LLC Distribution Limits and Improper-Distribution Liability in Hawaii
At a glance
| Governing law, entity, distribution, and winding-up scope | Hawaii Uniform LLC Act, HRS ch. 428; distribution is money/property/other-benefit transfer to member in member capacity or transferee of distributional interest. §§ 428-406 to -407 state no winding-up exclusion; § 428-806 separately orders winding-up assets (§§ 428-101, 428-806) |
|---|---|
| Ordinary-course debt-payment and insolvency test | No distribution if LLC could not pay debts as they become due in ordinary course of business (§ 428-406(a)(1)) |
| Assets, liabilities, preferences, fair value, and exclusions | No distribution if total assets below liabilities plus amount needed for superior member dissolution/winding-up/termination preferences; no compensation/benefit exclusion, liability exclusion, or express agreement variation stated (§ 428-406(a)(2)) |
| Accounting statements, valuation methods, and decision date | May rely on financial statements using accounting practices/principles reasonable in circumstances, fair valuation, or another reasonable method; decision date follows acquisition or 120-day rule (§ 428-406(b)-(c)) |
| Authorization, payment, redemption, debt, and delayed-payment measurement | Purchase/redemption/other distributional-interest acquisition: property-transfer or debt-incurrence date; all others: authorization if paid within 120 days, payment if later; each payment on distributed debt measured when paid (§ 428-406(c), (e)) |
| Conditional distribution debt, creditor status, parity, and subordination | Debt payable only when distribution could then be lawful excluded from liabilities and each payment on distributed debt retested; compliant member distribution debt at parity with general unsecured debt, with no express subordination exception. Entitled member has creditor remedies (§§ 428-405(c), 428-406(d)-(e)) |
| Authorizer, standard, and liability to the company | Member in member-managed LLC, or member/manager in manager-managed LLC, voting for/assenting to statutory or identified document violation owes LLC unlawful excess if failure to comply with § 428-409 duties is established (§ 428-407(a)) |
| Recipient knowledge, return amount, defenses, and contribution | Separate recipient rule reaches knowing member of manager-managed LLC only and only a § 428-406 violation, for unlawful excess. Sued authorizer may implead liable authorizers and those knowing member-recipients for contribution (§ 428-407(b)-(c)) |
| Limitation or repose period, accrual, and survival | Any § 428-407 authorizer, recipient, or contribution proceeding barred unless commenced within 2 years after distribution; no adjudication or dissolution extension stated (§ 428-407(d)) |
| Tax, fiduciary, transfer, bankruptcy, creditor, and calculation boundaries | Authorizer claim incorporates § 428-409 duties; operating agreement cannot eliminate loyalty/good faith and cannot unreasonably reduce care. No tax, fraudulent-transfer, bankruptcy, or calculation rule here; table does not decide conduct, knowledge, values, standing, or liability (§§ 428-103(b), 428-407, 428-409) |
Requirements one by one
Hawaii uses two tests and a member-preference add-on
HRS § 428-406(a) bars a distribution if the LLC could not pay debts as they become due in the ordinary course or total assets would fall below liabilities plus the amount needed to satisfy superior member preferences on a hypothetical dissolution, winding up, and termination.
The section states no compensation or benefit-plan exclusion and no liability exclusion from the balance-sheet comparison. The definition in § 428-101 reaches money, property, or another benefit transferred to a member in that capacity or to a transferee of the member's distributional interest.
Reasonable statements, fair valuation, or another reasonable method may be used
Under § 428-406(b), the company may rely on financial statements prepared using reasonable accounting practices and principles, fair valuation, or another method reasonable in the circumstances. This page does not select or apply a method.
An acquisition of a distributional interest is measured when money or property moves or company debt is incurred. Other payments use authorization if paid within 120 days and payment if later.
Conditional debt is excluded, retested, and at parity
Section 428-406(e) excludes debt payable only if and to the extent a member distribution could then be made. Each payment on debt issued as a distribution is itself retested when paid.
Compliant member distribution debt has parity with general unsecured company debt under subsection (d), which states no express subordination exception. Section 428-405(c) separately gives an entitled member creditor status and remedies.
Authorizer and recipient exposure have different predicates
Under HRS § 428-407(a), a member of a member-managed LLC—or a member or manager of a manager-managed LLC—who votes for or assents to a violation of § 428-406, the articles, a written operating agreement, or a signed record is liable to the company for the unlawful excess if failure to comply with § 428-409 duties is established.
The separate recipient provision is narrower. Subsection (b) reaches only a member of a manager-managed LLC who knew the distribution violated § 428-406, and caps recovery at the unlawful excess received. It does not use the authorizer subsection's broader list of governing-document violations.
A sued authorizer may implead other liable authorizers and the knowing member- recipients covered by subsection (b), and seek contribution under subsection (c).
Every proceeding under the liability section has a two-year bar
HRS § 428-407(d) bars a proceeding under the section unless it is commenced within two years after the distribution. The sentence states no adjudication condition or dissolution extension.
Winding up first discharges creditor obligations
HRS § 428-806 first applies assets to creditor obligations, including member-creditors. It then returns unreturned contributions and divides the remainder equally, using money. Sections 428-406 and 428-407 state no winding- up exclusion from their financial and recovery rules.
What trips people up
- The recipient class is narrow. Section 428-407(b) says “member of a manager-managed limited liability company.”
- The authorizer and recipient predicates differ. Governing-document violations appear in subsection (a), while subsection (b) names § 428-406.
- An authorizer needs more than assent. The company also must establish the incorporated § 428-409 duty failure.
Common questions
Is a member-managed recipient directly liable merely for knowing receipt?
Section 428-407(b)'s separate recipient rule does not say so; it identifies a member of a manager-managed LLC. A member-managed recipient might separately face the authorizer rule if its voting, assent, violation, and duty elements are established.
Does a member have creditor rights once entitled to a distribution?
Yes. HRS § 428-405(c) grants creditor status and remedies with respect to the distribution.
Must the winding-up residue be paid in kind?
No. Section 428-806 says the surplus is used to pay the distributable net amount in money.
Statutes and sources
- HRS §§ 428-101, 428-405 — define distributions and govern shares, form, and creditor status. Official § 428-101 and § 428-405 (accessed September 19, 2026).
- HRS § 428-406 — states the financial tests, valuation, timing, distribution-debt, and parity rules. Official current text (accessed September 19, 2026).
- HRS §§ 428-103, 428-407, and 428-409 — state agreement boundaries, authorizer and recipient liability, contribution, the two-year bar, and the incorporated conduct standards. Official § 428-103, § 428-407, and § 428-409 (accessed September 19, 2026).
- HRS § 428-806 — states the winding-up asset order. Official current text (accessed September 19, 2026).
Source links
Every statute quoted above, linked, with the date we checked it.
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