Category: Bankruptcy

Picture a Fontana trucking company three months into Chapter 7. A letter from the trustee’s lawyer lists two April 2023 company wires, to the IRS and the Franchise Tax Board, that paid the owner’s personal taxes. It wants the money back.

Until March 2025, a California trustee could also have sued the IRS for the federal share. United States v. Miller ended that. It did nothing for the owner.

What did the Supreme Court decide in United States v. Miller?

In Miller, 604 U.S. 518 (2025), decided March 26, 2025, an 8-1 Court (Justice Jackson writing, Justice Gorsuch dissenting) held that the waiver of sovereign immunity in 11 U.S.C. § 106(a) “applies only to the §544(b) claim itself,” not to the state-law claim nested inside it. Section 106(a) is jurisdictional. It does not change what section 544(b)(1) requires: a transfer “voidable under applicable law by a creditor holding an unsecured claim.” No creditor of the Utah debtor, which paid about $145,000 of two shareholders’ taxes, could have sued the IRS on a Utah-law claim outside bankruptcy, so neither could the trustee.

That ended the rule California courts had followed since In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017), which let a trustee recover about $13.4 million of shareholder taxes from the IRS. The Seventh Circuit had sided with the government in In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014).

The Court declined to decide the trustee’s fallback argument, that a creditor could have voided the payments by suing the shareholders, and the Tenth Circuit remanded on May 1, 2025. As of October 2026, I have found no published ruling on that theory.

How far back can a California bankruptcy trustee reach?

Under 11 U.S.C. § 548(a)(1), the trustee can undo transfers made “on or within 2 years before the date of the filing of the petition,” either with actual intent to hinder, delay or defraud, or for “less than a reasonably equivalent value” while insolvent or thinly capitalized. Section 548 borrows no state law, so Miller leaves it alone.

For older transfers the trustee uses section 544(b) and California’s Uniform Voidable Transactions Act: Cal. Civ. Code § 3439.04 for actual intent (a transfer “to an insider” heads its badges of fraud), and section 3439.05 for a transfer without reasonably equivalent value by an insolvent debtor, with section 3439.02 presuming insolvency when debts generally go unpaid as they come due. Remedies are in section 3439.07. Under section 3439.09, constructive fraud claims run four years, actual intent four years or one year after discovery, and nothing survives seven. Section 546(a) generally gives the trustee two years after the order for relief to sue; section 551 preserves what is avoided for the estate.

Can the trustee sue the owner whose personal taxes the company paid?

Yes. Collection runs through 11 U.S.C. § 550(a)(1), which reaches “the initial transferee of such transfer or the entity for whose benefit such transfer was made.” The owner whose tax bill was paid is that entity.

Under the Ninth Circuit’s dominion test, a transferee needs “dominion over the money or other asset, the right to put the money to one’s own purposes” (In re Bullion Reserve of North America, 922 F.2d 544 (9th Cir. 1991)), and In re Incomnet, Inc., 463 F.3d 1064 (9th Cir. 2006), noted that agencies including the IRS have been held initial transferees. A wire straight to the IRS or FTB makes the agency the initial transferee and the owner the beneficiary; money routed through the owner’s own account makes him the initial transferee. Either way he is in the first tier, and section 550(b)’s good-faith protection covers only later transferees.

California law supplies the actual creditor Miller demands. Civ. Code § 3439.08(b)(1) allows a judgment against “the first transferee of the asset or the person for whose benefit the transfer was made,” and no immunity protects the owner. The trustee usually pleads constructive fraud: the company was insolvent, and paying the owner’s personal tax gave it nothing, because value under section 3439.03 means property or satisfying the debtor’s own debt.

What defenses does a California owner have to a tax payment clawback?

Solvency is the best one: the trustee must prove insolvency, though a company behind on its bills faces the section 3439.02 presumption.

Calling the payment an authorized tax distribution usually backfires. A distribution is paid on the owner’s equity, so the company gets nothing for it. Corp. Code § 17704.05(a) also bars an LLC distribution that leaves the company unable to pay debts as they come due or with liabilities above assets, and section 17704.06 makes a consenting member, or one who knowingly received it, personally liable to the LLC for four years.

Two defenses need paper. Repaying a documented loan from the owner satisfies the company’s own debt, which is value, and the insider preference window in section 547(b)(4)(B) is one year. Reasonable pay for work is value too, if payroll records and a W-2 from that year back it up. Section 3439.08(a)’s good-faith defense covers only actual-intent claims, and only for reasonably equivalent value.

Does Miller also protect the Franchise Tax Board, CDTFA and EDD?

This is unsettled; I found no post-Miller decision involving a state tax agency. Within section 548’s two years, the better answer is that the agency can be sued. Central Virginia Community College v. Katz, 546 U.S. 356 (2006), held that the states “agreed in the plan of the Convention not to assert any sovereign immunity defense they might have had” in bankruptcy, so a 2025 payment to the FTB is recoverable in a 2026 case.

Past two years, the agency reading follows Miller’s method. Section 544(b) asks what a creditor could have done outside bankruptcy, where Katz does not apply. That creditor would face claim presentation under Gov. Code §§ 905.2 and 945.4, the bar on “legal or equitable process” against tax collection in Rev. & Tax. Code § 19381, and a refund suit that belongs to “any taxpayer” under section 19382. Miller’s examples of consenting states (Illinois, New York, Ohio) did not include California, which joined the 23-state brief backing the United States.

The trustee reading answers that Miller construed a federal waiver, while the states surrendered bankruptcy immunity at the founding. And Gov. Code § 945 says “A public entity may sue and be sued,” so a creditor who presented a claim could have sued.

My view, and it is only that: a Central District bankruptcy judge is more likely to protect the FTB under section 544(b), because I found no California consent to UVTA suits over tax paid on someone else’s account. CDTFA and EDD disputes are rarer, since a company’s sales and payroll taxes are usually its own debts.

How would this play out for a Fontana trucking LLC?

An illustrative case: a single-member Fontana trucking LLC, behind on fuel and repair vendors, wires $85,000 to the IRS and $22,000 to the FTB in April 2023 for its member’s 2022 personal income tax. It files Chapter 7 in the Riverside Division in September 2026.

At 41 months, the wires are outside section 548. The IRS claim fails under Miller, and the FTB claim is the open question many trustees will skip. The member faces all $107,000. Section 3439.09’s four years had not run at filing, and section 546(a) generally gives the trustee until September 2028. With no loan to repay and no payroll in a disregarded LLC, his defenses are thin. Repaying does not reopen his tax accounts; he just pays his own 2022 tax with his own money, years late.

The planning point: in the year or two before a possible filing, pay personal taxes from personal funds. Make any tax distribution only after a written finding, backed by current financial statements as section 17704.05(b) allows, that the LLC passes both tests. I see this most where the company always paid the owner’s estimates and nobody stopped when business turned.

