Delaware adopted the Uniform Assignment for the Benefit of Creditors Act on June 10, 2026, and the national bankruptcy bar has spent the summer calling it a faster, cheaper alternative to a Chapter 11 sale. California owners reading those alerts should know something the Delaware coverage mostly skips. California has run assignments for the benefit of creditors, usually called ABCs, for decades without a court, and the California version gives the assignee a power the new uniform act deliberately leaves out. For a struggling manufacturer in Perris or a restaurant group in Rancho Cucamonga, the choice among an ABC, Chapter 7, and Chapter 11 is one of the most consequential decisions an owner will make, and it usually has to be made quickly.
How does an assignment for the benefit of creditors work in California?
An ABC is a state-law liquidation. The company signs a general assignment, and everything it owns that isn’t exempt passes to a neutral professional called the assignee. The assignee liquidates the property and pays creditors from what it brings in, while the owners and managers step aside. Code of Civil Procedure § 493.010 defines the general assignment, and § 493.030 terminates attachment liens created within 90 days before it. In California there’s no petition, no judge, and no public docket unless someone sues. The Court of Appeal described the arrangement in Sherwood Partners, Inc. v. EOP-Marina Business Center (2007) 153 Cal.App.4th 977 as a transfer of the debtor’s assets in trust to the assignee, and it held that the assignee doesn’t take on the company’s lease obligations just by accepting the assignment.
The statutory framework is thin but specific. Under § 1802, the assignee must send written notice to creditors within 30 days of accepting the assignment and set a claims deadline between 150 and 180 days after that notice. Employees get a priority under § 1204 of up to $4,300 each for wages, commissions, vacation, and severance earned in the 90 days before the assignment. Revenue and Taxation Code § 19089 requires the assignee to notify the Franchise Tax Board within 10 days. The California Lawyers Association’s Insolvency Law Committee publishes an ABC desk guide that practitioners rely on for the rest.
What did Delaware and the uniform act change?
The Uniform Law Commission approved the act in 2025, and Delaware’s version, Senate Bill 267, replaced that state’s old ABC statute effective June 10, 2026. Law firm summaries count several other adopting states, including Utah and Arizona. The uniform act standardizes notice and claims procedures, authorizes the assignee to keep the business running, borrow money, and hold an auction, and sets a distribution order. Practitioner summaries report that Delaware’s version also sends the assignee to the Court of Chancery with a petition within 14 days. What the uniform act doesn’t do is give the assignee its own preference claim. It lets the assignee pursue only avoidance rights that a creditor could already bring under other law, such as a fraudulent transfer claim.
California hasn’t introduced the uniform act. The California Commission on Uniform State Laws voted in June 2025 to support it at the national level, and one law firm reports that a California Lawyers Association subcommittee is studying enactment, but we haven’t found a bill. For now, a California company assigning in California uses California’s existing rules.
Can a California assignee claw back preference payments?
Yes, and this is the feature that makes California different. Code of Civil Procedure § 1800 lets the assignee recover payments made to creditors in the 90 days before the assignment, or one year for insiders who had reasonable cause to believe the company was insolvent, with insolvency presumed during the 90-day window. The suit has to be filed within one year after the assignment. The statute borrows most of the Bankruptcy Code’s defenses, with two differences vendors should notice. Its ordinary course defense still uses the pre-2005 three-part test, requiring the debt to have been incurred in the ordinary course, paid in the ordinary course, and paid on ordinary business terms, where federal law now requires only one of the last two. And it has no minimum dollar floor, while the Bankruptcy Code shields non-consumer transfers under $8,575.
There’s a real question whether § 1800 survives federal preemption. The Ninth Circuit held it preempted in Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005), reasoning that it intruded on the federal bankruptcy power. The following year the Court of Appeal expressly disagreed in Haberbush v. Charles & Dorothy Cummins Family Ltd. Partnership (2006) 139 Cal.App.4th 1630. State courts follow Haberbush; federal courts in the Ninth Circuit are bound by Lycos. So a vendor sued in Riverside Superior Court faces the claim, while one with grounds to remove to federal court may not. Our firm’s preference clawback defense page covers the federal version of these defenses.
How does an ABC compare with Chapter 7 and Chapter 11?
| Feature | California ABC | Chapter 7 | Chapter 11 / Subchapter V |
|---|---|---|---|
| Who runs it | Assignee chosen by the company | Trustee appointed by U.S. Trustee | Management as debtor in possession |
| Court supervision | None unless litigation arises | Full | Full |
| Automatic stay | No | Yes | Yes |
| Sale free and clear, contract assignment over objection | No; requires lender and counterparty cooperation | Yes (§§ 363, 365) | Yes (§§ 363, 365) |
| Preference recovery | § 1800, 90 days, stricter defenses, preemption contested | § 547, 90 days | § 547, 90 days |
| Speed to a going-concern sale | Often days to weeks | Usually slower; businesses rarely operate | Weeks to months |
| Public filing | No | Yes | Yes |
| Eligibility limits | None | None for businesses | Subchapter V capped at $3,424,000 of debt |
The missing stay is the biggest practical weakness. An ABC works best when the secured lender is on board and the buyer is already lined up. It also carries an involuntary bankruptcy risk that owners should plan around. Under 11 U.S.C. § 303(h)(2), three unsecured creditors holding at least $21,050 in claims can force the company into bankruptcy without proving it’s generally not paying debts if a custodian, which includes an assignee, took possession within the prior 120 days. After 120 days, § 543(d)(2) directs the bankruptcy court to excuse the assignee from turning property over unless that’s needed to prevent fraud or injustice.
