ALI-ABA Limited Liability Entities Update 2012 - Selected Recent LLC Cases - April 10, 2012

Sep 16, 2026

Selected Recent LLC Cases compiles case law and key holdings for limited liability entities, focusing on recurring litigation themes under Delaware and related jurisdictions. The contents cover veil piercing standards, standing of creditors to pursue derivative claims, member standing for wrongful distribution, and how operating agreement terms shape fiduciary duty and liability outcomes. Additional coverage addresses authority of managers and members, capital call obligations, inspection rights, LLC formation and membership issues, charging orders, and charging protections.

LanguageEnglish

CategoryGeneral

FormatPDF

Pages29

Reading Time10 min

AccessFree to download

LLC Veil Piercing

No Standing of Creditors to Sue Derivatively on Behalf of Insolvent LLC Under Delaware Law

Claims for Wrongful Distribution Belong to LLC and Members Lack Standing to Assert

Interpretation of Operating Agreement; Authority to Make Capital Call and Liability for Failure to Satisfy Capital Call

Default Fiduciary Duties of Managers; Self-Dealing Transactions; Breach by Bad Faith Sham Auction; Reliance on Expert Advice Defense

Restriction or Elimination of Fiduciary Duties; Contractual Disclaimer; Fraud Claims Connected with Transfer of LLC Interest

Business Judgment Rule; Ratification; Reliance on Counsel Defense; Participation of LLC in Derivative Suit

Fiduciary Duty of Non-Member/Non-Manager Agent of LLC

Authority of Manager or Member

Assignment and Restrictions on Transfer of Membership Interest

Rights Obtained by Existing Member in Connection with Acquisition of Another Member’s Interest; Judicial Dissolution

Inspection Rights

Formation of LLC; Determination of Membership; Effect of Bankruptcy of Member

Married Couple is Neither Individual nor Entity and Cannot be LLC Member

Charging Order

Selected Recent LLC Cases ALI-ABA Limited Liability Entities Update 2012 April 10, 2012 Elizabeth S. Miller Professor of Law Baylor University School of Law © 2012 Elizabeth S. Miller, All Rights Reserved Table of Contents LLC Veil Piercing.............................................................. 1 No Standing of Creditors to Sue Derivatively on Behalf of Insolvent LLC Under Delaware Law............................................................ 4 Claims for Wrongful Distribution Belong to LLC and Members Lack Standing to Assert.............................................. 5 Interpretation of Operating Agreement; Authority to Make Capital Call and Liability for Failure to Satisfy Capital Call........................................ 5 Default Fiduciary Duties of Managers; Interpretation of Operating Agreement Provisions re Self-Dealing Transactions; Breach of Fiduciary Duty by Bad Faith Sham Auction; Reliance on Expert Advice Defense............................ 7 Interpretation of Operating Agreement: Restriction or Elimination of Fiduciary Duties; Effect of Contractual Disclaimer on Breach of Fiduciary Duty and Fraud Claims in Connection with Transfer of LLC Interest.......................................... 9 Business Judgment Rule; Ratification; Reliance on Counsel Defense; Participation of LLC in Derivative Suit............................................. 10 Fiduciary Duty of Non-Member/Non-Manager Agent of LLC........................... 12 Authority of Manager or Member................................................. 12 Interpretation of Operating Agreement; Effect of Assignment and Restrictions on Transfer of Membership Interest.................................. 16 Interpretation of Operating Agreement; Rights Obtained by Existing Member in Connection with Acquisition of Another Member’s Interest; Judicial Dissolution............................................................ 20 Inspection Rights.............................................................. 21 Formation of LLC; Determination of Membership; Effect of Bankruptcy of Member......... 22 Married Couple is Neither Individual nor Entity and Cannot be LLC Member.............. 25 Charging Order............................................................... 25 Selected Recent LLC Cases ALI-ABA Limited Liability Entities Update 2012 April 10, 2012 By Elizabeth S. Miller LLC Veil Piercing Martin v. Freeman, __ P.3d __, 2012 WL 311660 (Colo. App. 2012) . An LLC contracted with Martin forMartinto construct an airplane hangar, and the LLC sued Martin in 2006 for breach of the construction contract. In 2007, while the litigation was pending, the LLC sold its only asset, an airplane, for $300,000 and distributed the proceeds to the LLC’s sole member/manager, who paid the LLC’s litigation expenses. In 2008, a judgment was entered in favor of the LLC, and Martin appealed. In that appeal, the court of appeals determined that the LLC’s damages were speculative and remanded the case with instructions to enter judgment for Martin. On remand, the court declared Martin the prevailing party and awarded him $36,645 in costs. Martin initiated this action to pierce the veil ofthe LLC and hold the member personally liable for the costs in the previous case. The trial court pierced the veil, and the court of appeals affirmed on appeal. The court of appeals stated that, in order to pierce the LLC veil, the court must conclude (1) the corporate entity is an alter ego or mere instrumentality; (2) the corporate form was used to perpetrate a fraud or defeat a rightful claim; and (3) an equitable result would be achieved by disregarding the corporate form. The court addressed the defendants’ argument that the first and second prongs were not satisfied. (Although the caption identifies the LLC as a Delaware LLC, thereis no indication that any question regarding the governing law was raised, and the court applied Colorado law wit

FAQs

What are the key elements required to pierce an LLC veil?

The document summarizes a test requiring a finding that the LLC is an alter ego or mere instrumentality, that the LLC form was used to perpetrate fraud or defeat a rightful claim, and that disregarding the entity form achieves an equitable result.

Do creditors have standing to sue derivatively on behalf of an insolvent LLC under Delaware law?

The table of contents includes a dedicated section on lack of standing by creditors to bring derivative suits on behalf of an insolvent LLC under Delaware law.

How do operating agreement provisions affect fiduciary duty claims and liability?

The contents address interpretation of operating agreement terms that restrict or eliminate fiduciary duties, and the effect of contractual disclaimers on breach of fiduciary duty and related fraud claims tied to transfer of LLC interests.

Sep 16, 2026

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