Picture a buyer’s lawyer emailing a 24-page stock purchase agreement on a Friday and asking for a signature by Monday. The price line reads “$1.00 and other good and valuable consideration.” A two-year noncompete starts at closing, and one exhibit the text relies on is missing. A South Dakota snack company owner signed something similar, filed Chapter 11, and was allowed to reject it in In re Dandurand, No. 24-40401 (Bankr. D.S.D. May 23, 2025). On August 10, 2026 the Eighth Circuit Bankruptcy Appellate Panel affirmed in Kanyon Holdings, LLC v. Dandurand (In re Dandurand), No. 25-6010 (B.A.P. 8th Cir. Aug. 10, 2026).
That case ran on South Dakota law. California’s rulebook differs, and in several places it is harder on a buyer who drafts loosely.
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North Star Tax and Legal Briefing: Selling a California Business? What a Buyer's $1 Purchase Agreement Can Cost You
A buyer's one-dollar purchase agreement, a broad noncompete, and a sign-now-close-later timeline: how California courts read the draft, when the noncompete exception applies, and what a seller should insist on before signing.
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A buyer’s lawyer emails you a twenty-four-page stock purchase agreement on a Friday and wants a signature by Monday. The price line reads one dollar and other good and valuable consideration. A two-year noncompete starts at closing, and one exhibit the whole document leans on is missing. If you own a California business, here is the uncomfortable part: signing that draft can cost you the real price, your leverage, and the tax result, all at once. A South Dakota snack company owner signed something very much like it, filed Chapter eleven, and was allowed to walk away from the deal. That is the Dandurand case, and California’s rulebook is harder still on a buyer who drafts loosely.
Start with the idea this episode turns on: an executory contract. That is a signed deal where both sides still owe something real. If the shares have not moved and the money has not moved, you have one. It matters because bankruptcy law lets a debtor, with court approval, reject an unfinished contract, and the Ninth Circuit, which covers California, treats that as a business judgment call the court will usually approve. So hold onto the distinction between signing and closing. Once the deal has closed, there is normally nothing left to reject. You are simply a creditor. The gap between signature and closing is where the danger lives. One more piece: the merger clause, the sentence saying this document is the complete and exclusive deal. In California, it shuts the door on side promises you cannot find in the text.
How does a California court read a purchase agreement that does not make sense? The judge looks for what both sides intended and favors a reading that works. If doubt remains, the vagueness is construed against the party who caused it, usually the buyer whose lawyer wrote the draft. But the one-dollar recital survives, because California presumes a signed writing has consideration. The phrase never says whether the buyer owes an earn-out or must retire the company’s bank line, and if the merger clause holds, you cannot add those terms through testimony. You are left arguing ambiguity or fraud, and either one means a trial. Now the noncompete. California voids most restraints on doing business. The exception covers a seller who sells goodwill or disposes of all of his or her ownership interest. Keep a ten percent stake, as that snack company owner did, and you have not sold all of it. In the Hill Medical case, the court voided a covenant because the buyout paid nothing for goodwill, and a one-dollar price is not a sign anyone valued goodwill. Here is the point that cuts the other way. Walking away in bankruptcy is not free. The Supreme Court’s Tempnology decision confirmed that rejection works like an ordinary breach, not a rescission. The seller keeps the shares and holds a damages claim, but usually an unsecured one.
Why does this hit ordinary businesses? Take the illustration from the post: Maria owns all the stock of an S corporation running a heating and air conditioning company in Rancho Cucamonga, with a two hundred thousand dollar basis. A buyer offers two point four million dollars: one point two million in cash at closing, a six hundred thousand dollar note, and a six hundred thousand dollar earn-out. Report the full two point two million dollar gain in one year and California taxes it as ordinary income; the state has no lower capital gains rate. Ignoring deductions and other income, that is roughly two hundred sixty-three thousand dollars, about twelve thousand of it from the extra one percent above a million. Installment reporting, which California follows, spreads the gain over the years she actually collects it and cuts that surcharge to about one thousand dollars. But the return needs a real price to report, and the agreement is where that price has to live. If her note is unsecured and the buyer later files, she is a general unsecured creditor on six hundred thousand dollars.
Three things to do this week if a buyer has handed you a draft. First, close in escrow. Sign and close the same day, with the stock released only when the cash clears. That removes the window in which either side can file. Second, get every number typed into the agreement: cash, note, earn-out, and any debt the buyer assumes, with every schedule attached. Third, if you are carrying a note, take a security interest in what you sold, and ask for a guaranty from the buyer’s principals, especially when the buyer closes through a new shell company. That is what we do at North Star Law Firm. The initial consultation is free, and the full written analysis with citations is at C A dash legal dot net.