Is your company running out of runway, or has a lender already sent a default notice? The window to choose between an ABC, Chapter 7, and Subchapter V can close in weeks. Get the options on paper while you still have them.
What does the choice look like for an Inland Empire manufacturer?
Consider a frozen-food manufacturer in Perris, organized as an S corporation with two equal owners and 85 employees. It owes its bank $4 million on a blanket lien that both owners guaranteed, $2.5 million to trade creditors, and $140,000 in accrued wages. At $6.64 million of debt, it isn’t eligible for Subchapter V today. The Senate passed a bill on August 3, 2026 to restore the $7.5 million limit, but the House hadn’t passed it as of this writing.
Assume an assignee can sell the plant as a going concern for $2.6 million and collect $1.1 million of receivables, and that costs run $250,000 with the bank agreeing to carve out the wage claims. The bank recovers about $3.31 million and has a $690,000 deficiency. If the assignee nets $135,000 from § 1800 preference suits and the bank agrees those recoveries aren’t its collateral, trade creditors get about $106,000. In a Chapter 7, where a trustee sells equipment piecemeal for an assumed $1.5 million and collects $950,000 of receivables, the statutory trustee commission alone can reach $96,750 under § 326(a). The bank’s deficiency grows to about $1.8 million, trade creditors share roughly $47,000, and the owners’ guaranty exposure is more than $1.1 million worse than in the ABC. Those figures rest on assumed sale values, but the direction is typical: a going-concern sale protects guarantors.
The tax side can’t wait until April. An asset sale by an S corporation passes gain through to the shareholders even though no cash reaches them. If equipment with a $500,000 basis sells for $1.7 million, that $1.2 million is ordinary recapture income on the owners’ personal returns. Cancellation of debt income is tested for the insolvency exclusion at the corporate level for an S corporation under 26 U.S.C. § 108(d)(7), but at the partner level for an LLC taxed as a partnership, which can leave solvent members owing tax on forgiven debt. California generally follows § 108 and adds its 1.5% S corporation tax.
What liabilities follow the owners no matter which path they pick?
None of these procedures erases the personal exposure California imposes on people who run a company. Officers and managers who willfully fail to remit collected sales tax can be held personally liable under § 6829 once the business terminates. Unemployment Insurance Code § 1735 does the same for unpaid payroll contributions and withheld income tax, and Labor Code § 558.1 reaches owners and officers for certain wage violations, including final pay. The federal trust fund recovery penalty under 26 U.S.C. § 6672 and every personal guaranty survive as well. An ABC also has its own traps: the assignee must honor the federal priority statute, 31 U.S.C. § 3713, or face personal liability, and shutting down an establishment with 75 or more employees triggers Cal-WARN notice obligations. One quiet advantage is that California’s bulk sales law in Commercial Code § 6103 doesn’t apply to a general assignment or to the assignee’s later sale.
Frequently Asked Questions
Is an assignment for the benefit of creditors the same as bankruptcy?
No. An ABC is governed by state law with no bankruptcy filing, no court supervision in California, and no automatic stay. The company transfers its assets to an assignee who liquidates them for creditors.
Has California adopted the Uniform Assignment for the Benefit of Creditors Act?
No. Delaware and several other states have adopted it, but we haven’t found a California bill. California ABCs still follow the Code of Civil Procedure and common law.
Can an assignee in California sue to recover payments made before the assignment?
Yes. Code of Civil Procedure § 1800 allows recovery of preferential payments made within 90 days, or one year for insiders. Whether it’s preempted depends on the court: state courts say no, and the Ninth Circuit says yes.
Can creditors stop an ABC by filing an involuntary bankruptcy?
They can try. Within 120 days after the assignee takes possession, three creditors with at least $21,050 in claims can file, and the court doesn’t require proof of general nonpayment.
Does an ABC eliminate my personal guaranty?
No. Guaranties, responsible person liability for sales and payroll taxes, and federal trust fund penalties survive. A better sale price can shrink the deficiency the guarantor owes.
How long does a California ABC take?
The sale can close in days or weeks when a buyer is ready. The claims process runs longer, since the claims deadline falls 150 to 180 days after the assignee’s notice to creditors.
How North Star Law Firm Can Help
North Star Law Firm advises California business owners, lenders, and trade creditors on insolvency options, including ABCs, Chapter 7 liquidations, and Subchapter V reorganizations, and it defends vendors facing clawback claims in state and federal court. Phillip Zagotti is a California attorney and a CPA admitted in the Central District of California, so the liquidation analysis, guaranty exposure, and tax consequences of a sale are modeled together rather than handed off. Owners weighing a sale of a distressed company can also review the firm’s work on buying and selling a business.