Assignments for the benefit of creditors (ABC's as they are called) are known for their speed and flexibility. In California, the practice of an ABC occurring followed seconds later by a sale of the assignor's assets is well established. The buyer's ability to take over the failing business quickly in a seamless transition is a principal benefit of the ABC process. The speed and the seamless transition help preserve going concern values for the benefit of creditors.

A recent unpublished decision of a California appellate court appears to question this practice. El Saad v. Tarakji, No. G044716, 2011 WL 5910059 (Cal. Ct. App. Nov. 28, 2011). In Tarakji, Callcom obtained a fraud judgment against West Coast Distributors. One month later, West Coast made an assignment for the benefit of creditors and three days later the assignee sold all of West Coast's assets to Platinum Touch, a newly formed entity owned by West Coast's insiders, for $20,000 cash and the assumption of $4.7 million in purported secured debt.

Callcom challenged the sale to Platinum Touch as a fraudulent transfer. In the course of agreeing with Callcom, the Court included some inaccurate and misleading language regarding an assignee's obligation to give notice of a sale:

Civil Code section 1802 is designed to ensure that the assignee gives notice to all identified creditors before proceeding with the disposition of the debtor's property. ... In other words, the assignee for the benefit of creditors is obligated to follow formal procedures, and consider the interests and claims of all creditors before disposing of the debtor's property. Clearly this means that the assignee cannot simply make a deal in advance of the general assignment, to dispose of the debtor's property to a designated third party - even if that third party were chosen by the debtor's primary creditor - without providing notice to anyone else, as occurred in this case.  

El Saad v. Tarakji, 2011 WL 5910059, at *5 n. 3.

The Court went on to state:

It is practically inconceivable that an actual assignee for the benefit of creditors would agree, in advance of the assignment, to transfer the entirety of a debtor's assets to a third party - for nominal consideration - without ever notifying those creditors or giving them an opportunity to question the debtor's own negative characterization of its net value, or its chosen buyer. But if appellants are to be believed, that's exactly what [assignee] agreed to do here.  

Id., at *5 n. 4.

The Court's analysis of section 1802 is incorrect. Indeed, the Court read a requirement into the statute that simply is not there. The statute does not mention sales and does not include an express requirement that the assignee give notice of a sale. Instead, Civil Code section 1802 merely directs an assignee to fix a bar date for the filing of claims and to give notice of the assignment and of the bar date to creditors. Further evidence that notice of an assignee's sale is not required is found in the California Commercial Code, which expressly excepts ABC's and sales by the assignee from the notice and other requirements of the bulk sales law. Cal. Com. Code § 6103(c)(6).

The Court's construction of section 1802 to require notice of a sale creates a host of other problems. Among the more obvious is the amount of notice to give. The statute does not state how many days notice should be given. Nor does the statute provide any procedure to address any objections to the sale or comments that creditors might have.

The holding in El Saad may be a reflection of its egregious facts. The case involved a sale to insiders for a nominal amount immediately after a fraud judgment had been entered against the assignor. The principal consideration for the sale was the buyer's assumption of secured debt, but there was no evidence that this debt was valid. Nor was there any evidence that the assignee had done anything to market the assets prior to the sale to the insider. Instead, the entire transaction appeared to be a sham.

Some comfort can be taken in the fact the El Saad opinion is unpublished. Because the opinion is unpublished, it has no precedential value and cannot be cited. According to the California Rules of Court, an unpublished opinion "must not be cited or relied on by a court or a party in any other action." Cal. Rules of Court 8.1115(a). Nonetheless, although the opinion cannot be cited, it is out there, as evidence of how one court read section 1802.

As Ben notes, the lesson here is to carefully consider the rights of all creditors who are affected by the liquidation of a troubled company. By properly structuring the sale of the borrower's assets, it is usually possible to get the bank paid while avoiding costly bankruptcy and litigation.