Utah Court of Appeals
Must Utah LLCs pay non-member creditors before member creditors during dissolution? DePatco v. Teton View Golf Explained
Summary
Teton View Golf Estates, LLC failed and owed money to both DePatco (a non-member creditor) and Idaho Development (a member creditor with a secured interest). The trial court granted summary judgment declaring that under Utah law, Teton View must pay DePatco before paying Idaho Development during the winding up process.
Analysis
In DePatco v. Teton View Golf, the Utah Court of Appeals addressed a critical question about creditor priority when limited liability companies dissolve and wind up their affairs.
Background and Facts
Teton View Golf Estates, LLC, a Utah limited liability company, borrowed substantial funds from Idaho Development, LLC (one of its members) to purchase and develop Idaho land. Idaho Development secured the loan with a deed of trust on the property. Teton View also hired DePatco, Inc., a non-member, to provide construction services. When Teton View failed, both creditors sought payment from the company’s assets. Idaho Development held a first-position deed of trust, while DePatco had recorded a materialman’s lien.
Key Legal Issues
The central issue was whether Utah Code section 48-2c-1308 required Teton View to pay non-member creditors before member creditors during the winding up process, even when the member creditor held superior security interests. The parties also disputed whether Teton View’s operating agreement could alter the statutory priority scheme.
Court’s Analysis and Holding
The Court of Appeals applied the plain language of section 48-2c-1308(1), which explicitly requires dissolved LLCs to pay “liabilities to creditors other than members” before paying “liabilities to members in their capacities as creditors.” The court rejected Idaho Development’s argument that general lien priority law should override the specific LLC statute, explaining that specific statutes control over general ones. The court also held that operating agreements cannot restrict non-member creditor rights without their consent under section 48-2c-120(1)(h).
Practice Implications
This decision highlighted an unusual feature of Utah’s former LLC statute that subordinated even secured member creditors to unsecured non-member creditors during dissolution. The court noted this rule had been criticized and was subsequently changed by the Utah Revised Uniform Limited Liability Company Act, which treats member and non-member creditors equally. However, the old priority rule applied to LLCs formed before January 1, 2014, until January 1, 2016.
Case Details
Case Name
DePatco v. Teton View Golf
Citation
2014 UT App 266
Court
Utah Court of Appeals
Case Number
No. 20130882-CA
Date Decided
November 14, 2014
Outcome
Affirmed
Holding
Under Utah Code section 48-2c-1308, a dissolving limited liability company must pay non-member creditors before paying member creditors, regardless of security interests or operating agreement provisions.
Standard of Review
Correctness for statutory interpretation and legal conclusions; correctness for summary judgment determinations
Practice Tip
When advising LLC members who may become creditors, consider the creditor priority implications under applicable LLC statutes, as member status can subordinate otherwise superior security interests during dissolution proceedings.
Need Appellate Counsel?
Lotus Appellate Law handles appeals before the Utah Court of Appeals, Utah Supreme Court, California Court of Appeal, and the United States Court of Appeals for the Tenth Circuit.
Related Court Opinions
About these Decision Summaries
Lotus Appellate Law publishes these summaries to keep practitioners informed — not as legal advice. Each case turns on its own facts. If a decision here is relevant to your matter, we’re happy to discuss it.