A company is under strain. The owners want to take a distribution. Somebody asks the sensible question — are we solvent? — and the CFO pulls up the balance sheet.
That’s the wrong document. Or at best, it’s one of several. Minnesota law asks the insolvency question in at least four places, and they don’t all ask it the same way. Add the Bankruptcy Code and it’s five.
I bring this up with business clients because the mismatch costs real money. The same LLC distribution, on the same facts, can be lawful under the LLC act and voidable under the fraudulent transfer act. A corporation’s distribution is different, because the corporate statute takes it out of the fraudulent transfer act by its terms. So a Minnesota LLC and a Minnesota corporation running identical financials through identical facts can get opposite answers. And the receivership chapter uses the word without defining it at all. That’s four real tests and one phantom.
The UVTA: a balance sheet, plus a presumption that does the real damage
Minn. Stat. § 513.42(a) is the classic balance-sheet version:
A debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets.
Paragraph (b) then adds a second route that has nothing to do with the balance sheet, and it shifts the burden:
A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.
The asset side gets adjusted against the debtor, too. Paragraph (c) excludes from “assets” any “property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable” under the Act. Paragraph (d) does the mirror image, excluding from “debts” an obligation secured by a valid lien on property not counted as an asset.
So under the UVTA, a company that’s paying late is presumed insolvent, and the party resisting has to prove otherwise. That’s a very different fight from having to prove insolvency yourself, and in a clawback case it’s often the whole ballgame. I walked through the rest of the Act in my voidable transactions guide.
Chapter 302A asks about cash flow — and buries its balance-sheet piece four subdivisions down
Minn. Stat. § 302A.551, subd. 1(a) governs whether a Minnesota corporation may make a distribution:
The board may authorize and cause the corporation to make a distribution only if the board determines … that the corporation will be able to pay its debts in the ordinary course of business after making the distribution and the board does not know before the distribution is made that the determination was or has become erroneous.
Paragraph (b) restates it as an objective condition: “The corporation may make the distribution if it is able to pay its debts in the ordinary course of business after making the distribution.”
That’s a pure cash-flow test. But § 302A.551 doesn’t stop at subdivision 1, and the back half matters. Subdivision 4(a) adds a restriction where preferred shares exist: a distribution to a class or series may be made only if amounts payable to holders with a preference are paid, and only if
(2) The payment of the distribution does not reduce the remaining net assets of the corporation below the aggregate preferential amount payable in the event of liquidation to the holders of shares having preferential rights …
So it overstates things to say “no balance sheet.” Chapter 302A does look at net assets — but only far enough to protect holders of preferential rights, and only where those holders exist. It never asks the general question of whether total assets beat total liabilities.
That means a Minnesota corporation with no preferred shares outstanding faces one question and one only: can it pay its debts in the ordinary course after the distribution? A corporation whose liabilities exceed its assets at fair valuation — insolvent under § 513.42(a) and under the Bankruptcy Code — can satisfy § 302A.551 on cash flow alone.
Subdivision 4 also carries a safe harbor you should know about. A determination that the distribution doesn’t reduce net assets below the aggregate preferential amount “is presumed to be proper” if it’s made in compliance with the § 302A.251 standard of conduct on the basis of reasonable accounting methods or a fair valuation, and “[l]iability under section 302A.251 or 302A.559 will not arise if the requirements of this paragraph are met.”
Get it wrong and it’s personal. Minn. Stat. § 302A.559, subd. 1 makes a director who was present and failed to vote against, or who consented in writing to, a distribution violating § 302A.551, subd. 1(a) liable “to the extent that the distribution exceeded the amount that properly could have been paid,” and subd. 2 lets that director implead the shareholders who received it. I mapped that and the other direct routes to an owner here.
The LLC act states the same two tests — in one place instead of two
Minn. Stat. § 322C.0405, subd. 1 puts both tests in a single subdivision:
A limited liability company may not make a distribution if after the distribution:
(1) the company would not be able to pay its debts as they become due in the ordinary course of the company’s activities; or
(2) the company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.
Two tests, joined by “or” — fail either one and the distribution is prohibited.
Now do the algebra, because the algebra is where this gets interesting. Clause (2) asks whether total assets would fall below total liabilities plus the superior preferential amount. Net assets are total assets minus total liabilities. So clause (2) is really asking whether net assets would fall below the preferential amount — which is exactly what § 302A.551, subd. 4(a)(2) asks. Same test, different words.
