assignment for the benefit of creditors california statute

• assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

• Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
• Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
• Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
• Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
• After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
• After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
• Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
• Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
• Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Read more about our firm

© 2023, Stimmel, Stimmel & Roeser, All rights reserved  | Terms of Use | Site by Bay Design

Macdonald Fernandez LLP

PROTECTING CLIENTS AND HELPING THEM GROW Since 1993

Assignment for the Benefit of Creditors

Unlike several other states, California’s assignment for the benefit of creditors (ABC) statute law provides for a robust and effective out-of-court procedure for smoothly terminating a business. This process is preferred by many technology companies, startups and entrepreneurs because it helps principals to easily move on to new projects.

An ABC provides for several advantages. For example, an ABC is initiated by the business itself, not by its creditors, and the business can set the stage for a controlled termination. Specifically, the business evaluates and selects its own general assignee to handle the termination, and the professionals who will be involved are known in advance. (By contrast, the trustee appointed in a Chapter 7 bankruptcy case is unknown, and the trustee’s investigation of assets and financial affairs can be expensive and uncomfortable.) Moreover, the business has the opportunity to plan, prepare and marshal its resources prior to initiating the ABC.

A chief advantage is that an ABC allows the business to take steps to maximize value, including by potentially selling assets as a going concern and identifying potential asset purchasers in advance. Approaches to asset sales can be tailored to maximize value, including strategic marketing, private sales, and simple or highly structured auctions. An ABC is also a low-profile, out-of-court procedure that minimizes the principals’ exposure to unwanted scrutiny. Other advantages of an ABC include:

• Streamlined process for finally resolving claims
• Priority claims for employees
• Opportunity to undo certain transactions (fraudulent transfers and preferences)
• Avoidance of unperfected liens

Our lawyers represent businesses, general assignees and creditors in ABCs. Specifically, in one example, we represented a creditor in a large technology company’s ABC. Through careful and practical negotiation, we were able to obtain a carve-out agreement such that our client was entitled to be paid certain funds that would have gone to the former principal of the company while simultaneously preserving key business relationships.

  (858) 481-1300   [email protected]

• Health & Safety Receiverships
• Partition Referee Matters
• Business Dispute Receiverships
• Cannabis Receiverships
• Rents & Profits Receiverships
• Post-Judgment Receiverships
• Legal Representation of Receivers & Referees
• Property Examples
• Meet the Team
• In the News
• Career Opportunities
• Case Study: Americana Lodge Receivership
• Case Study: Desert Hot Springs Hyundae Hotel
• Case Study: Garden Grove Receivership Project
• Case Study: Using a Receiver to Enforce Family Law and Divorce Judgements
• Guide to Cannabis Receiverships
• Whitepaper: Hoarding Receiverships
• Whitepaper: Abandoned Property Receivership
• Whitepaper: The Impact of Motel Crime
• Whitepaper: Partition Action Process

Introduction to Assignments for the Benefit of Creditors

August 2, 2023

ABC is an alternative to formal bankruptcy proceedings and is governed by state laws in the United States. In this article, we will explain why an ABC can potentially be a good alternative to bankruptcy, and other reasons why a distressed business should consider it. It is an unfortunate truth that many businesses in all industries are struggling through uncharted economic times. 

• Millions of Americans in the workforce died from COVID-19 or had to reduce their hours due to long-COVID symptoms. 
• High rates of inflation affected consumers and small business owners alike
• The economy continues to suffer from supply chain issues  

When circumstances feel bleak, owners of distressed businesses may start to feel like bankruptcy is their only option. An ABC should, at the very least, be considered. 

Assignment for the Benefit of Creditors: An Alternative to Bankruptcy

In an ABC, the business serves as the assignor, who transfers all assets to the control of another person–the assignee. This third-party individual sells the assets and distributes the sale proceeds to the creditors. 

Importantly, initiating an ABC does not require a court filing. Thus, it is not subject to ongoing court oversight. Instead, an ABC is merely a contract pursuant to which the company transfers legal and equitable title, as well as custody and control, of its assets to an independent third-party assignee. This assignee is required to sell the transferred assets and distribute the proceeds of their sale.

Choosing an Assignee

Unlike a trustee who is randomly assigned by the bankruptcy court, an ABC assignee is selected by the assigning company. This is important because you can hand-pick an assignee with specialized knowledge and experience. 

A hand-picked assignee with the right experience can maximize the value of your assets and help reduce your debt burden to your creditors. 

