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HomeCorporations CodeCh. 4Art. 2§ 7420 Improper Distribution Liability

§ 7420 Improper Distribution Liability

Corporations Code·California
AI Summary·Official Text·Key Terms·Related Statutes·References
AI SummaryVerified

§ 7420 Improper Distribution Liability

Key Takeaways

  • •If someone gets money from a company that they shouldn't have (like a payout when the company is in trouble), they have to pay it back with interest.
  • •The person who got the money might also have to pay back the company's boss organization or the people the company owes money to, but only up to what the company owes them.
  • •If someone sues to get this money back, they can also drag in other people who got money they shouldn't have, to make them pay their share too.
  • •This rule doesn't change other laws about unfair money moves, like hiding money to avoid paying debts.

Example

Imagine a company is struggling and owes a lot of money to its workers and suppliers. The boss still decides to pay himself a big bonus. Later, the company can't pay its bills.

The boss has to give back that bonus money with interest because he knew the company was in trouble and shouldn't have taken the money. The workers or suppliers who didn't get paid can sue the boss to get that bonus money back for the company.

AI-generated — May contain errors. Not legal advice. Always verify source.

Official Source
View on CA.gov

§ 7420 Improper Distribution Liability

(a) Any person who with knowledge of facts indicating the impropriety thereof receives any distribution, including a payment in redemption of a membership, prohibited by this chapter is liable to the corporation for the amount so received by the person with interest thereon at the legal rate on judgments until paid. (b) Any person who with knowledge of facts indicating the impropriety thereof receives any distribution, including a payment in redemption of a membership, prohibited by this chapter is liable to the corporation for the benefit of the head organization, or of all of the creditors entitled to institute an action under subdivision (c), for the amount so received by the person with interest thereon at the legal rate on judgments until paid, but not exceeding the obligations of the corporation owed to the head organization at the time of the violation, or the liabilities of the corporation owed to nonconsenting creditors at the time of the violation, as the case may be. (c) Suit may be brought in the name of the corporation to enforce the liability (1) to creditors arising under subdivision (b) for a violation of Section 7411 or 7412 against any or all persons liable by any one or more creditors of the corporation whose debts or claims arose prior to the time of the distribution and who have not consented thereto, whether or not they have reduced their claims to judgment, or (2) to the head organization arising under subdivision (b) for a violation of Section 7413 against any or all persons liable by any head organization which pursuant to the corporation’s articles is entitled to a distribution of assets upon dissolution. (d) Any person sued under subdivision (b) may implead all other persons liable under subdivision (b) and may in the absence of fraud by the moving party compel contribution, either in that action or in an independent action against persons not joined in that action. (e) Nothing contained in this section affects any liability which any person may have under the Uniform Voidable Transactions Act (Chapter 1 (commencing with Section 3439) of Title 2 of Part 2 of Division 4 of the Civil Code). (Amended by Stats. 2015, Ch. 44, Sec. 20. (SB 161) Effective January 1, 2016.)

Last verified: January 23, 2026

Key Terms

prohibited distributionliabilitycreditorshead organizationlegal rate on judgments

Related Statutes

  • § 12455 Prohibited Distribution Liability
  • § 13302 Member Debt Liability Limit
  • § 25247 Broker-Dealer Public Records
  • § 28210 Licensee Governing Body Requirements
  • § 28211 Annual Licensee Board Meetings

References

  • Official text at leginfo.legislature.ca.gov
  • California Legislature. Corporations Code. Section 7420.
View Official Source