity of the limited liability company”;
• refrain from dealing with the company “as or on behalf of a party having an interest adverse to” it; and
• refrain from competing with the company in the conduct of its business before the company dissolves. § 7-80-404(1)(a)–(c), C.R.S. The statute says the duties “include” these three, so the list is not necessarily exhaustive. § 7-80-404(1); 1 David C. Cripe, Colorado Practice Series: Methods of Practice § 5:25 (Stephen A. Hess ed., 8th ed. 2026).

Next, the duty of care is described in section 7-80-404(2) and is far narrower than many owners assume. It applies to “the conduct and winding up of the business” and “shall be limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” § 7-80-404(2), C.R.S. A manager who makes a poor business decision, or even a negligent one, has not breached the statutory duty of care. The claim requires gross negligence or worse, which can be especially difficult to show given the deference courts afford to corporate decisions under the business judgment rule.

The third obligation is the “contractual obligation of good faith and fair dealing,” which governs how every member and manager discharges duties and exercises rights. § 7-80-404(3), C.R.S. The word “contractual” ties the obligation to the implied covenant from contract law rather than to a broader equitable standard. See Cripe, supra, § 5:25. An operating agreement may describe the standards by which good faith is measured, if those standards are not unreasonable, but it may not eliminate the obligation. § 7-80-108(2)(d), C.R.S.

Not every act that appears to violate these duties gives rise to a breach of fiduciary duty claim, however. The LLC Act provides that a member or manager “does not violate a duty or obligation to the limited liability company solely because the member’s or manager’s conduct furthers the member’s or manager’s own interest.” § 7-80-404(4), C.R.S. And a member or manager “may lend money to, and transact other business with, the limited liability company,” with the same rights as an outsider, “subject to other applicable law.” § 7-80-404(5), C.R.S.

Crossing the Line: Where Self-Interest Becomes Self-Dealing

Sections 7-80-404(4) and (5) do not protect conduct that is self-dealing in substance, and Gagne II shows where the line falls. In Gagne II, a mother and son formed four LLCs to buy and operate apartment buildings in Fort Collins. 2019 COA 42, ¶¶ 3–4. Under revised operating agreements, the mother was “Chief Executive Manager,” held fifty-one percent of the voting rights, and was required to perform her duties “in good faith, in a manner [she] reasonably believe[s] to be in” the companies’ best interests. Id. After trial, the district court found that she had altered the books to record “distributions” to her son so she could take “distributions” herself, made unnecessary loans to the companies on terms favorable to her, charged the companies “rent” for her own home in Indiana, paid herself excessive management fees, used company money to pay professionals who protected her interests rather than the companies’, and took “numerous improper ‘reimbursements’” for personal and extravagant expenses. Id. ¶ 25.

Her defense was that the operating agreements, the LLC Act, and the business judgment rule authorized each of those things. Id. ¶ 24. The court of appeals agreed that, in the abstract, a manager may make distributions, lend money to the company, pay rent for space, hire professionals, earn reasonable management fees, and obtain reimbursement. Id. ¶ 26. But “none of these sources of authority immunizes [a manager] from such acts taken purely for self-interest, in bad faith, and in breach of her fiduciary duties to the LLCs and their members.” Id.
The business judgment rule did not change the result. The division assumed the rule applies to LLC managers, but because the rule presumes that a manager acted in good faith and in the honest belief that the action served the company, “by its own terms it doesn’t apply if a manager acts in bad faith or without any reasonable belief that she is serving the company’s best interests.” Id. ¶ 26.

Thus, in Gagne II, the focus was the purpose and terms of each transaction, not its label. Managers are allowed to lend money and charge fees; the questions are why a particular loan or fee was put in place, on what terms, and for whose benefit. Those are questions of fact, which are decided by a trial court. In Gagne II, the district court found the mother and her other son “almost entirely incredible,” and the court of appeals declined an invitation to reweigh the evidence. Id. ¶¶ 15, 51. The case came up as a judicial dissolution proceeding, and the court accounted for the misconduct when it divided the assets: it found that the mother owed the companies $768,635.87, adjusted the members’ shares accordingly, and held her responsible for $400,000 of her son’s attorney fees. Id. ¶ 38.

Company Opportunities, Company Property, and Unfinished Business

Because the duty of loyalty requires a fiduciary to account for “the appropriation of an opportunity of the limited liability company,” many cases turn on a single question: whose opportunity was it?

LaFond v. Sweeney is the leading case that discusses this issue. There, two lawyers practiced together as an LLC with no written operating agreement; they had orally agreed to split profits 60/40 and later 50/50. 2015 CO 3, ¶ 3. When they dissolved the firm in 2008, a contingent-fee case was pending. Id. ¶¶ 4–5. The client chose to stay with one of the lawyers, who continued the work, and the case eventually settled for roughly $26 million (including about $2.6 million in attorney fees). Id. ¶¶ 4–5, 8. The trial court, however, valued the case by the hours worked before dissolution and capped the other lawyer’s share at $298,589.94. Id. ¶ 7. The Colorado Supreme Court rejected that approach. The pending case was the LLC’s unfinished business, the profits from it belonged to the LLC, and they had to be divided under the profit-sharing agreement in place at dissolution. Id. ¶¶ 11, 28, 45. As the court put it, “[t]he fiduciary duties in the LLC Act militate against members and managers seeking personal gain at the expense of the firm.” Id. ¶ 37.

Two features of LaFond deserve attention. First, the parties’ operating agreement was entirely oral, and the court enforced it because operating agreements in Colorado may be written or oral. Id. ¶ 18; § 7-80-102(11)(a), C.R.S. Second, the court held that the LLC Act gave the lawyer who finished the case no right to extra pay for winding it up. LaFond, ¶¶ 38–45. Notably, the statute now permits “reasonable compensation for services rendered in winding up the business of the limited liability company,” § 7-80-404(6), C.R.S., but the holding of LaFond is unchanged: profits from the company’s business belong to the company.

So how do courts determine what constitutes an “opportunity” of the company? The purpose clause in the operating agreement often decides what counts as the company’s opportunity. In Long v. Cordain, a university professor who was a leading proponent of the Paleo Diet formed an LLC with a graduate student from one of his courses. Their agreement said the company’s business was “to develop a full range of products and services, including without limitation, books, newsletters, consulting services, [and] food products, based upon the Paleo Diet.” 2014 COA 177, ¶¶ 2–3. The student later alleged that the professor had engaged in “self-dealing and appropriating the Company’s business opportunities by conducting speaking arrangements, publishing books and taking other action for his own benefit.” Id. ¶ 26. The court of appeals held that this was a state-law derivative claim for breach of fiduciary duty, not a copyright claim, and reversed its dismissal because dismissal was decided on preemption grounds based on the characterization of the claim as a copyright claim. Id. ¶¶ 26–27. Given the company’s broad purpose clause, the books and speaking engagements were plausibly the company’s business. Of note, a court need not stop at the plain language of the operating agreement’s purpose provision: “A sensible interpretation of precedent is that the prupose clause is of primary importance, but other evidence of purpose may be helpful as long as the [c]ourt is not asked to engage in speculation.” Gagne II, 2019 COA 42, ¶ 21 (quoting Meyer Nat. Foods LLC v. Duff, No. CV 9703-VCN, 2015 WL 3746283, at *4 (Del. Ch. June 4, 2015)).

A narrowly drawn purpose clause has the opposite effect: it narrows the set of opportunities the company can claim. See Cripe, supra, § 5:25. When the agreement says nothing about purpose, the court will look to other evidence of why the company was formed, as long as it is not asked to speculate. Gagne II, ¶¶ 20–22.

What the Operating Agreement Can Change

The LLC Act explicitly recognizes the freedom of contract. Its stated intent is “to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.” § 7-80-108(4), C.R.S. An operating agreement governs the relations among the members, the managers, and the company—and it controls over contrary provisions of the Act, subject to a short list of exceptions. § 7-80-108(1)(a), C.R.S.

For fiduciary litigation, the key provision is section 7-80-108(1.5), C.R.S. Duties, “including, but not limited to, fiduciary duties,” may be “restricted or eliminated by provisions in the operating agreement, as long as any such provision is not manifestly unreasonable.” The limits are specific. The agreement may not eliminate the obligation of good faith and fair dealing, may not unreasonably restrict members’ and managers’ information rights under section 7-80-408, and may not impose duties on non-parties without their consent. § 7-80-108(2)(b), (d), (e), C.R.S.