When you choose a highly qualified assignee, the ABC can proceed much faster than bankruptcy, as there is no court oversight and no strict procedural requirements the assignee must follow. This also leads to a lower overall cost compared to other options. 

The ABC can also benefit the management of a struggling company by placing the responsibility for winding down the business and disposing of assets directly on the assignee, whose fiduciary duty is to the creditors. The assignor’s burden can be lifted.

Creditors of the assignor must simply submit proofs of claim to the assignee to receive payment by the assignee from the proceeds of the sale of the assignment estate. After liquidation, the assignee determines the distribution amounts based on claim priority frameworks. Generally, an ABC will only be a feasible option if there is buy-in and cooperation from the struggling company’s largest creditors. 

Why Should Distressed Companies Consider an ABC?

Some distressed companies may not be qualified to take advantage of Chapter 11 reorganization. For example, California’s cannabis companies are unable to qualify for Chapter 11, as they cannot participate in any federal programs. Other struggling companies may prefer to find a faster, cheaper method to dissolve their business, as opposed to Chapter 11. 

Griswold Law–A Receiver Who Can Also Serve as an Assignee

Richardson “Red” Griswold has been appointed as a receiver by the California courts more than 180 times. Much of the work of a receiver overlaps with that of an ABC assignee, which is why Red has also helped companies pursue an Assignment for the Benefit of Creditors.

To learn more about ABCs and if they are the right option for your struggling business, contact us today . 