The way I read them, the corporate and LLC statutes are built the same way. Each has an ability-to-pay-debts test and a net-assets-against-preferences test. What’s different is the drafting: chapter 322C puts both in one subdivision, joined by “or.” Chapter 302A splits them across subdivision 1 and subdivision 4.
That split is the trap. Open § 302A.551, read subdivision 1, and stop — which is the natural thing to do, because subdivision 1 is captioned “When permitted” and reads like a complete rule — and you’ll walk away thinking Minnesota corporations face only a cash-flow test. They don’t. The balance-sheet piece is four subdivisions later, under the caption “Restrictions.”
Some real differences remain, and they’re narrower than the drafting makes them look. Chapter 322C measures preferential rights that are “superior to those of persons receiving the distribution” — a relative-priority comparison. Chapter 302A measures the aggregate preferential amount, with an exception where the distribution itself goes to the preference holders in order of priority. And § 302A.551, subd. 4 carries the safe harbor quoted above, which § 322C.0405 states differently: subdivision 2 permits reliance on “financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable under the circumstances.”
When I advise on a specific distribution, I read both subdivisions of the statute that applies instead of reasoning from the entity type. Any other advisor should do the same.
The Bankruptcy Code: balance sheet, with exclusions
11 U.S.C. § 101(32) defines “insolvent” as:
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of— (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title …
And for a municipality, subparagraph (C): financial condition such that the municipality is “(i) generally not paying its debts as they become due unless such debts are the subject of a bona fide dispute; or (ii) unable to pay its debts as they become due.”
Balance sheet, like the UVTA — but without the UVTA’s equitable-insolvency presumption. Look where the Code puts the equity test: it saves “generally not paying its debts as they become due” for municipalities. For an ordinary business debtor, federal insolvency is purely a net-worth question.
Here’s why that matters. A trustee reaching back under 11 U.S.C. § 544(b) borrows state law — and Minnesota law hands over both a longer reach-back and § 513.42(b)’s presumption. The UVTA sets no deadline of its own, so the period comes from § 541.05, subd. 1, and both clauses that could govern run six years: clause (2), for a liability created by statute, and clause (6), for fraud, which doesn’t accrue until the fraud is discovered. The Code’s own avoidance power in § 548(a)(1) reaches back two years. The trustee gets the friendlier test by going through the UVTA instead of the Code. That route needs a transfer that’s “voidable under applicable law”, though, and for a Minnesota corporation’s distributions, applicable law includes § 302A.551, subd. 3(d), which I come back to below.
Chapter 576 uses the word and never defines it
Minn. Stat. § 576.25, subd. 4:
In addition to those situations specifically provided for in statute, a limited or general receiver may be appointed when a corporation or other entity is dissolved, insolvent, in imminent danger of insolvency, or has forfeited its corporate rights …
“In imminent danger of insolvency” looks forward, and chapter 576’s definitions don’t define “insolvent” at all. So a creditor moving for a receiver is arguing about a condition the chapter never spells out. In practice the movant picks whichever test above helps most, and the respondent picks another. I covered the mechanics in my receivership guide.
The four tests side by side
| Regime | Balance-sheet test? | Equity (pay-as-they-come-due) test? | Who bears the burden |
|---|---|---|---|
| UVTA § 513.42 | Yes — at fair valuation, with adjusted assets and debts | Yes, as a presumption of insolvency | Presumption shifts it to the party resisting |
| Corporation § 302A.551 | Yes — subd. 4(a)(2), net assets against the aggregate preferential amount | Yes — subd. 1 | Board makes the determination; § 302A.559 exposes directors, subject to subd. 4’s safe harbor |
| LLC § 322C.0405 | Yes — subd. 1(2), the same comparison stated as total assets against total liabilities plus superior preferences | Yes — subd. 1(1) | Company, on a reasonable method |
| Bankruptcy 11 U.S.C. § 101(32)(A) | Yes — at fair valuation, with exclusions | No (reserved for municipalities at (C)) | Party asserting insolvency |
| Receivership § 576.25, subd. 4 | Undefined | Undefined; includes “imminent danger of insolvency” | Contested |
A Minnesota corporation can lawfully distribute while it’s insolvent under the UVTA and the Bankruptcy Code. Those two measure debts against assets at fair valuation. Chapter 302A measures ability to pay debts in the ordinary course, plus net assets against the preferential amount — and neither of those is the same question. And by the statute’s terms, the UVTA doesn’t reach that distribution. Section 302A.551, subd. 3(d) provides that sections 302A.551 to 302A.559 “supersede all other statutes of this state with respect to distributions, and the provisions of sections 513.41 to 513.51 do not apply to distributions made by a corporation governed by this chapter.” Some Minnesota commentators read that sentence narrowly, as protecting directors who complied with § 302A.551 while leaving an improper distribution recoverable for creditors. The Eighth Circuit described that reading in McGraw v. Commissioner, 384 F.3d 965, 976–77 (8th Cir. 2004), found it “unnecessary to determine whether this analysis can be reconciled with the plain language of § 302A.551, subd. 3(d),” and decided the case under a different statute. Two federal trial-level rulings in Minnesota, known from later opinions that report them, applied subd. 3(d) as written: a bankruptcy court’s dismissal of fraudulent transfer claims over a stock redemption to the extent they were corporate distributions, In re Metropolitan Steel Fabricators, Inc., 191 B.R. 150, 152 & n.5 (Bankr. D. Minn. 1996), and a district court’s ruling, not reviewed on appeal, that the act didn’t apply to a corporation’s distribution of stock to its shareholders, Helm Financial Corp. v. MNVA Railroad, Inc., 212 F.3d 1076, 1079–80 (8th Cir. 2000). So for a corporation, the statute’s text says the UVTA doesn’t reach a distribution, and I found no Minnesota appellate decision reading it more narrowly.
Chapter 322C has no sentence like subd. 3(d). An LLC distribution can pass § 322C.0405, decided on reasonable financial statements under subdivision 2, and still be made while the company was insolvent under § 513.42 — at a fair valuation, with paragraphs (c) and (d) adjusting assets and debts, or by paragraph (b)’s presumption — or leave it insolvent. If it was made for no reasonably equivalent value, it’s exposed under the UVTA’s constructive-fraud route in § 513.45(a), as to creditors whose claims arose before the distribution, and, in bankruptcy, under § 544(b). For an LLC, following the distribution statute is no defense under the fraudulent transfer statute.
And the corporate and LLC tests are the same in substance. That’s the useful part. The difference people think they see comes from where the Legislature put the balance-sheet piece — subdivision 4 in one statute, clause (2) of subdivision 1 in the other. If you’re comparing entity types on the distribution test itself, you’re comparing drafting, not law. The entity type does matter once the question becomes whether a creditor can unwind the distribution, because of subd. 3(d).
What I tell clients to do before the distribution, not after
- Run every test that applies to you, not just the one you’re used to. For an LLC that’s both § 322C.0405 tests, plus § 513.42’s definition of insolvency — because insolvency is an element of the constructive-fraud claim in § 513.45, and that claim can make the transfer voidable by an existing creditor even if the distribution passed both. For a corporation it’s the § 302A.551, subd. 1 equity test, plus subd. 4 if any class holds a preference — and read subd. 3(d) before assuming the UVTA is in play at all, because it says sections 513.41 to 513.51 “do not apply to distributions made by a corporation governed by this chapter.”
- Write down the determination when you make it. Section 302A.551, subd. 1(a) is written around what the board determines, and subd. 2 of § 322C.0405 permits reliance on reasonable financial statements or a fair valuation. A memo written the week of the distribution is worth far more than a reconstruction two years later.
- Treat “paying late” as a legal fact, not a cash-management habit. Section 513.42(b) turns generally not paying debts as they come due into a presumption of insolvency. If your payables are stretched, your evidentiary position is worse than you think.
- Watch the reach-back asymmetry. Section 513.42(c) pulls out of the asset side anything already transferred with intent to hinder, delay, or defraud — so one earlier questionable transfer makes the later transfer easier to attack.
- Don’t treat “we had an appraisal” as the end of it. “Fair valuation” is the standard in both § 513.42(a) and § 101(32)(A), and people litigate it. Who bears the burden on value is often the whole case.
- Sequence the wind-down with the creditor rules in mind, including the trust fund tax exposure that doesn’t care about any of these tests.
Insolvency is a conclusion, not a fact
Insolvency feels like a fact about a company. Either it can pay its debts or it can’t. That’s not how the law treats it. It’s a legal conclusion that changes depending on which statute is asking, and a Minnesota business can face it in at least five places — four Minnesota statutes and the Bankruptcy Code — using at least three different measures.
