2011 California Code
Corporations Code
TITLE 2.5. LIMITED LIABILITY COMPANIES [17000 - 17656]
CHAPTER 6. Distributions and Withdrawals
Section 17254

(a) No distribution shall be made if, after giving effect to the distribution, either of the following occurs:

(1) The limited liability company would not be able to pay its debts as they become due in the usual course of business.

(2) The limited liability company s total assets would be less than the sum of its total liabilities plus, unless the operating agreement provides otherwise, the amount that would be needed, if the limited liability company were to be dissolved at the time of the distribution, to satisfy the preferential rights of other members upon dissolution that are superior to the rights of the member receiving the distribution.

(b) The limited liability company may base a determination that a distribution is not prohibited under subdivision (a) on any of the following:

(1) Financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances.

(2) A fair valuation.

(3) Any other method that is reasonable in the circumstances.

(c) Except as provided in subdivision (e), the effect of a distribution under subdivision (a) is measured as of (1) the date the distribution is authorized if the payment occurs within 120 days after the date of authorization, or (2) the date payment is made if it occurs more than 120 days after the date of authorization.

(d) (1) If terms of the indebtedness provide that payment of principal and interest is to be made only if, and to the extent that, payment of a distribution to members could then be made under this section, indebtedness of a limited liability company, including indebtedness issued as a distribution, is not a liability for purposes of determinations made under subdivision (b).

(2) If the indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is actually made.

(e) A member or assignee of a member is obligated to return a distribution from a limited liability company to the extent that (1) the member or assignee had actual knowledge of facts indicating the impropriety of the distribution, and (2) immediately after giving effect to the distribution, and notwithstanding the compromise of an obligation referred to in subdivision (b) of Section 17201, all liabilities of the limited liability company, other than liabilities to members or assignees on account of their interest in the limited liability company and liabilities as to which recourse of creditors is limited to specified property of the limited liability company, exceed the fair market value of the limited liability company s assets, provided that the fair market value of any property that is subject to a liability as to which recourse of creditors is so limited shall be included in the limited liability company assets only to the extent that the fair market value of the property exceeds this liability.

(f) A cause of action with respect to an obligation to return a distribution pursuant to subdivision (e) is extinguished unless the action is brought within four years after the distribution is made.

(Amended by Stats. 1996, Ch. 57, Sec. 19. Effective June 6, 1996.)