How does a California court read a purchase agreement that does not make sense?
The court looks for what both sides intended when they signed under Cal. Civ. Code § 1636, reading the document as a whole under section 1641 and favoring a workable reading under section 1643. Together they let a judge repair a broken cross-reference from the rest of the deal. If doubt remains, Cal. Civ. Code § 1654 construes it against “the party who caused the uncertainty to exist.” Usually that is the buyer, whose lawyer wrote the draft.
California is also unusually open to outside evidence. Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33 (1968), asks whether the evidence supports a meaning to which the words are “reasonably susceptible,” not whether the text looks plain to the judge. Cal. Code Civ. Proc. § 1856 bars testimony contradicting a fully integrated writing, but Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Ass’n, 55 Cal. 4th 1169 (2013), admits fraud evidence even when it contradicts the written terms.
What does “$1.00 and other good and valuable consideration” actually promise?
Less than most sellers assume. Cal. Civ. Code § 1614 treats a signed writing as presumptive evidence of consideration, so the recital keeps the contract alive. But the phrase never says whether the buyer owes an earn-out or must retire the company’s bank line. Those are real dollars a buyer may later deny promising.
The merger clause closes the trap. If the court finds the writing was meant as the complete and exclusive statement of the deal, section 1856(b) blocks the seller from adding side terms through testimony. The seller is left arguing ambiguity or fraud, and either one means a trial. I would rather see the numbers typed into the agreement.
Will the buyer’s noncompete hold up under California law?
Often it will not. Cal. Bus. & Prof. Code § 16600 voids contracts restraining anyone from a lawful business. Effective January 1, 2024, AB 1076 added section 16600.1, barring noncompliant noncompetes in employment contracts, and SB 699 added section 16600.5, which gives employees a private right of action with attorney’s fees.
The exception in section 16601 applies when the seller sells goodwill or disposes of all of his or her ownership interest. A seller who keeps 10 percent, as in Dandurand, has not sold all of it. Hill Medical Corp. v. Wycoff, 86 Cal. App. 4th 895 (2001), voided a physician’s covenant because the buyout paid nothing for goodwill, requiring a clear sign the parties “valued or considered goodwill as a component of the sales price.” A one-dollar stated price is not that sign.
Moving the covenant into the seller’s employment agreement does not reliably help. In Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170 (2012), an employment covenant running past the purchase agreement’s three-year covenant was unenforceable.
Has a buyer sent you a purchase agreement and asked for a fast signature? Your leverage over the price terms and the noncompete exists only before you sign, and the tax result gets locked in at the same moment.
Can a bankruptcy filing undo a signed sale agreement in the Ninth Circuit?
Yes, if the deal is still executory when the case is filed. 11 U.S.C. § 365(a) lets a debtor reject an executory contract with court approval. The Ninth Circuit applies the Countryman test, and sitting en banc in In re Robert L. Helms Construction & Development Co., 139 F.3d 702 (9th Cir. 1998), it asked whether, at filing, each party has “something it must do to avoid materially breaching the contract.” A signed stock sale that has not closed usually qualifies, since shares and money are both still owed. That cuts both ways: a buyer that files before closing can reject, too.
The standard is forgiving. Agarwal v. Pomona Valley Medical Group, Inc. (In re Pomona Valley Medical Group, Inc.), 476 F.3d 665 (9th Cir. 2007), adopted the business judgment rule and directs approval unless rejection is “so manifestly unreasonable that it could not be based on sound business judgment.”
What is a seller left holding if the buyer rejects the deal?
A damages claim, usually unsecured. Section 365(g) treats rejection as a breach immediately before the petition, and 11 U.S.C. § 502(g) allows the claim as a prepetition one. Mission Product Holdings, Inc. v. Tempnology, LLC, 587 U.S. 370 (2019), confirmed that rejection works like an ordinary breach rather than a rescission. The seller keeps the shares and claims the lost bargain in bankruptcy dollars, the position I discussed for California creditors facing a Chapter 11 debtor.
Watch the cap. If part of the payout was salary under an employment agreement, section 502(b)(7) limits damages for ending it to one year of pay plus unpaid amounts. And once the deal has closed with money still owed on a note, there is usually nothing left to reject; the seller is simply a creditor.
What protections should a California seller demand before signing?
Close in escrow if you can, signing and closing the same day with stock released only when the cash clears. That removes the window in which either side can file. If the two must be separated, insist on a dated agreement with every schedule attached.
Seller financing is where I see owners take the most risk, so take a security interest in what you sold. Under Cal. Com. Code § 9203, it becomes enforceable once value is given and the buyer signs a security agreement describing the collateral. Keeping the endorsed share certificate gives control under section 8106, which perfects under section 9314; equipment and receivables need a financing statement under section 9310. Private equity buyers often close through a new shell company, so ask for a guaranty from the fund or its principals and objective release terms for any holdback.
How would the tax bill look for a Rancho Cucamonga seller?
Take an illustrative case: Maria owns all the stock of an S corporation running an HVAC service company in Rancho Cucamonga, with a $200,000 stock basis. In November 2026 a buyer offers $2.4 million: $1.2 million cash at closing, a $600,000 note paid over 2027 and 2028, and a $600,000 earn-out tied to 2027 revenue. The draft recites one dollar plus “other” consideration and bars her from competing anywhere in Southern California for five years.
As a CPA, my first question is what price the return will report, because gain is amount realized minus basis. Reported all in 2026, the $2.2 million gain is ordinary income in California; the Franchise Tax Board says the state has no lower capital gains rate. On the 2025 single schedule, ignoring deductions and other income, that is roughly $263,000, about $12,000 of it from the 1 percent that Cal. Rev. & Tax. Code § 17043 adds above $1 million (13.3 percent at the top). Under the installment method of 26 U.S.C. § 453, which California follows through section 17551, about $1.1 million of gain lands in 2026 and the rest as payments arrive, which cuts that surcharge to about $1,000.
In an asset deal, 26 U.S.C. § 1060 requires an allocation reported on IRS Form 8594, binding both sides if agreed in writing, and debts the buyer assumes count as price under Treas. Reg. § 1.1001-2(a)(1). The buyer amortizes a noncompete over 15 years under 26 U.S.C. § 197, while Maria generally reports that slice as ordinary income. A real goodwill allocation is also the evidence Hill Medical asks for, so negotiate the allocation and the noncompete together.
| Buyer’s draft says | Risk for a California seller | Ask for |
|---|---|---|
| “$1.00 and other consideration” | Merger clause shuts out unwritten promises; tax reporting needs a real price | Cash, note, earn-out and assumed debts in writing |
| Broad noncompete | Void unless § 16601 applies and the price reflects goodwill | Covenant limited to where the business operated |
| Unsecured seller note | General unsecured claim if the buyer files | Perfected security interest and a guaranty |
| Sign now, close later | Executory contract either side can reject | Same-day closing through escrow |
Frequently Asked Questions
Can I get out of a business sale agreement I already signed in California?
Sometimes. Outside bankruptcy you need a contract defense, such as fraud or a material breach by the buyer. A seller who files bankruptcy before closing can ask to reject the agreement as an executory contract, and Ninth Circuit courts defer to the debtor’s business judgment. Rejection is not free; the buyer keeps a damages claim.
Is a $1.00 purchase price enforceable in California?
Usually the contract survives, because California presumes a signed writing has consideration. The fight is over what “other consideration” means. Vague terms are construed against the party who drafted them, typically the buyer, but proving the real price can take testimony and a trial. Writing every price term into the agreement avoids that dispute.
Can a buyer enforce a noncompete if I keep a minority stake?
Probably not under the stock-sale branch of Business and Professions Code section 16601, which covers an owner disposing of all of his or her ownership interest. A buyer could argue goodwill was sold, but courts read the exception narrowly. A retained stake plus a nominal stated price makes that argument much weaker.
What happens to my seller note if the buyer files bankruptcy?
Without collateral, the note is a general unsecured claim, often paid at a steep discount. A security interest in the stock or assets you sold, perfected under the California Commercial Code before the filing, makes you a secured creditor instead. A guaranty from the buyer’s owners gives you a second source of payment.
Does California tax the gain on selling my business at a lower rate?
No. California taxes capital gains as ordinary income, so a large sale can hit the 12.3 percent bracket plus a 1 percent surcharge on taxable income above $1 million, a 13.3 percent top rate. Installment reporting, which California generally follows, spreads the gain over the years you actually collect it.
How North Star Law Firm Can Help
North Star Law Firm reviews and negotiates purchase agreements for California owners in the Inland Empire, the Sacramento area and statewide through its buying and selling a business and contract drafting and review practices, and models the tax side of the same deal through business sale tax structuring. When one side of a signed deal is already in financial trouble, the firm also advises on the bankruptcy consequences. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.
If a buyer has handed you a purchase agreement, contact North Star Law Firm or schedule a consultation before you sign.