The “manifestly unreasonable” standard is still a nebulous concept in Colorado with few precedential cases to guide the analysis. The leading Colorado treatise suggests that eliminating the duty not to take company property, or the duty to avoid conflicted transactions, is the most vulnerable kind of provision, while narrowing the duty not to compete by geography, time, or line of business is more defensible. Id. Because the statute invites evidence of commercial setting and purpose, a fight over one of these clauses is often a fight over what deal the parties actually made—yet another reason we encourage our clients to have robust written operating agreements. When a party contends that a provision is manifestly unreasonable, the court must give the parties a reasonable opportunity to present evidence of the provision’s “commercial setting, purpose, and effect.” § 7-80-108(2.5)(c), C.R.S.

Be aware that writing fiduciary duties into the agreement can change the character of the claim. For example, in Martin v. Hamil, a division held that because the members’ fiduciary duties were set out in their operating agreement, the economic loss rule barred a tort claim for breach of fiduciary duty and left the plaintiff with contract remedies. 2018 WL 11714893, ¶¶ 42–43. The decision is unpublished and not binding, but the risk it identifies is real. For example, a contract claim carries different defenses and damages rules, and exemplary damages are not available for breach of contract.

The Next Step: Proving a Breach of Fiduciary Claim

To recover for breach of fiduciary duty, a plaintiff must prove “1) that the defendant was acting as a fiduciary of the plaintiff; 2) that he breached a fiduciary duty to the plaintiff; 3) that the plaintiff incurred damages; and 4) that the defendant’s breach of fiduciary duty was a cause of the plaintiff’s damages.” In re Estate of Chavez, 2022 COA 89M, ¶ 36 (quoting Graphic Directions, Inc. v. Bush, 862 P.2d 1020, 1022 (Colo. App. 1993)). Damages need not be calculated to the dollar, but they cannot rest on speculation; the plaintiff must offer substantial evidence that provides a reasonable basis for computing the loss and must tie the loss to the breach. Graphic Directions, 862 P.2d at 1024–25.
The statute itself supplies a measure of recovery in many LLC cases. A fiduciary must “hold as trustee” any property, profit, or benefit derived from the company’s business or property. § 7-80-404(1)(a), C.R.S. Recovery can therefore focus on what the defendant gained rather than only on what the company lost, as it did in LaFond. Equitable remedies, including an accounting and a constructive trust, are also available. See Hooper v. Yoder, 737 P.2d 852, 860–61 (Colo. 1987) (approving constructive trust as remedy for a partner’s breach of fiduciary duty).

Several considerations apply to deciding whether to assert a claim for breach of fiduciary duty:

• Limitations. Claims for breach of fiduciary duty must be brought within three years. § 13-80-101(1)(f), C.R. S. The period generally runs from when the injury and its cause were known or should have been known through reasonable diligence. § 13-80-108(8), C.R.S.
• Exemplary damages. A request for exemplary damages (if the injury “is attended by circumstances of fraud, malice, or willful and wanton conduct”) may not be included in the initial complaint. § 13-21-102(1)(a), (1.5)(a), C.R.S. It may be added by amendment after initial disclosures, on a prima facie showing of a triable issue. § 13-21-102(1.5)(a), C.R.S. The award generally may not exceed the actual damages. § 13-21-102(1)(a), C.R.S.
• Fee exposure for the plaintiff. Breach of fiduciary duty is a tort. When an action whose essence is in tort is dismissed on a defendant’s motion under C.R.C.P. 12(b), the defendant is generally entitled to its attorney fees. Schulz v. Laszlo & Assocs., LLC, 2025 COA 24, ¶¶ 30–31 (discussing section 13-17-201, C.R.S.). This is an important consideration in deciding whether to bring only a breach of fiduciary duty claim, especially if the claim may be a weak one: if the complaint cannot survive dismissal under C.R.C.P. 12(b), it can cost the client more than the case is worth.
• Contractual fee-shifting. Many operating agreements shift fees to the prevailing party. For example, in Gagne II, the son recovered his appellate fees under such a clause. Gagne II, ¶ 52.

Who Holds the Claim: Direct or Derivative

Whether a claim belongs to the member or to the LLC is often the most consequential threshold question. To decide it, Colorado courts ask, as between the LLC and the plaintiff, “(1) who suffered the alleged harm, and (2) who would receive the benefit of any remedy,” looking at all the facts alleged in the complaint. Young v. Bush, 2012 COA 47, ¶ 61. A member may bring a direct claim only for an injury “separate and distinct from the injury to the LLC or the other members.” Id. ¶ 60.

Diverting a company opportunity, siphoning company funds, or charging the company inflated fees injures the LLC first—and thus any recovery belongs to the LLC. A breach of a personal agreement with the member is different. In Young, the member’s claim that the manager breached a personal settlement agreement with him was a direct claim, because the relief would go to him rather than to the companies. Id. ¶ 64. In the closely held corporate setting, the court of appeals has also allowed a minority shareholder to sue directly where the alleged injury flowed from his status as a noncontrolling shareholder and was not shared by all shareholders. Kim v. Grover C. Coors Tr., 179 P.3d 86, 90 (Colo. App. 2007). In another case, the court of appeals analyzed whether the members had “a distinct, proprietary interest in their share of [] undeclared distributions that allowed them to bring an individual claim against [another member] for civil theft” and emphasized “it is important for the fact finder to determine whether diverted funds are actually distributions, because if only a derivative suit is permitted, the damages recovered simply revert to the wrongdoer.” Tisch v. Tisch, 2019 COA 41, ¶¶ 62–63. Whether that reasoning carries over to a particular LLC dispute depends on the facts and the operating agreement.

Critically, the claims must be properly characterized at the beginning of litigation. In Young, the plaintiff argued for the first time in a post-judgment motion that his claims for access to records and an accounting were direct claims. The division held that the argument came too late. Young, ¶ 65. The trial court’s attempt to reinstate a different claim after the notice of appeal was filed was also ineffective because the trial court no longer had jurisdiction. Id. ¶ 63. When the facts support both theories, the complaint should plead in the alternative and state plainly which claims are brought individually and which on the company’s behalf.

Complying with Requirements to Assert a Derivative Claim

A member who sues on the LLC’s behalf must satisfy the requirements of the LLC Act and C.R.C.P 23.1.

First, there must be written demand. The LLC Act requires the member to make a written demand on the LLC “to take suitable action” and then wait thirty days, unless the LLC rejects the demand sooner or waiting would cause irreparable injury to the LLC. § 7-80-714(1), C.R.S.
Second, there are specific pleading requirements for a derivative suit. The complaint must be verified; must allege that the plaintiff was a member at the time of the challenged transaction (or that the membership later passed to him by operation of law); and must describe with particularity the efforts made to obtain action from the managers or members and why those efforts failed. C.R.C.P. 23.1. The action may not be maintained if the plaintiff does not fairly and adequately represent similarly situated members, and it may not be dismissed or settled without court approval. C.R.CP. 23.1.

Derivative suits are also subject to motions to dismiss by the company. The court must dismiss the case on the LLC’s motion if an independent manager (or, if none, a majority of the independent members, or a court-appointed panel) determines in good faith, after an inquiry, that the suit is not in the company’s best interests. In this analysis, the plaintiff bears the burden of proving the statutory requirements were not met. § 7-80-716(1), (2), (6), C. R.S. Young v. Bush shows how this plays out in a family company. 2012 COA 47. In Young, the four LLCs held special meetings “represented as having met separately, at fifteen-minute intervals, over the course of one hour at a single location,” and every member but the plaintiff voted that the lawsuit was not in the companies’ best interests. Young, ¶ 41. The plaintiff showed that two of the voting members were the manager’s brothers and senior officers of his development company, another was a vice president there, another had an office in a building the development company owned, and another was the manager’s wife. Id. ¶ 42. Those relationships created a fact question about independence, and the plaintiff was entitled to discovery before the court ruled. Id. ¶ 43. The division also held that the statute’s required “inquiry” may be less searching than a corporate special litigation committee’s investigation, but it must produce enough information for a good-faith decision. Id. ¶¶ 55–57.

Be aware that derivative standing can also be lost in parallel proceedings. In Schulz, after a receiver was appointed for the company in separate litigation, the district court dismissed the member’s derivative action on the ground that the appointment divested him of the ability to pursue the company’s claims. 2025 COA 24, ¶ 10.

Judicial Dissolution: When the Relationship Cannot Be Repaired

It is not surprising that members considering asserting fiduciary claims against one another struggle to work together to carry on the business of the company. In these situations, courts can help dissolve the company and wind up the business.

