Section 407. Liability for Unlawful Distributions

(a) A member of a member-managed company or a member or manager of a manager-managed company who votes for or assents to a distribution made in violation of Section 406, the articles of organization, or the operating agreement is personally liable to the company for the amount of the distribution which exceeds the amount that could have been distributed without violating Section 406, the articles of organization, or the operating agreement if it is established that the member or manager did not perform the member's or manager's duties in compliance with Section 409.

(b) A member of a manager-managed company who knew a distribution was made in violation of Section 406, the articles of organization, or the operating agreement is personally liable to the company, but only to the extent that the distribution received by the member exceeded the amount that could have been properly paid under Section 406.

(c) A member or manager against whom an action is brought under this section may implead in the action all:

(1) other members or managers who voted for or assented to the distribution in violation of subsection (a) and may compel contribution from them; and

(2) members who received a distribution in violation of subsection (b) and may compel contribution from the member in the amount received in violation of subsection (b).

(d) A proceeding under this section is barred unless it is commenced within two years after the distribution.

Comment

Whenever members or managers fail to meet the standards of conduct of Section 409 and vote for or assent to an unlawful distribution, they are personally liable to the company for the portion of the distribution that exceeds the maximum amount that could have been lawfully distributed. The recovery remedy under this section extends only to the company, not the company's creditors. Under subsection (a), members and managers are not liable for an unlawful distribution provided their vote in favor of the distribution satisfies the duty of care of Section 409(c).

Subsection (a) creates personal liability in favor of the company against members or managers who approve an unlawful distribution for the entire amount of a distribution that could not be lawfully distributed. Subsection (b) creates personal liability against only members who knowingly received the unlawful distribution, but only in the amount measured by the portion of the actual distribution received that was not lawfully made. Members who both vote for or assent to an unlawful distribution and receive a portion or all of the distribution will be liable, at the election of the company, under either but not both subsections.

A member or manager who is liable under subsection (a) may seek contribution under subsection (c)(1) from other members and managers who also voted for or assented to the same distribution and may also seek recoupment under subsection (c)(2) from members who received the distribution, but only if they accepted the payments knowing they were unlawful.

The two-year statute of limitations of subsection (d) is measured from the date of the distribution. The date of the distribution is determined under Section 406(c).