Frequently Asked Questions

Can a bankruptcy trustee make the IRS return taxes my company paid for me?

Only for payments made within two years before the filing, under section 548. For older payments, United States v. Miller bars the claim against the IRS, but the trustee can still pursue you.

How far back can a California trustee go to recover a payment made for an owner?

Usually four years, under California’s Uniform Voidable Transactions Act as applied through section 544(b). Actual-intent claims can sometimes run one year from discovery, never past seven years.

Is a tax distribution under my LLC operating agreement safe from a trustee?

Not if the LLC was insolvent. A distribution gives the company nothing back, and Corporations Code section 17704.05 bars distributions that leave an LLC unable to pay its debts.

Can the trustee collect the same payment from both the IRS and me?

No. Section 550(d) allows only one satisfaction. After Miller, the IRS is out of reach for payments older than two years, so the claim usually lands on the owner.

Does Miller protect the Franchise Tax Board from a trustee’s lawsuit?

Not for payments within two years, because Katz held the states gave up sovereign immunity in bankruptcy. For older payments the question is open, and I have found no decision on it.

How North Star Law Firm Can Help

North Star Law Firm defends California owners against trustee demands over pre-filing payments through its preference and clawback defense practice and advises companies weighing a Chapter 7 filing. Its tax defense work covers the IRS and FTB side. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California and the U.S. Tax Court.

If a trustee has written about payments your company made for you, contact North Star Law Firm or schedule a consultation before the response date passes.

A Riverside County jury has returned a $450,000 verdict against your company. Your lawyer likes the appeal, but the bond needed to stop enforcement requires collateral you lack, and the creditor has recorded an abstract of judgment. Someone suggests Subchapter V.

A D.C. bankruptcy judge kept alive a Subchapter V case built around two creditors in In re JPK Newco, LLC, No. 25-00200 (Bankr. D.D.C. June 12, 2026), using a Fourth Circuit test. California answers to the Ninth Circuit instead.

Can a California business file bankruptcy mainly to stop one creditor?

Sometimes. 11 U.S.C. § 1112(b) allows dismissal “for cause,” and the Ninth Circuit counts a bad-faith filing as cause. Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994), called the good faith label “somewhat misleading” and asked “whether a debtor is attempting to unreasonably deter and harass creditors or attempting to effect a speedy, efficient reorganization on a feasible basis.”

A dispute with one creditor is not fatal. In re Stolrow’s Inc., 84 B.R. 167 (B.A.P. 9th Cir. 1988), held that a petition arising from a two-party dispute is not “per se” bad faith. Three Los Angeles clothing retailers filed the day after a shareholder bonded a state-court receivership, and kept their cases because a receivership would have triggered termination clauses in twelve store leases and put more than 100 jobs at risk.

What does a Riverside or Los Angeles bankruptcy judge look for in a bad-faith motion?

A common starting point in the Central District is In re St. Paul Self Storage Ltd. Partnership, 185 B.R. 580 (B.A.P. 9th Cir. 1995). It weighs whether the debtor has one asset, an ongoing business, unsecured creditors and cash flow, and whether the case is “essentially a two party dispute capable of prompt adjudication in state court.” That debtor had not operated since 1991, owed its other debts mostly to insiders and professionals, and filed shortly before trial. Filing a plan did not help; the panel called that “reverence for form.”

Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989), the D.C. court’s test, requires findings of “objective futility” as well as “subjective bad faith,” so a credible early plan can end the motion. I have found no published Ninth Circuit decision adopting that two-part rule; here the factors are weighed together.

They protect debtors too. In re Sullivan, 522 B.R. 604 (B.A.P. 9th Cir. 2014), reversed a Santa Ana dismissal: stopping collection is not bad faith without intent to harass, a creditor’s vow to reject any plan does not prove futility, and the court must weigh conversion for all creditors. Typical bad-faith two-party cases, the panel said, “may involve delays on the eve of trial (litigation tactics), forum shopping, new-debtor syndrome (special purpose entities), repeat filers, and repeatedly delayed foreclosure sales.”

Is a California LLC or corporation eligible for Subchapter V in 2026?

11 U.S.C. § 1182(1) now adopts the small business debtor definition in 11 U.S.C. § 101(51D): a debtor “engaged in commercial or business activities,” not primarily owning single asset real estate, with no more than $3,424,000 of noncontingent, liquidated debt (excluding insider and affiliate debt), at least half from the business. That figure took effect April 1, 2025; the temporary $7.5 million cap lapsed in 2024.

Congress has passed H.R. 7730, the Bankruptcy Threshold Adjustment Act, restoring $7,500,000, with final Senate approval September 28, 2026. On October 9 it awaited the President’s signature, and it covers only cases commenced after enactment.

NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air, LLC), 638 B.R. 403 (B.A.P. 9th Cir. 2022), put the burden on the debtor and required it to be “presently” engaged in some business activity. Litigating and staying in good standing sufficed for an LLC with no employees, but a litigation-only shell can be eligible and still look like St. Paul.

Can a Subchapter V filing take the place of an appeal bond in California?

That was Marsch. The debtor filed Chapter 11 before a $2.56 million restitution judgment was entered, though she was not in business and could pay or bond it. The Ninth Circuit upheld dismissal and $27,452 in sanctions, calling the filing “a transparent attempt to use a Chapter 11 petition and the resulting stay as an inexpensive substitute for the bond required under state law.”

Under Cal. Code Civ. Proc. § 917.1, an appeal does not stay enforcement of a money judgment without an undertaking of double the judgment, or one and one-half times through an admitted surety insurer. Marsch left open whether an operating company may file when enforcement “would cause severe business disruption.”

Judgment liens add a legitimate reason. An abstract creates a real property lien under Cal. Code Civ. Proc. § 697.310; a Secretary of State filing under section 697.510 reaches business personal property. A lien created within 90 days before the petition, while the debtor was insolvent, may be avoidable under 11 U.S.C. § 547(b). Sullivan credited a filing 89 days after the lien for “leveling the playing field for other creditors.”

What can Subchapter V do that a state-court appeal cannot?

It can bind the creditor to a plan. Under 11 U.S.C. § 1191(b), the court may confirm a plan no impaired class accepts if it is “fair and equitable,” which for unsecured claims mainly means three to five years of projected disposable income. Section 1181(a) removes the absolute priority rule, so owners can keep the company. Because no class must accept, a creditor’s no vote rarely proves futility. The plan is due within 90 days under section 1189(b).

The creditor may seek relief under 11 U.S.C. § 362(d)(1) to finish the state case, judged by the Curtis factors in In re Kronemyer, 405 B.R. 915 (B.A.P. 9th Cir. 2009). Removed claims can be remanded “on any equitable ground” under 28 U.S.C. § 1452(b), and 11 U.S.C. § 305(a)(1) permits dismissal when that better serves creditors and the debtor. For the creditor’s side, see my post on California judgment creditors facing a Chapter 11 debtor.