I don’t think that’s sloppiness. Each test fits what its statute is trying to do. The corporate distribution rule asks about cash flow because a going concern that can pay its bills should be allowed to pay its owners. The fraudulent transfer act asks about net worth and about paying late, because it’s trying to catch value walking out the door. The Bankruptcy Code asks about net worth because it’s dividing up an estate.
So “are we solvent?” isn’t a question anyone should answer without first asking who wants to know. The most expensive version of this mistake is the common one. An LLC member takes a distribution the LLC act allows, and finds out two years later that a different statute, with a presumption running against them and a six-year limitations period borrowed from § 541.05, subd. 1, was measuring something else the whole time.
At Madgett Law, LLC, I advise Minnesota businesses and owners on distributions, wind-downs, and workouts where solvency is the real question, and I represent creditors, receivers, and transferees when a transfer gets challenged after the fact. If you’re thinking about a distribution while the company is under strain, the analysis is cheaper now than in a clawback action. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 513.42 (insolvency — paragraph (a), the fair-valuation balance-sheet test; paragraph (b), the presumption arising from generally not paying debts as they become due other than as the result of a bona fide dispute, and the burden it imposes; paragraphs (c) and (d), exclusions from assets and debts); Minn. Stat. § 302A.551 (distributions — subd. 1, when permitted, the board determination, and the ability to pay debts in the ordinary course of business; subd. 3, how the effect is measured, including paragraph (d), under which sections 513.41 to 513.51 do not apply to distributions made by a corporation governed by chapter 302A; subd. 4, restrictions protecting holders of preferential rights, the net-assets condition, the presumption of propriety, and the statement that liability under § 302A.251 or § 302A.559 will not arise where the paragraph’s requirements are met) and § 302A.559, subds. 1 and 2 (liability of directors for illegal distributions; impleader and contribution from shareholders under § 302A.557, subd. 1); Minn. Stat. § 322C.0405, subds. 1 and 2 (limitations on distribution; both the equity test and the balance-sheet test including superior preferential rights; the permitted bases for the determination); Minn. Stat. § 576.25, subd. 4 (appointment of a limited or general receiver where an entity is dissolved, insolvent, in imminent danger of insolvency, or has forfeited its corporate rights); Minn. Stat. §§ 513.44 and 513.45 (voidable transfers as to present and future creditors) (Minnesota Office of the Revisor of Statutes); 11 U.S.C. § 101(32) (definition of “insolvent,” including the separate formulations for entities, partnerships, and municipalities) and 11 U.S.C. § 544(b) (trustee’s avoidance of transfers voidable under applicable law) (Legal Information Institute); 11 U.S.C. § 548(a)(1) (avoidance of transfers made or incurred on or within two years before the petition) (U.S. Code, govinfo.gov); Minn. Stat. § 541.05, subd. 1 (six-year limitations periods, including clause (2), a liability created by statute, and clause (6), relief on the ground of fraud, accruing on discovery) (Minnesota Office of the Revisor of Statutes); Finn v. Alliance Bank, 860 N.W.2d 638, 656–58 (Minn. 2015) (either clause potentially applies to claims under the act; actual-fraud claims take clause (6); no opinion on constructive-fraud claims); McGraw v. Commissioner, 384 F.3d 965, 976–77 (8th Cir. 2004) (§ 302A.551, subd. 3(d); the commentators’ narrower reading described and not decided); In re Metropolitan Steel Fabricators, Inc., 191 B.R. 150, 152 & n.5 (Bankr. D. Minn. 1996) (reporting the court’s earlier dismissal of fraudulent transfer claims to the extent they were corporate distributions); Helm Financial Corp. v. MNVA Railroad, Inc., 212 F.3d 1076, 1079–80 (8th Cir. 2000) (reporting a district court ruling, not pursued on appeal, that the act did not apply to a stock distribution, citing subd. 3(d)) (case text: Caselaw Access Project; CourtListener). Chapter 576 does not define “insolvent”; that observation is drawn from the chapter’s definitional section. Whether a particular entity is solvent under any of these tests is a factual question requiring individualized analysis, including with your accountant. This article is general legal information, not legal advice, and reading it does not create an attorney–client relationship. No outcome is promised or implied.