• There are no suggestions because the search field is empty.
• Court-Appointed Receivership (65)
• Real Estate (63)
• Contract Disputes (40)
• Real Estate Finance (33)
• Business Litigation (32)
• Real Estate Transaction (32)
• Business Owners (30)
• Partition Referee (30)
• San Diego (29)
• Enforcing Judgments (27)
• Partition Action (27)
• Collections Law (26)
• Foreclosure Law (26)
• Uncategorized (26)
• Commercial Leases (24)
• Commercial Properties (24)
• Tenants' Rights (23)
• California (22)
• Employment Law (22)
• Hoarding (20)
• Business Formation: Asset Protection (17)
• Construction Law (17)
• receivership (17)
• Employment Class Action (16)
• Loan Modification (15)
• Landlord (13)
• Tenant (13)
• Consumer Fraud (10)
• Trade Secrets (10)
• Attorneys' Fees Clauses (9)
• Consumer Class Action (9)
• Employment Discrimination (9)
• Unlawful Detainer (9)
• business owner (9)
• health & safety (9)
• receiver (9)
• abandoned property (8)
• business (8)
• receiverships (8)
• Fraud against Senior Citizens (6)
• Receivership Remedy (6)
• Trademark Law (6)
• employee (6)
• health and safety code (6)
• healthy & safety receiver (6)
• Health & Safety Code (5)
• Reimbursement of Employee Business Expenses (Labor (5)
• code enforcement (5)
• confidentiality agreement (5)
• foreclosure (5)
• misappropriation (5)
• trade secret (5)
• Eviction (4)
• Marijuana Dispensaries (4)
• abandoned (4)
• collection (4)
• creditor (4)
• employer (4)
• fire hazard (4)
• health and safety (4)
• litigation (4)
• money judgment (4)
• security deposit (4)
• 3 Day Notice (3)
• Cannabis (3)
• Health & Safety Code Receiver (3)
• Health and Safety receivership (3)
• abandoned building (3)
• attorney (3)
• code enforcement officers (3)
• complaint (3)
• corporation (3)
• court-appointed receiver (3)
• hoarder (3)
• judgment (3)
• lawsuit (3)
• new business (3)
• partnership (3)
• partnership agreement (3)
• real estate. california (3)
• real property (3)
• rents and profits (3)
• san diego county (3)
• substandard conditions (3)
• tenant rights (3)
• 30 Day Notice (2)
• 60 Day Notice (2)
• City of San Diego (2)
• Post-Judgment Receiver (2)
• Uniform Trade Secrets Act (2)
• absentee landlord (2)
• bankruptcy (2)
• business disputes (2)
• business formation (2)
• company (2)
• confidential information (2)
• debt collection (2)
• dispute (2)
• distressed properties (2)
• entrepreneur (2)
• general partnership (2)
• habitability (2)
• habitability requirements (2)
• health and saftey code (2)
• hoarders (2)
• hoarding support (2)
• initial inspection (2)
• judgment creditor (2)
• judgment debtor (2)
• mortgage (2)
• move out (2)
• nuisance property (2)
• property (2)
• property value (2)
• right of possession (2)
• san diego real estate (2)
• slumlord (2)
• small business (2)
• small claims (2)
• tenancy (2)
• warranty of habitability (2)
• wear and tear (2)
• workers compensation (2)
• Add new tag (1)
• Animal Hoarding (1)
• California Civil Code Section 3426 (1)
• California Civil Code Section 3426.1 (1)
• City of Chula Vista (1)
• Civ. Code (1)
• Civil Code Section 3426.1(d) (1)
• Distressed Business (1)
• Health and Safety Receivership Process (1)
• Historic Properties (1)
• Jessica Pineda v. Williams-Sonoma Stores (1)
• Liquor License Receiverships (1)
• Mills Act (1)
• Neighborgood Blight (1)
• Partition Remedy (1)
• Post-Judgment Receivership(s) (1)
• Song-Beverly Credit Card Act of 1971 (1)
• The Health and Safety Receivership Process (1)
• The Uniform Trade Secrets Act (1)
• Williams Sonoma (1)
• abstract of judgment (1)
• account levy (1)
• adjustable rate mortgage (1)
• asset protection (1)
• assignment for the benefit of creditors (1)
• bank garnish (1)
• bank levy (1)
• bitcoin (1)
• board of directors (1)
• business entity (1)
• business insurance (1)
• california class action (1)
• city attorney (1)
• class action (1)
• cleaning deposit (1)
• client list (1)
• collecting judgment (1)
• commercial insurance (1)
• commercial project (1)
• confidential (1)
• confidentiality (1)
• consumer class action (1)
• consumer protection (1)
• court award (1)
• court order (1)
• covid-19 (1)
• credit card transaction (1)
• cryptocurrency (1)
• deceased owner (1)
• deduction (1)
• default (1)
• defendant (1)
• demolition (1)
• deutsche bank (1)
• diliberti (1)
• disposable earnings (1)
• employee contract (1)
• employee misclassification (1)
• employee tax (1)
• ending tenancy (1)
• entrepreneurs (1)
• family law (1)
• federal (1)
• fictitious business name (1)
• former employer (1)
• governing document (1)
• hiring agreement (1)
• hospitality assets (1)
• human smuggling (1)
• illegal business (1)
• illegal cannabis dispensary (1)
• illegal gambling parlor (1)
• implied warranty (1)
• improper means (1)
• incorporate (1)
• incorporating (1)
• independent contractor (1)
• insurance broker (1)
• inurance (1)
• joseph diliberti (1)
• judgment collection (1)
• judgment lien (1)
• late rent (1)
• lease term (1)
• liability insurance (1)
• limited liability company (1)
• limited liability partnership (1)
• limited partnership (1)
• liquidation (1)
• lodging properties (1)
• malpractice insurance (1)
• massage parlors (1)
• mortgage default (1)
• move out inspection (1)
• negligent landlord (1)
• new company (1)
• no disclosure (1)
• non-compete agreement (1)
• non-disclosure (1)
• occupant relocation (1)
• partial rent (1)
• partnership disputes (1)
• partnership formation (1)
• personal information (1)
• personal service (1)
• plaintiff (1)
• post-judgment collection (1)
• prejudgment claim to right of possession (1)
• proprietary information (1)
• provisional director (1)
• public safety (1)
• real property lien (1)
• real property receiver (1)
• relocation (1)
• rental property (1)
• repair and deduct (1)
• residential zoning laws (1)
• retail center (1)
• retaliatory eviction (1)
• robo-signing (1)
• robosigning (1)
• san diego employer (1)
• san diego foreclosure (1)
• secretary of state (1)
• self-employment tax (1)
• service (1)
• sex trafficking (1)
• short-term rental (1)
• small claims court (1)
• sober living house (1)
• squatters (1)
• struggling hotels (1)
• substandard hotel (1)
• substitute service (1)
• trademark (1)
• trademark infringement (1)
• trademark law (1)
• unlicensed in-home business (1)
• unnamed occupants (1)
• wage garnishment (1)
• weed abatement (1)
• withhold (1)
• withhold security deposit (1)
• writ of execution (1)
• wrongful foreclosure (1)
• zip code class action (1)

Recent Posts

For more information please contact Griswold Law

Phone: (858) 481-1300

Email: [email protected]

Address: 705 N. Vulcan Avenue, Encinitas, CA 92024

No communication via email or content posted on this website creates an attorney-client privilege. The information on this website is purely hypothetical. The information on this website should not be relied upon. If you have legal questions or are seeking legal assistance, you should contact an attorney immediately.