Section 1112(b)(2) bars dismissal only for “unusual circumstances” plus a likely plan and a justified, curable act or omission. A bad motive is hard to cure, so I would not rely on it.

What does a Subchapter V filing do to the company’s taxes and costs?

26 U.S.C. § 1399 creates no new taxable entity for an LLC or corporation; section 1398 applies only to individuals. Taxes stay due under 28 U.S.C. § 960, missed postpetition taxes are cause under section 1112(b)(4)(I), and the $800 tax under Cal. Rev. & Tax. Code § 17941 continues.

As a CPA, I ask how the company is taxed. Discharged debt is excluded under 26 U.S.C. § 108(a)(1)(A), and California generally conforms (Rev. & Tax. Code §§ 17131, 24307). For an LLC taxed as a partnership, section 108(d)(6) applies it member by member, so members outside bankruptcy may need the insolvency exclusion. S corporations apply it at the entity level.

Subchapter V skips quarterly U.S. Trustee fees under 28 U.S.C. § 1930(a)(6)(A), but the trustee is paid under 11 U.S.C. § 330(a), plus counsel. Against a $450,000 judgment, that can pencil out.

How would a Murrieta contractor’s filing fare?

Illustration: a Murrieta grading LLC has 18 employees, a $600,000 bank line, $280,000 of vendor debt and $190,000 of equipment loans. In August 2026 a customer wins $450,000 in Riverside County Superior Court and records an abstract. A surety undertaking would be $675,000. Total debt of about $1.52 million is under the limit.

Version one files in October, inside 90 days, keeps payroll running and pays the judgment pro rata with vendors over three years while challenging the lien. That resembles Stolrow’s and should survive a section 1112(b) motion.

Version two closed in 2025, owns a counterclaim and a pickup, owes $40,000 to the owner’s brother and its lawyers, and files the morning of trial holding enough sale proceeds to bond. That is St. Paul with a Marsch twist.

Frequently Asked Questions

Is it bad faith to file Subchapter V to stop a judgment creditor in California?

Not by itself. An operating business with other creditors usually passes; a shell filing to delay trial or avoid an affordable bond does not.

Does a creditor’s refusal to vote for my plan doom a Subchapter V case?

No. Section 1191(b) allows confirmation without any impaired class accepting, if the plan is fair and equitable. Sullivan also refused to treat a creditor’s early threat as proof of futility.

What is the Subchapter V debt limit right now?

As of October 9, 2026, $3,424,000 in noncontingent, liquidated debts. H.R. 7730 would raise it to $7,500,000 for later cases but awaited the President’s signature. Confirm before filing.

Can my LLC qualify for Subchapter V if it has stopped operating?

Possibly. Under RS Air the debtor must be presently engaged in some business activity, and litigating can count. A dormant company still faces a tougher bad-faith fight.

Will the bankruptcy court decide my lawsuit instead of the state court?

Often not. The creditor can seek stay relief to finish it there. Moving a losing case to a friendlier forum is a classic bad-faith marker under St. Paul.

How North Star Law Firm Can Help

North Star Law Firm tests whether a Subchapter V filing will hold up and represents small business debtors through its bankruptcy practice; when the fight began with a contract, it reviews the agreement through contract drafting and review. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.

If a judgment or an appeal bond is forcing the question, contact North Star Law Firm or schedule a consultation before you file.

Chapter 7 is supposed to be quick. The case behind Phillips v. Goldman (In re Gilman), 176 F.4th 1152 (9th Cir. 2026) (en banc) was filed in the Central District of California in February 2011 and is still open. After years of homestead litigation and the debtor’s 2021 death, a judgment creditor sued the trustee personally for letting a Van Nuys house and a Northridge commercial building decay while the debtor and his wife kept the rent.

On May 7, 2026, an eleven-judge en banc panel held that the trustee could not end that suit on immunity grounds. As a California attorney and a CPA, I read the opinion as a guide to what creditors should watch in a trustee’s paperwork, and as a mirror of a California family trust trustee’s duties.

What did the en banc Ninth Circuit decide about trustee immunity?

Judge Jacqueline Nguyen wrote the opinion, with no concurrence or dissent, and untangled two doctrines. Quasi-judicial immunity is absolute but narrow, covering functions “essential to the authoritative adjudication of private rights” in the estate. Derived immunity protects acts the bankruptcy court approved, but only when the act was within the trustee’s authority, creditors had notice, the trustee candidly disclosed the material facts, and the court signed off.

Collecting rent and preserving buildings make the trustee “a property manager,” not an adjudicator, so quasi-judicial immunity did not apply. Derived immunity failed on the pleadings because no order authorized years of inaction, though the trustee may raise it again on remand.

The larger change is the standard of care. The lower courts, following In re Continental Coin Corp., 380 B.R. 1 (Bankr. C.D. Cal. 2007), had shielded trustees from ordinary negligence. The en banc court rejected tying immunity to degree of fault. Outside immunity, a trustee answers for plain negligence under Hall v. Perry (In re Cochise College Park, Inc.), 703 F.2d 1339 (9th Cir. 1983), and Bennett v. Williams, 892 F.2d 822 (9th Cir. 1989), which asks what an ordinarily prudent person would do.

The trustee has petitioned the Supreme Court in Goldman v. Phillips, No. 26-315, citing a three-way circuit split. The response is due October 13, 2026, and the petition reports that the Ninth Circuit stayed its mandate.

Does a creditor need permission to sue a trustee, and how long does it have?

Under Barton v. Barbour, 104 U.S. 126 (1881), and In re Crown Vantage, Inc., 421 F.3d 963 (9th Cir. 2005), suing a trustee in another forum for official acts requires leave of the bankruptcy court. Phillips sued inside the bankruptcy court, so leave never came up, but a creditor eyeing a state court suit needs it.

The bankruptcy court found the claims time-barred under the four-year catch-all in Cal. Code Civ. Proc. § 343. The district court reversed under a continuous accrual theory, and the trustee did not contest that on appeal. A companion claim on the trustee’s bond under 11 U.S.C. § 322 and Fed. R. Bankr. P. 2010(b) was treated as derivative; section 322(d) bars bond suits filed more than two years after the trustee’s discharge. On oversight, the court spoke to creditors rather than the U.S. Trustee: a trustee who reports regularly shifts the burden of objecting to them, and a silent creditor may be estopped.

Why can a California homestead dispute keep a Chapter 7 open for years?

Under Cal. Code Civ. Proc. § 704.710(c), a homestead is the “principal dwelling” where the debtor or spouse lived when the lien attached and continuously afterward. In the earlier appeal, In re Gilman, 887 F.3d 956 (9th Cir. 2018), the Ninth Circuit vacated because the bankruptcy court looked only at occupancy. With escrow open on a sale the day he filed, the court also had to find whether Gilman intended to keep living there.

