United States: LLC Managers Beware: Get Involved With Member Distributions By An Insolvent LLC And You May Be Personally Liable

Last Updated: September 2 2014
Article by Vicki Harding

Vieira v. Harris (In re JK Harris & Co., LLC), 512 B.R. 562 (Bankr. D. S.C. 2012)

A chapter 7 trustee sued a manager of three limited liability company (LLC) debtors for breach of fiduciary duty and to hold the manager personally liable for distributions made to members, including himself.

The chapter 7 trustee served as trustee for three jointly administered debtors (JK Harris, SBS and Holding). John Harris (Harris) owned at least 60% of the voting interests of Holding, and Harris and/or Holding owned 100% of the voting interests in JK Harris and SBS. Harris was a manager of the manager-managed LLCs and a member of the member-managed LLC.

The debtors filed chapter 11 bankruptcies, which were converted to chapter 7 cases within a few months. At the time of conversion the debtors owed ~$30 million and claimed assets of ~$5.2 million in their bankruptcy schedules, although the assets were mostly accounts receivables that became worthless when the cases were converted.

The debtors were insolvent for at least seven or eight years prior to the bankruptcy filings. During this period the debtors incurred millions of dollars of additional liability and distributed ~$3.5 million to Harris in member distributions (in addition to paying salary and making loans to Harris).

The trustee sued Harris asserting claims under the state LLC act for breaches of fiduciary duty and authorization of unlawful distributions. Harris' primary defense was that he was unaware of the statutory provisions relied on by the trustee, and he did not know that the distributions were prohibited. Although the trustee did not accept his purported ignorance, the trustee contended that this was immaterial (i.e. "ignorance of the law is no excuse").

To hold Harris personally liable for a member distribution, the trustee had to prove each of the following elements:

  • Harris was a manager of a manager-managed LLC or a member of a member-managed LLC.
  • Harris agreed to or authorized the distribution, which was in violation of the state LLC act or the LLC's operating agreement or articles of organization.
  • Harris violated his fiduciary duties under the LLC act.

With respect to the first element, Harris was a manager of Holding and JK Harris, which were manager-managed LLCs, and he was a member of SBS, which was a member-managed LLC.

With respect to the second element: As is typically the case, the LLC act prohibited a distribution to members if afterwards the LLC would not be able to pay its debts as they become due in the ordinary course of business, or if its total assets would be less than total liabilities plus any liquidation preference amounts if the LLC were to be terminated. In this case, even before the distributions the LLCs were insolvent in that their liabilities exceeded the value of their assets. So the member distributions were in violation of the LLC act. And Harris authorized all of the distributions. So, the second element was proved.

With respect to the third element, the court discussed the duties of loyalty and care. The duty of loyalty includes:

  • "[A] duty to account to and hold for Debtors 'any property, profit, or benefit derived by the members' of Debtors." – Authorizing distributions to himself while the debtors were insolvent harmed the debtors and breached Harris' duty of loyalty.
  • "[A] duty to refrain from dealing with Debtors on behalf of someone having an interest that was adverse to the Debtors." – The distributions "served to plunge Debtors deeper into insolvency" and "use of Debtors' funds to increase [Harris'] personal wealth was adverse to the interests of Debtors."

Under the duty of care:

  • A manager is "limited to refraining from engaging in [1] grossly negligent or [2] reckless conduct, [3] intentional misconduct, or [4] a knowing violation of law."
  • Under state law "gross negligence is 'the failure to exercise slight care' or 'the absence of care that is necessary under the circumstances.'"
  • "'Recklessness implies the doing of a negligent act knowingly'; it is a 'conscious failure to exercise due care.'"

Under the statute any of the four types of conduct – grossly negligent, reckless conduct, intentional misconduct and knowing violation of law – constitutes a violation of the duty of care. Consequently, even if Harris did not commit a knowing violation of the LLC act, he could still violate the duty of care based on gross negligence or recklessness.

Although it might seem that it would be difficult to establish a breach of the duty of care since the standard of care is pretty low (e.g. "slight care," "negligent act knowingly"), the court's analysis was as follows:

[Harris] was aware that Debtors were insolvent at all times during the Period of Insolvency, but nevertheless authorized and received the Member Distributions, rather than allowing those funds to be used for debt service and ongoing operations. Even as Debtors began accruing millions of dollars in additional liabilities, Defendant continued authorizing and receiving Member Distributions. In doing so, [Harris] deprived the financially insolvent Debtors of funds that could have been used for operations, to attract investors, to persuade additional lenders, or to satisfy some of the very large claims against Debtors. The undisputed facts show that [Harris'] actions in authorizing and receiving the Member Distributions in the face of Debtors' imminent financial collapse were grossly negligent and reckless.

Thus Harris violated his fiduciary duties and was liable for the member distributions under the LLC act.

Many state statutes (1) provide that a member distribution is not permitted when the LLC is insolvent and (2) hold a member or manager liable based solely on authorizing the distribution, without requiring a breach of fiduciary duty. However, under the court's approach, the additional requirement that there be a breach of fiduciary duty does not appear to be significant since almost by definition authorizing distributions when the entities were insolvent was viewed as a breach. Members and managers authorize or consent to member distributions while an LLC is insolvent at their peril.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki Harding
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions