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When Is an LLC Manager Personally Liable for an Improper Distribution?

Under the Florida Revised Limited Liability Company Act (“Revised Act”), a manager or member’s (“manager”) consent to an improper distribution may have serious consequences. Indeed, a manager can be personally liable for consenting to an improper distribution when two elements exist. First, the LLC must be insolvent. Second, the manager must have breached his or her fiduciary duty.

So what is insolvency under the Revised Act? An LLC is insolvent when the LLC cannot pay its debts as they come due, or the LLC’s assets are less than the sum of its liabilities, including the amount the LLC would be required to pay to satisfy any preferential rights owed to members or others if the LLC were to dissolve.

A manager violates a fiduciary duty of loyalty when the manager fails to properly account to the LLC; acts with adverse interests towards the LLC; or competes with the LLC. Similarly, a manager violates a fiduciary duty of care by engaging in grossly negligent, reckless, willful or intentional misconduct, or knowingly violates the law.

If the LLC is both insolvent and the manager has breached a fiduciary duty, that manager can be held personally liable for consenting to the improper distribution. The manager’s personal liability, however, is limited to the amount of the distribution that was improper, not the entire distribution.

In addition to the manager’s liability for consenting to an improper distribution, the person receiving the improper distribution also may be held personally liable, if the person acted with knowledge. Hence, an innocent recipient of an improper distribution may not be held personally liable under the statute.

The bottom line is that the personal-liability consequences can be serious for a manager or the recipient if a distribution is made when the LLC is insolvent and certain fiduciary duties have been violated.

If you are aware of a situation in which an LLC manager has authorized an improper distribution, contact the LLC lawyers at McCabe Rabin, P.A. at 561-659-7878 or 877-915-4040 for a free consultation.

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