Gilman claimed $100,000 under the old tiers. AB 1885 (Stats. 2020, ch. 94) rewrote section 704.730 effective January 1, 2021: the greater of $300,000 or the prior year’s county median single-family price, capped at $600,000, both indexed each January to the California CPI. From Department of Industrial Relations annual averages, I calculate a 2026 floor near $370,650 and a cap near $741,300; no agency publishes an official figure. Barclay v. Boskoski, 52 F.4th 1172 (9th Cir. 2022) fixes exemptions on the petition date, so a 2011 case still runs on 2011 law.

What happens when a Chapter 7 debtor dies before the case closes?

Under Fed. R. Bankr. P. 1016(a), the case continues “as though the death or incompetency had not occurred.” In practice the court looks to the probate personal representative, or the successor trustee of the debtor’s living trust, when the debtor’s participation is needed. Property abandoned under 11 U.S.C. § 554 goes back to the debtor, which after death means probate or the trust administration, liens attached. The homestead statute speaks of the debtor “or the judgment debtor’s spouse,” and section 704.720(d) protects a separated spouse who stays in the home, but the code does not squarely say how a claimed exemption carries over to a surviving spouse.

What should a creditor look for in the trustee’s reports and tax filings?

In asset cases the U.S. Trustee Program requires a Form 1 property record and a Form 2 cash receipts and disbursements record, submitted in an interim report at least annually. If the estate owns a rental, I expect Form 2 to show rent coming in and property tax and insurance going out. A rental that sits on Form 1 for years with no rent on Form 2 is the Gilman pattern.

Post-petition rents belong to the estate under 11 U.S.C. § 541(a)(6), and an individual’s Chapter 7 estate is its own taxpayer under 26 U.S.C. § 1398. It files Form 1041 as a transmittal for a Form 1040 per IRS Publication 908 once it crosses the 26 U.S.C. § 6012(a)(8) threshold. The FTB Form 541 instructions require Form 541, with Form 540 attached, when gross income exceeds $10,000 or net income exceeds $1,000. An estate holding a rental but filing no returns is a red flag.

11 U.S.C. § 704(a)(7) requires the trustee to furnish requested information, and 11 U.S.C. § 105(d) lets a party in interest request a status conference aimed at an “expeditious and economical resolution.” Section 324 allows removal for cause.

How does a California family trust trustee’s exposure compare?

A family trust trustee owes the same core duty with no immunity at all. Cal. Prob. Code § 16040 requires “reasonable care, skill, and caution” judged against a prudent person in a like capacity. Section 16006 requires preserving trust property and section 16007 requires making it productive, so letting a sibling live rent-free in a trust rental breaches both.

Remedies under section 16420 include removal and reduced compensation, and section 16440(a)(3) charges the trustee with profit that would have accrued, which is how lost rent becomes a personal judgment. Section 16460 gives a beneficiary three years from an account that adequately discloses the claim. A trustee unsure what to do can petition for instructions under section 17200(b)(6). I have written about trust accountings and notices and about a trust trustee who files bankruptcy.

What could a neglected Redlands rental cost the creditors?

Here is an illustration. A Yucaipa contractor files Chapter 7 in the Riverside Division in March 2022, owning a Redlands rental worth $560,000 with a $150,000 mortgage. He lives elsewhere, so no homestead applies. The trustee never demands turnover, and the debtor keeps collecting $2,700 a month, pays the $1,100 mortgage, and pockets $1,600.

The house sells in July 2025, forty months later. Diverted rent: $64,000. Tax delinquency penalties paid from escrow: about $2,600. A roof leak that a $9,000 repair would have stopped in 2022 pushes the price to $528,000, or $23,000 below the $551,000 net a prompt repair would have produced. Total loss: about $89,600, or roughly 22 cents on the dollar against $400,000 in unsecured claims before administrative costs.

Frequently Asked Questions

Can a Chapter 7 trustee in California be personally liable for negligence?

Yes, in the Ninth Circuit. The en banc court in Phillips v. Goldman (2026) held that ordinary negligence is enough when no immunity applies. Quasi-judicial immunity covers only adjudication-type functions, and derived immunity requires a court order obtained after notice and candid disclosure. A Supreme Court petition challenging the rule, No. 26-315, is pending.

Does a Chapter 7 case end if the debtor dies?

No. Federal Rule of Bankruptcy Procedure 1016(a) says a Chapter 7 case continues as though the death had not occurred. A probate representative or successor trustee usually steps in where the debtor’s participation is needed. Property the trustee abandons returns to the debtor’s probate estate or trust administration, with existing liens still attached.

How much is the California homestead exemption in 2026?

Code of Civil Procedure section 704.730 sets it at the greater of $300,000 or the county median single-family sale price for the prior year, capped at $600,000, with both figures adjusted each January for California inflation. By my calculation, the 2026 range is about $370,650 to $741,300. In bankruptcy, the amount is fixed on the petition date.

What reports should a creditor review in a Chapter 7 asset case?

Ask for the trustee’s Form 1 property record and Form 2 cash receipts and disbursements record, which the U.S. Trustee Program requires in interim reports at least annually. If the estate owns a rental, look for rent deposits and property tax payments. Also ask whether the trustee filed federal Form 1041 and California Form 541, since post-petition rents are estate income.

How long does a beneficiary have to sue a California trustee for uncollected rent?

Under Probate Code section 16460, a beneficiary who receives a written account or report that adequately discloses the claim generally has three years from receipt to file. Without an adequate account, the three years run from when the beneficiary discovered, or reasonably should have discovered, the problem.

How North Star Law Firm Can Help

North Star Law Firm represents creditors, debtors and fiduciaries in California bankruptcy cases and trust disputes, with a focus on the Inland Empire and the Sacramento region. The firm reviews trustee reports and estate tax filings, pursues or defends claims arising from Chapter 7 cases, advises successor trustees on trust administration, and prepares fiduciary and bankruptcy estate tax returns. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.

If a trustee’s handling of property is costing you money, contact North Star Law Firm or schedule a consultation.

If your California business borrowed from the SBA during the pandemic, a letter from the SBA or Treasury may already be on your desk. California went first. On February 6, 2026, the SBA suspended 111,620 California borrowers tied to more than $8.6 billion in PPP and COVID EIDL loans, and on September 14, 2026 it suspended 870,000 more nationwide.

The letter rarely says which problem you have. An honest default means the business used the money for the business, then closed and stopped paying. A fraud allegation means the government thinks the application was false. The envelopes look alike, but the law treats them very differently.

What does an SBA suspension actually change?

A suspended borrower cannot get new SBA business or disaster loans or use other SBA programs, including 8(a) contracting. The SBA’s own word is “suspected.” A suspension is not a court finding, and the releases do not say it is a government-wide exclusion or that it changes how your existing loan is serviced.