• California Department of Real Estate
• California Secretary of State
• State of California Courts
• U.S. Department of Housing and Urban Development
• United States District Court, Southern District of California
• United States Patent and Trademark Office

assignment for benefit of creditors

Primary tabs.

Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

• commercial activities
• financial services
• business law
• landlord & tenant
• property & real estate law
• trusts, inheritances & estates
• wex definitions

Southern California Bankruptcy Law Blog

What are abcs assignment for the benefit of creditors.

Kindergarteners have one answer to the question in our title.  Bankruptcy attorneys have another.  An ABC is an “Assignment for the Benefit of Creditors,” and it provides an alternative to Chapter 7 liquidation for a small business that is shutting down.  Let’s compare the two approaches to resolving business debts.

I.          Business Bankruptcy

The Bankruptcy Code is a federal statute enacted pursuant to the authority of Congress to “. . . establish . . . uniform laws on the subject of bankruptcies throughout the United States.”  U.S.  Const. art. 1, § 8.  Businesses that file for bankruptcy protection do so under one of two chapters of the Bankruptcy Code:  Chapter 7 or Chapter 11.

            A.        Chapter 11 Reorganization

Chapter 11 bankruptcy is known as reorganization:  the business wants to continue and needs a way to address its debt problems.  As part of the process the debtor (or if the exclusivity period has passed, a creditor – see 11 U.S.C. § 1121 for details) files a plan of reorganization.  The plan may erase some debts entirely, convert some debts to stock, and pay some debts in full.  To accomplish this some assets may be liquidated.  In the typical scenario the holders of stock in the business – the equity holders – find that their interest is wiped out.  The big picture goal in a Chapter 11 is to return the business to a profitable state.

            B.        Chapter 7 Liquidation

Chapter 7 bankruptcy is known as liquidation:  the business’s assets are liquidated and the proceeds are distributed to the creditors on a pro rata basis according to certain priority rules found in 11 U.S.C. §§ 507 and 726.  At the end of the process the business ceases to exist.  Therefore, a business cannot receive a discharge under Chapter 7 because once the bankruptcy is completed the business is over.

In a liquidation bankruptcy the Court appoints a Chapter 7 Trustee to administer the assets.  This usually means that the owners of the business no longer have anything to do with the business. 

II.        ABC

ABCs are a state law, rather than a federal law, concept.  They have been used in California for almost a hundred years.

In an ABC the business hires someone to liquidate the assets and distribute the proceeds to the creditors.  The business assigns the assets to that person for that purpose.  The assignee then serves as a sort of private “Chapter 7” Trustee, and has a fiduciary obligation to maximize the liquidation proceeds.

One fundamental difference between Chapter 7 liquidation and an ABC is that an ABC usually does not involve any court – state or federal.  The result is that an ABC is a more streamlined process that takes less time to complete than a Chapter 7 bankruptcy.  Thus, while the net effect is frequently the same in both processes:  the business is liquidated and ceases to exist, the time involved can be significantly less in an ABC.

Another difference is that in a Chapter 7 the creditors have very little, if any, input in the process, whereas in an ABC the creditors have to agree to the results beforehand for the process to succeed.

However, ABCs can backfire on the business owners if used in the wrong context. 

III.       Four Common Settings Where ABCs Are Inappropriate

            A.        The Unincorporated Business

The concept of incorporation was developed to limit the liability of businesses owners.  When a business owner forms a corporation, he or she creates a new person.  While the person created is not a biological person, it is a legal person with its own assets, liabilities, income, expenses, and legal life.  As long as the separate personhood of the corporation is preserved, the business owner frequently does not share the business’s liabilities.

With an unincorporated business the owner is usually personally liable for the business’s debts, in part, because the owner and the business are essentially one and the same person – i.e. , “alter-egos of each other.”  As a consequence, upon completion of an ABC the business owner may still be personally liable for the unpaid portion of the business’s debts.  Therefore, ABCs are generally not recommended for unincorporated businesses.

