The California Revised Uniform Limited Liability Company Act defines a "distribution" as a transfer of money or other property from a "limited liability company" (Cal. Corp. Code § 17701.02(k)) to another "person" (Cal. Corp. Code § 17701.02(v)) on account of a "transferable interest" (Cal. Corp. Code § 17701.02(aa). Cal. Corp. Code § 17701.02(f). A "distribution", however, does not include amounts constituting reasonable compensation for present or past service or reasonable payments made in the ordinary course of business under a bona fide retirement plan or other benefits program. Cal. Corp. Code §§ 17701.02(f) & 17704.05(g).
The RULLCA does not prohibit distributions but it does prohibit an LLC from making a distribution in the following two situations:
- The LLC would not be able to pay its debts as they become due in the ordinary course of the LLC's activities.
- The LLC's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the LLC were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.
Cal. Corp. Code § 17704.05(a). If a distribution is made in either situation, a member in a member-managed LLC or a manager in a manager-managed LLC who consents to the distribution may be held personally liable for the amount by which the distribution exceeds the amount that could have been distributed without violating the statute. Cal. Corp. Code § 17704.06(a).
In Pratt v. Higgins, 2023 WL 4564551 (N.D. Cal. July 17, 2023), the plaintiff, a minority member in an LLC , alleged that the controlling member had "saddled" the LLC with over $5 million in liabilities while receiving over $7 million in transfers from the LLC. Judge Haywood S. Gilliam, Jr. ruled that this was insufficient to survive the defendants' motion to dismiss because the plaintiff failed to demonstrate that the LLC "suffers from potential insolvency or it is unable to 'pay its debts as they became due,' and cites no case law suggesting that simply making distributions from an entity that has outstanding debt violates the statute."