Delinquency is what moves the file. Under 31 U.S.C. § 3711(g) and 31 C.F.R. § 285.12, a delinquent SBA debt goes to Treasury after 120 to 180 days, and the SBA’s COVID EIDL servicing page says it cannot help once a loan is in cross-servicing. As a CPA, I watch what came next. On September 23, 2026, the SBA announced that the IRS had found discrepancies tied to about $100 billion in referred loans and opened examinations. Your application numbers are being checked against your returns.

Which questions do I ask before anyone answers the letter?

I start with the application and lay it next to the 2019 return it was built from. If revenue or payroll matches, we are probably in honest-default territory. If not, I want to know who typed it. Many Inland Empire owners paid a “loan consultant” in 2020 who inflated figures without telling them. That helps on intent. It does not erase the problem.

Then I trace the loan deposit through the bank statements, because a working capital loan spent on personal bills changes the story. I check the entity’s status with the Secretary of State, and the original loan size, since the SBA required a personal guaranty only on COVID EIDL loans greater than $200,000. Last, I pin down which letter this is, because a 30-day demand under Operation No Doze runs on a different clock than a suspension notice or a Treasury collection letter.

Where does a civil fraud claim end and criminal exposure begin?

The civil side starts with the Program Fraud Civil Remedies Act at 31 U.S.C. § 3802, which the SBA calls the administrative False Claims Act. It allows a penalty of up to $14,308 per false claim under 13 C.F.R. § 142.1 plus up to twice the claim, and Pub. L. 118-159 raised the ceiling for these cases to $1,000,000 in 31 U.S.C. § 3803(c). A False Claims Act suit under 31 U.S.C. § 3729 means triple damages plus $14,308 to $28,619 per claim under 28 C.F.R. § 85.5.

Prosecutors charge 18 U.S.C. § 1014 for false statements to the SBA, 18 U.S.C. § 1343 for wire fraud, and 18 U.S.C. § 1344 for bank-made PPP loans. Pub. L. 117-165 (now 15 U.S.C. § 636(b)(16)) and Pub. L. 117-166 give the government 10 years for EIDL and PPP fraud, so a 2020 application stays open into 2030. All four California U.S. Attorney’s offices joined the summer surge the SBA Inspector General reported on September 14. If an agent has called or the numbers were simply wrong, criminal defense counsel should see the file before anyone writes to the SBA.

What does the honest-default path look like for a closed California business?

Hardship accommodation, now called payment assistance on the SBA’s page, cuts payments 50 percent for six months but only for businesses still operating and less than 90 days past due. A closed restaurant does not qualify.

The realistic tool is an offer in compromise. The SBA’s requirements letter, revised July 10, 2026, says talks generally begin only after collateral is liquidated. It also asks a dissolved business to prove closure and supply its final signed return. An accepted offer ends Treasury offset, and a Form 1099-C may follow. When home equity is the sticking point, I have clients apply for a home equity loan and attach the written denial.

At Treasury, the SBA warns that interest and fees can add as much as 28 percent. I run two tracks: a FOIA request for the collection file to test whether required notices went out, and a written request that Treasury drop the fee and set a long-term plan. Expect 60 to 90 days. A notice defect rarely lasts, since the SBA can resend and refer again. Offset has no time limit under 31 U.S.C. § 3716(e).

Many of our SBA loan and business debt files end in bankruptcy. For an individual borrower or guarantor, an honest-default EIDL is ordinary unsecured debt in Chapter 7, though an LLC gets no discharge under 11 U.S.C. § 727(a)(1). To claim fraud, the SBA must sue within 60 days after the first date set for the creditors’ meeting under Fed. R. Bankr. P. 4007(c).

How does a fraud allegation change what bankruptcy can do?

Under 11 U.S.C. § 523(a)(2)(A), a debt obtained by fraud is not discharged. In the Ninth Circuit the creditor must prove five elements, including intent to deceive and justifiable reliance, under Turtle Rock Meadows Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000), with the reliance standard drawn from Field v. Mans, 516 U.S. 59 (1995).

One point I rarely see raised: an EIDL revenue figure is arguably a statement about financial condition, and Lamar, Archer & Cofrin, LLP v. Appling, 584 U.S. 709 (2018) held that even a statement about one asset can qualify. If so, the SBA must use section 523(a)(2)(B), which demands reasonable reliance. For loans approved fast on self-certified numbers, that is a real fight. Penalties differ. Section 523(a)(7) excepts government penalties that are not compensation for actual loss, so per-claim PFCRA penalties likely survive.

Where does California law add its own traps?

Payroll first. If a PPP application counted workers the business paid as contractors, either the application overstated payroll or the business misclassified employees, and willful misclassification costs $5,000 to $15,000 per violation under Cal. Lab. Code § 226.8.

Then the entity. A California LLC owes annual tax under Cal. Rev. & Tax. Code § 17941 until it files a certificate of cancellation. Even so, I usually keep the LLC and its EIN alive until the 1099-C arrives, then report the cancelled debt on Form 982 under the insolvency exclusion in 26 U.S.C. § 108(a)(1)(B). The SBA’s new final-return request makes that sequencing harder.

What should you avoid doing this month?

Silence is the classic mistake, because an unanswered demand becomes a Treasury referral and later a Justice Department one. Read any repayment form before signing; an acknowledgment that the loan was obtained improperly can hand the SBA the first elements of a section 523(a)(2) case. Don’t dissolve the LLC because someone on an SBA phone line suggested it. And skip the merchant cash advance for a lump-sum payment (our Kossoff post explains why).

How might this play out for a Fontana restaurant?

Consider an illustrative Fontana taqueria LLC that borrowed $150,000 in COVID EIDL funds in June 2020. Its 2019 Form 1065 showed $412,000 in gross receipts, matching the application, and the money went to rent and payroll. It closed in March 2024 and sold its equipment for $6,000. In September 2026 the owner got a suspension notice and a Treasury letter showing about $171,000 in principal and interest plus roughly $48,000 in fees.

With no personal guaranty at $150,000, the LLC owes the debt and she does not, unless the application was false. Her numbers tie out, so this is an honest default. We ask Treasury to remove the fee and offer a modest compromise for an empty LLC, then cancel it after the 1099-C. Change one fact. Had the application claimed $612,000 in revenue, she would face personal PFCRA and False Claims Act exposure until 2030, and her first call should go to criminal defense counsel.

Frequently Asked Questions

Does an SBA suspension mean I have been accused of a crime?

No. The SBA describes suspended borrowers as tied to suspected fraud, and a suspension is not a criminal charge or a court finding. It blocks new SBA loans and programs. Collection or a referral to the IRS or the Justice Department can follow, so the notice deserves a careful written response.

Can a COVID EIDL loan be discharged in a California Chapter 7 case?

For an individual borrower or guarantor, usually yes, if it is an ordinary default. The SBA can object by filing a complaint under 11 U.S.C. § 523(a)(2) within 60 days after the first date set for the creditors’ meeting and proving fraud. An LLC or corporation can file Chapter 7 but receives no discharge.

Am I personally liable for my company’s COVID EIDL loan?