            B.        Piercing The Corporate Veil

Even if a business is incorporated, a creditor may still be able to go after the owner if it can show that the owner eroded the separate personhood of the corporation.  Once the creditor has established that the owner and the corporation are alter-egos of each other, it can hold the owner personally liable for the business’s debts.

Typical ways to establish an alter-ego relationship include showing:  (1) undercapitalization at the time of incorporation, (2) failure to maintain corporate niceties such as regular meetings of the board of directors and the keeping of minutes of those meetings, and (3) comingling of funds.

For the small business owner, the problem of fund commingling is quite common.  For example, the owner may need funds for personal expenses and takes money from the till to cover them.  Even if the money is repaid, the use of corporate funds for personal use demonstrates an alter-ego relationship.  Another common example involves the owner putting personal funds into the business to keep it afloat.  Once again, even if the money is repaid the use of personal funds for corporate use demonstrates an alter-ego relationship. 

One way around this problem is to have formalized loans.  However, many small business owners fail to formalize the loans – especially if the dollar amounts are relatively small – perhaps because the need is usually immediate and the exigencies do not permit time for formalization of the transaction.

Therefore, if a creditor can pierce the corporate veil, the owner may still be liable for the business’s debts after the completion of the ABC.

            C.        Personal Guarantees

When a business needs financing the owner may attempt to get a loan from a bank.  The bank may be reluctant to give such a loan to a small business unless the owner provides a personal guarantee. 

As a result, the owner signs the loan documents in two capacities:  one as the authorized representative of the business, and the other as a separate human being.  As the authorized representative of the business the owner’s signature obligates the business to repay the loan under the contract terms.  As a separate human being the business owner’s signature obligates the owner personally to repay the debt.

Consequently, the owner is now personally liable for the entirety of the debt !  In the United States co-debtors are jointly and severally liable for the debt.  Each co-debtor is 100% liable for the debt (though the creditor cannot collect more than the total contractual liability).

Therefore, if the owner has signed a personal guarantee, the owner will still be liable for the unpaid portion of the debt at the conclusion of the ABC.

            D.        Undersecured Debts

In the taxonomy of debt there are many ways to break things down.  One way is to distinguish between secured and unsecured debts.  A secured debt is one in which the debtor has put up some form of collateral to secure the debt.  Common examples include a home mortgage and a car loan.  In those two cases the house and the car serve as security for their respective debts.  In the event of default the creditor is permitted to repossess the collateral and resell it.

Suppose a business takes out a loan that is secured by a business asset.  Suppose further that at the point when the business needs debt relief – either through a Chapter 7 bankruptcy, or through an ABC – the asset has dropped in value to the point that it is worth considerably less than the current balance on the loan; i.e. , the debt is undersecured (in the popular vernacular:  “under water”).  Then an ABC may not be possible.

In an ABC a secured creditor is entitled to payment in full upon the liquidation of the asset securing the debt.  Therefore, if a secured creditor’s debt is undersecured, it must consent to the ABC before the ABC can proceed.

• Find a Lawyer
• Ask a Lawyer
• Research the Law
• Law Schools
• Laws & Regs
• Newsletters
• Justia Connect
• Pro Membership
• Basic Membership
• Justia Lawyer Directory
• Platinum Placements
• Gold Placements
• Justia Elevate
• Justia Amplify
• PPC Management
• Google Business Profile
• Social Media
• Justia Onward Blog

2007 California Code of Civil Procedure Title 11.7. Recovery Of Preferences And Exempt Property In An Assignment For The Benefit Of Creditors

Ca codes (ccp:1800-1802).

Disclaimer: These codes may not be the most recent version. California may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.

Get free summaries of new opinions delivered to your inbox!

• Bankruptcy Lawyers
• Business Lawyers
• Criminal Lawyers
• Employment Lawyers
• Estate Planning Lawyers
• Family Lawyers
• Personal Injury Lawyers
• Estate Planning
• Personal Injury
• Business Formation
• Business Operations
• Intellectual Property
• International Trade
• Real Estate
• Financial Aid
• Course Outlines
• Law Journals
• US Constitution
• Regulations
• Supreme Court
• Circuit Courts
• District Courts
• Dockets & Filings
• State Constitutions
• State Codes
• State Case Law
• Legal Dictionary
• Legal Blogs
• Business Forms
• Product Recalls
• Justia Connect Membership
• Justia Premium Placements
• Justia Elevate (SEO, Websites)
• Justia Amplify (PPC, GBP)
• Testimonials