A member or manager may ask the court to dissolve the LLC if “it is not reasonably practicable to carry on the business of the limited liability company in conformity with the operating agreement.” § 7-80-810(2), C.R.S. The party seeking dissolution must show that the managers and members “are unable to pursue the purposes for which the company was formed in a reasonable, sensible, and feasible manner.” Gagne v. Gagne, 2014 COA 127, ¶ 31 (hereinafter “Gagne I”). The test is whether continuing is reasonably practicable—not whether it is impossible. Id. ¶ 33. Courts weigh seven nonexclusive factors: (1) whether management is unable or unwilling to pursue the company’s purposes; (2) whether a member or manager has engaged in misconduct; (3) whether the members clearly cannot work together; (4) whether there is deadlock; (5) whether the operating agreement provides a way around the deadlock; (6) whether, given the company’s finances, there is still a business to operate; and (7) whether continuing is financially feasible. Id. ¶ 35. No single factor controls, and misconduct alone is not enough. Id. ¶¶ 36, 39.
Of note, the LLC standard is deliberately different from the corporate one. A shareholder may seek dissolution of a corporation when those in control have acted in a manner that is “illegal, oppressive, or fraudulent.” § 7-114-301(2)(b), C.R.S. The court of appeals has declined to read an oppression standard into the LLC statute. Gagne I, ¶¶ 37–38. On remand in the same case, five of the seven factors favored dissolution even though the companies were financially healthy, and the court divided the apartment buildings in kind through a “drop and swap” structured to allow a tax-deferred exchange. Gagne II, ¶¶ 36, 38–39, 48.

Interim relief may be available while the case proceeds if the members simply cannot carry out the company’s operations. In Gitlitz v. Bellock, a manager alleged that a third manager had been improperly elected and had negotiated a contract worth more than $40 million without his knowledge or consent. 171 P.3d 1274, 1277 (Colo. App. 2007). The court of appeals held that the loss of a contractual right to manage and control a business may be irreparable harm supporting a preliminary injunction. Id. at 1279–80 (Colo. App. 2007). Our companion article on emergency injunctions discusses that standard in detail.

Steps to Take Before Filing a Lawsuit

Initiating litigation can be overwhelming because the law is complicated and the rules of civil procedure are not intuitive. Thus, we generally encourage members or managers to retain legal counsel to help them navigate this process. That said, there are some general tips to consider before commencing litigation on your own.

1. Pull the articles of organization and every version of the operating agreement— along with amendments, side letters, memoranda of understanding, buy-sell agreements, and management or employment agreements.
2. Review these documents and identify the management structure, any contractual fiduciary duties, the purpose clause, conflict-approval procedures, fee-shifting provisions, buyout rights, and dispute-resolution clauses.
3. Use the information rights the LLC Act protects to make records requests. An operating agreement may not unreasonably restrict them. § 7-80-108(2)(b), C.R.S. In Young, an earlier records action led to an accounting firm’s review that identified “numerous issues” that gave rise to a subsequent action. 2012 COA 47, ¶ 3.
4. Follow the money: general ledger entries, distributions, member loans and their terms, management fees, reimbursements, payments to related parties, and changes to the books. Gagne was decided on exactly this kind of evidence.
5. Identify each opportunity at issue and the evidence of whose opportunity it was by examining the operating agreement’s purpose clause and how the company actually operated.
6. Decide, claim by claim, whether the injury is direct or derivative. For derivative claims, serve a written demand and calendar the thirty-day period, or document why waiting would cause irreparable injury if you are contemplating seeking an injunction.
7. Check the three-year limitations period and when the claim was, or should have been, discovered.
8. Assess fee exposure on both sides, including section 13-17-201 and any contractual fee provision.
9. Decide early whether the goal is damages, an accounting, a buyout, dissolution, or interim injunctive relief. The answer changes what needs to be proven and how quickly.

Belzer Law represents Colorado businesses and their owners in ownership disputes, fiduciary duty claims, derivative litigation, and judicial dissolution proceedings. Every Belzer Law attorney is a former judicial clerk, and our trial and appellate lawyers work these cases together so that the record built in the trial court is one that will hold up on appeal. If you are facing a dispute among the owners of a Colorado LLC, contact Belzer Law to discuss the facts and your options.

This article provides general information about Colorado law as of October 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Unpublished decisions of the Colorado Court of Appeals are cited for illustration only; they are not binding precedent.