It depends on loan size and facts. The SBA required personal guaranties only on COVID EIDL loans greater than $200,000, so an owner of a smaller loan usually is not liable on the note. An owner who made a false statement on the application can still be personally liable under the fraud laws.

How long does the government have to bring a PPP or EIDL fraud case?

Ten years. Public Laws 117-165 and 117-166, signed in August 2022, require criminal charges or civil enforcement actions alleging borrower fraud on a COVID EIDL or PPP loan to be filed within 10 years after the offense. An application submitted in mid-2020 can support a case until mid-2030.

Can the Treasury collection fee on an SBA loan be removed?

Sometimes. When an SBA loan goes to Treasury cross-servicing, interest and fees are added, which the SBA says can reach 28 percent. A written request asking Treasury to remove the fee, paired with a records request for the collection file, has worked in matters I have handled, though answers take two to three months.

How North Star Law Firm Can Help

North Star Law Firm represents California business owners facing SBA suspensions, 30-day demand letters and Treasury collection on PPP and COVID EIDL loans, from the Inland Empire and the Sacramento area to clients statewide. The firm handles SBA loan and business debt resolutions, offers in compromise, IRS examinations through its tax defense practice, and Chapter 7 filings when a discharge is the right answer. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Bankruptcy Court for the Central District of California.

If an SBA or Treasury letter is on your desk, contact North Star Law Firm or schedule a consultation before the 30 days run out.

A Moreno Valley warehouse worker rear-ended in 2024 files Chapter 7 a year later and checks “No” on the line asking about claims against third parties. After the discharge, her injury lawsuit hits a summary judgment motion arguing she swore to the bankruptcy court that the claim did not exist.

That defense is judicial estoppel, which the Supreme Court addressed on June 11, 2026, in Keathley. The omission can usually be repaired, but through the bankruptcy court, and creditors may share the recovery.

What did the Supreme Court decide in Keathley?

Thomas Keathley was in a confirmed Chapter 13 plan in Arkansas, paying creditors 100 percent, when a Buddy Ayers Construction driver hit him in 2021. He told his bankruptcy lawyer and sued in Mississippi, but nobody amended the schedules until the defense raised it. The Fifth Circuit still barred the suit, because its rule called an omission inadvertent only if the debtor lacked knowledge of the facts or any motive to conceal.

In Keathley v. Buddy Ayers Construction, Inc., No. 25-6 (U.S. June 11, 2026), a unanimous Court vacated. Justice Jackson wrote that courts “should look to the totality of the circumstances surrounding the omission.” It only assumed estoppel applies in bankruptcy and left the bad-faith question open.

Justice Thomas, joined by Justice Gorsuch, wrote that the doctrine itself “merits a closer look.” Justice Sotomayor added that estoppel mostly rewards a defendant “neither misled nor impacted by the delayed disclosure,” and that the calculus “may look different” after discharge, citing the reopening statute.

What changes in a California federal court that already followed Ah Quin?

Less than in Texas. Hamilton v. State Farm Fire & Casualty Co., 270 F.3d 778 (9th Cir. 2001), barred a Los Angeles debtor who listed “None” for contingent claims and then sued his insurer, applying the factors of New Hampshire v. Maine, 532 U.S. 742 (2001): a clearly inconsistent position, a court that accepted the first one, and unfair advantage.

Ah Quin v. County of Kauai Department of Transportation, 733 F.3d 267 (9th Cir. 2013), then held that once a debtor reopens and corrects the schedules, “rather than applying a presumption of deceit,” the court asks whether the omission was “in fact, inadvertent or mistaken.” Keathley quoted that line with approval.

The change is reach. Ah Quin kept a narrower test for debtors who never reopened; Keathley has no such limit, so in our view knowing about the accident should no longer be enough. Reopening is still the best fact a debtor can show.

Does a Riverside County judge apply Keathley or California’s own test?

California’s own. Jackson v. County of Los Angeles, 60 Cal.App.4th 171 (1997), set out a five-element test that the California Supreme Court restated in Aguilar v. Lerner, 32 Cal.4th 974 (2004), ending with the requirement that “the first position was not taken as a result of ignorance, fraud, or mistake.” Even when every element is met, applying it is discretionary.

Cloud v. Northrop Grumman Corp., 67 Cal.App.4th 995 (1998), refused to infer intent from a missing wrongful termination claim and gave the debtor time to secure “the bankruptcy trustee’s participation in, or abandonment of” it. Miyahara v. Wells Fargo Bank, N.A., No. B317726 (Cal. Ct. App. Feb. 9, 2024), called estoppel an “extraordinary remedy” and held mistake was a fact question unfit for demurrer.

In Riverside County Superior Court, Keathley persuades but does not bind. Cloud’s move is the practical one: Code Civ. Proc. § 368.5 lets the court substitute the trustee without the case abating, and a trustee never took an inconsistent position.

Who owns the claim, and how fast do you need to reopen?

Probably not you. Under 11 U.S.C. § 541(a)(1), every claim existing on the petition date became estate property. Scheduled but unadministered property returns to the debtor at closing under § 554(c); unscheduled property “remains property of the estate” under § 554(d). Cusano v. Klein, 264 F.3d 936 (9th Cir. 2001), held that such a claim “continues to belong to the bankruptcy estate,” leaving the debtor without standing.

So move to reopen under 11 U.S.C. § 350(b) “to administer assets”; under Rule 5010, a trustee is appointed when needed, as here. Rule 1009(a) allows amendments only “before the case is closed,” so reopening comes first. Schedules are verified under Rule 1008; a knowing and fraudulent false declaration is a crime under 18 U.S.C. § 152(3), and § 157 reaches fraud schemes. Correcting the omission voluntarily is the best proof of mistake.

Chapter 13 differs. Section 1306(a)(1) adds post-petition claims to the estate until the case closes, while § 1306(b) leaves the debtor in possession. Confirmation vests property in the debtor under § 1327(b) unless the plan says otherwise. Keathley left open whether a continuing duty to disclose exists, but Balthrope v. Sacramento County Department of Health & Human Services, 398 F. App’x 285 (9th Cir. 2010) (unpublished), and Miyahara require amendment.

How do California exemptions change who benefits from the recovery?

If the money would go to the debtor anyway, estoppel protects no creditor. Under Code Civ. Proc. § 703.140(b)(11)(E), a payment “on account of personal bodily injury” is exempt up to $36,750, the figure effective April 1, 2025 (Form EJ-156). Paragraph (11)(B) covers an employment settlement “to the extent reasonably necessary for the support” of the debtor, and a renter can add the (b)(5) wildcard.

The alternative, Code Civ. Proc. § 704.140(b), exempts an injury recovery “to the extent necessary for the support of the judgment debtor,” with no cap but a fight over need. When exemptions swallow the claim, the trustee usually abandons it, which ends the standing problem.

A late exemption will be tested. Law v. Siegel, 571 U.S. 415 (2014), bars denying one for bad faith alone, but In re Elliott, 523 B.R. 188 (9th Cir. BAP 2014), leaves room for state-law grounds, and Rule 4003(b)(2) gives the trustee a year after closing to attack a fraudulent one.

What does the fix look like for a Moreno Valley worker?

Assume our worker is hit on State Route 60 in March 2024 and files Chapter 7 in the Central District’s Riverside Division in April 2025. Her “No” on Statement of Financial Affairs question 9 is accurate, since she has not sued. Schedule A/B item 33, covering claims “whether or not you have filed a lawsuit,” is not. All figures and dates are illustrative.

She gets a no-asset discharge in July 2025, sues in Riverside County Superior Court in February 2026 within Code Civ. Proc. § 335.1‘s two years, and faces an estoppel motion in August. In September she reopens, amends Schedules A/B and C, and claims $36,750 plus $15,000 of remaining wildcard. The trustee hires her injury lawyer under 11 U.S.C. § 327(e) and substitutes in.

A $150,000 settlement, less a $60,000 fee, $6,000 of costs, and a $14,000 lien, nets $70,000. She keeps $51,750; the estate’s $18,250 goes to the trustee and her $52,000 of debt. Barring the claim outright would have helped only the defendant.

Now the CPA’s point: physical injury damages are excluded under IRC § 104(a)(2); emotional distress alone is not. A wage or termination recovery is mostly taxable, and under IRC § 1398 the Chapter 7 estate is a separate taxpayer reporting its share on Form 1041 (IRS Publication 908). Draft the settlement’s allocation and withholding with both taxpayers in mind.

Frequently Asked Questions

Can I still pursue a lawsuit I forgot to list in my Chapter 7 bankruptcy?

Often yes, but maybe not in your own name. An unscheduled claim stays in the bankruptcy estate after closing under 11 U.S.C. section 554(d). Reopen the case and amend the schedules, then let the trustee pursue the claim or abandon it to you, ideally before the defense motion is heard.

What did Keathley v. Buddy Ayers Construction decide?

In its June 11, 2026 decision, a unanimous Supreme Court held that courts deciding whether a bankruptcy omission was inadvertent must weigh the totality of the circumstances, not only knowledge and motive to conceal. Two Justices questioned the doctrine itself, and Justice Sotomayor doubted it should apply during an open bankruptcy.

Does Keathley apply in California state court?

Not as binding law. California courts use the five-element test from Jackson v. County of Los Angeles and Aguilar v. Lerner, which excuses a position taken through ignorance, fraud, or mistake and treats estoppel as discretionary. Keathley is persuasive and points the same way.

How much of a personal injury recovery can a California debtor exempt?

Under Code of Civil Procedure section 703.140(b)(11)(E), a personal bodily injury payment is exempt up to $36,750 as adjusted April 1, 2025, and a renter may add the wildcard. The alternative in section 704.140 protects a recovery only to the extent necessary for support.

Is a personal injury settlement taxable if the bankruptcy trustee collects it?

Damages for personal physical injuries or physical sickness are excluded under IRC section 104(a)(2), and a Chapter 7 estate computes income like an individual. Emotional distress alone and most employment recoveries are taxable, and the trustee reports the estate’s share on Form 1041 under IRC section 1398.

Do Chapter 13 debtors have to disclose claims that arise after filing?

Keathley left that open, so treat the answer as yes. Section 1306(a)(1) makes post-petition claims estate property until the case closes, and both a Ninth Circuit memorandum and a 2024 California Court of Appeal decision treat amending the schedules as required while the case is open.

How North Star Law Firm Can Help

North Star Law Firm helps debtors and former debtors across the Inland Empire and the Sacramento area reopen Chapter 7 cases or amend Chapter 13 schedules to capture a missed claim, and we work out exemptions and settlement splits as part of our bankruptcy practice. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California, so the schedules and the tax reporting come from one desk.

If a lawsuit or claim never made it onto your bankruptcy schedules, contact North Star Law Firm or schedule a consultation.

The call comes the week after the bankruptcy notice arrives. A mother created a trust, named a child as trustee, learned money had been leaving it, and sued in probate court. Then the trustee filed bankruptcy.

The trust is not being liquidated to pay her credit cards. Under 11 U.S.C. § 541(d), a debtor holding only bare legal title brings only that into the estate. What is at risk is the money claim against her, and a discharge can erase it in about three months.

Fantasia v. Diodato, 154 F.4th 1123 (9th Cir. 2025), came out of this fact pattern and ends with a beneficiary losing her appeal on timing.

What does the automatic stay stop when your trustee files bankruptcy?

The petition triggers 11 U.S.C. § 362(a)(1), halting the “commencement or continuation” of any proceeding against the debtor that could have been brought earlier. Section 362(a)(3) adds any act “to exercise control over property of the estate.” Your surcharge claim is frozen.

It does not shorten your time. Under 11 U.S.C. § 108(c), a limitations period still running on the petition date survives until the later of its own expiration or 30 days after the stay terminates. The trap is reading the stay as a general pause.

Does the trust property go into the trustee’s bankruptcy estate?

Not the beneficial interest. Section 541(d) brings property in which the debtor holds only legal title into the estate “only to the extent of the debtor’s legal title,” not “to the extent of any equitable interest in such property that the debtor does not hold.” So the Moreno Valley rental titled in the trust is not reachable by her Chapter 7 trustee.

The protection is narrower than it sounds. Money already moved into her personal accounts is hers on the petition date and is in the estate. Recovering it means tracing, and the hook is Cal. Prob. Code § 16420(a), which lets a beneficiary impose a constructive trust and recover trust property wrongfully disposed of.

Does a California trustee lose the office by filing bankruptcy?

Read the statute, not the instinct. Cal. Prob. Code § 15642(a) allows removal “in accordance with the trust instrument, by the court on its own motion, or on petition of a settlor, cotrustee, or beneficiary under Section 17200.” Subdivision (b)(2) is your ground: “Where the trustee is insolvent or otherwise unfit to administer the trust.” Subdivision (b)(1) adds breach of trust.

Notice that section 15642 says insolvency, not bankruptcy. A different section does the work here. Under Cal. Prob. Code § 15643(f), the office of trustee is vacant once “the trustee is the subject of an order for relief in bankruptcy,” and in a voluntary case the petition itself is the order for relief under 11 U.S.C. § 301(b). The vacancy is filled under § 15660: the instrument’s named successor first, then a trust company the adult beneficiaries all accept, then the court. A trustee who keeps signing checks will dispute that she is out, so the removal petition under Probate Code § 17200, with a request under section 15642(e) to suspend her powers while it is pending, is still worth filing.

Sort the remedies by the stay line. Of the nine in section 16420(a), appointing a receiver, removing the trustee, and compelling an account aim at the trust res. Compelling the trustee “to redress a breach of trust by payment of money” is a stayed claim against the debtor, measured by Probate Code § 16440(a) as loss with interest plus the trustee’s profit.

What is the 60-day deadline that decides whether your surcharge claim survives?

This is the one that ends cases. Federal Rule of Bankruptcy Procedure 4007(c) requires a complaint to determine dischargeability under section 523(c) within 60 days after the first date set for the section 341(a) meeting. The first date set, not the continued date. Rule 2003(a) puts that date 21 to 40 days after the order for relief.

The consequence is blunt. Section 523(c)(1) discharges a debt of the kind described in paragraphs (2), (4), or (6) of section 523(a) unless the creditor asks the court to except it. Miss the date and the probate judgment you win later is a judgment on a discharged debt. A Chapter 13 is no reprieve: 11 U.S.C. § 1328(a)(2) carries paragraph (4) into its exceptions.

Does a California trustee’s misuse of trust funds fit section 523(a)(4)?

Section 523(a)(4) excepts a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” Under Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003), and In re Honkanen, 446 B.R. 373 (9th Cir. BAP 2011), the fiduciary relationship “must be one arising from an express or technical trust that was imposed before, and without reference to, the wrongdoing that caused the debt.” A trustee under a signed trust instrument fits.

State of mind is the fight. Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), holds that defalcation requires “knowledge of, or gross recklessness in respect to, the improper nature of the fiduciary behavior.” Plead sections 523(a)(2)(A) and (a)(6) as alternatives.

Do not assume an existing probate judgment carries over. Plyam v. Precision Development, LLC (In re Plyam), 530 B.R. 456 (9th Cir. BAP 2015), reversed because the state judgment lacked a finding equivalent to willfulness under California’s preclusion elements, so ask for express findings on intent. And under Langenkamp v. Culp, 498 U.S. 42 (1990), a proof of claim gives up the jury trial right.

How do you get stay relief, and what did Fantasia decide about appealing it?

Section 362(d)(1) allows relief “for cause,” decided case by case. In re Tucson Estates, Inc., 912 F.2d 1162, 1166 (9th Cir. 1990). To finish litigation elsewhere, the framework is the In re Curtis factors, 40 B.R. 795, 799-800 (Bankr. D. Utah 1984), endorsed in Kronemyer v. American Contractors Indemnity Co. (In re Kronemyer), 405 B.R. 915 (9th Cir. BAP 2009): judicial economy, state court expertise, prejudice, and whether only bankruptcy issues are involved.

In Fantasia, a mother created an irrevocable trust in 2011 naming her daughter trustee, sued her in Massachusetts in 2017 over misuse of trust property, and the daughter filed Chapter 13 in Arizona in 2019. The bankruptcy court granted stay relief and abstention in February 2020, then in a March 2021 order granted a Rule 60(b)(6) motion and reimposed the stay. The mother appealed only after losing at trial.

Applying Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020), and the finality framework of Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), the Ninth Circuit held that reimposing the stay is as final as granting or denying it: “that is a distinction without a difference for purposes of finality.” The district court therefore lacked jurisdiction.

Rule 8002(a)(1) gives 14 days to appeal, and Rule 8002(d)(2) forbids extending it for a stay relief order. Expect an immediate appeal if you win, and ask the judge to put the Curtis analysis on the record.

How does this play out on a Riverside calendar?

Assume a Riverside family trust holding a Moreno Valley rental and roughly $600,000 in brokerage assets, with a daughter as trustee. Over three years she moves about $180,000 into her own accounts, then files Chapter 7 in the Central District of California, Riverside Division, on October 5, 2026. The figures and dates are illustrative.

By October 12 the beneficiaries petition the Riverside County Superior Court to remove and suspend her and compel an account. The clerk sets the section 341 meeting for November 4, 2026. Sixty days later is Sunday, January 3, 2027, so Rule 9006(a)(1)(C) moves the Rule 4007(c) deadline to Monday, January 4. The Rule 3002(c) claim deadline falls December 14.

In November they move under Rule 2004 to examine her and subpoena three years of personal bank statements, and file the section 362(d)(1) motion. The accounting decides the rest. Matching her deposits against trust withdrawals carries both the removal petition and the defalcation case, and the fiduciary returns often show the diversion: Form 1041 distributions nobody received, or a California Form 541 reporting rent nobody saw.

Frequently Asked Questions

Can a trustee discharge what she owes the trust in bankruptcy?

Sometimes yes. A surcharge debt is dischargeable unless a beneficiary files a timely complaint and proves an exception, usually 11 U.S.C. section 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity. Under Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013), that requires knowledge of, or gross recklessness about, the improper conduct. If nobody files, the debt is discharged.

Does the trust property go to the trustee’s creditors?

No. Under 11 U.S.C. section 541(d), property in which the debtor holds only legal title enters the estate only to the extent of that legal title. A California trustee holds legal title while the beneficiaries hold the equitable interest, so a rental or brokerage account titled in the trust is not available to her personal creditors. Funds already moved into her own name must be traced.

How long do I have to file the nondischargeability complaint?

Sixty days after the first date set for the section 341(a) meeting of creditors, under Federal Rule of Bankruptcy Procedure 4007(c). The clock runs from the first date set, not a continued meeting. An extension requires a motion filed before the deadline passes, for cause, with no later relief for excusable neglect.

Do I have to remove a trustee who filed bankruptcy, or is the office already vacant?

Under California Probate Code section 15643(f), the office of trustee is vacant once the trustee is the subject of an order for relief in bankruptcy, which in a voluntary case is the petition itself. The successor named in the instrument, or one selected under section 15660, takes over. If the trustee disputes the vacancy or keeps acting, petition under section 15642, which also allows removal for breach of trust or unfitness.

What did the Ninth Circuit decide in Fantasia v. Diodato?

In Fantasia v. Diodato, 154 F.4th 1123 (9th Cir. 2025), the court held that an order vacating earlier stay relief and reimposing the automatic stay is final and immediately appealable. Applying Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35 (2020), the panel called that a distinction without a difference. Because the beneficiary waited over a year, her appeal was dismissed.

Should I keep the case in probate court or move it to bankruptcy court?

Often both, on different tracks. Removal, suspension of powers, and an accounting belong in probate court, which can act quickly under Probate Code section 15642(e). The nondischargeability complaint can only be heard in bankruptcy court. The Curtis factors adopted in In re Kronemyer, 405 B.R. 915 (9th Cir. BAP 2009), decide where the money claim goes.

How North Star Law Firm Can Help

North Star Law Firm represents beneficiaries and successor trustees across the Inland Empire and the Sacramento area when a trustee’s bankruptcy collides with a trust administration dispute, handling removal and accounting on the probate side and stay relief and nondischargeability on the bankruptcy side, including reading a Chapter 7 debtor’s schedules against the trust’s own books and fiduciary returns. Phillip Zagotti is a California attorney and a CPA admitted to the U.S. Bankruptcy Court for the Central District of California, so one person does the accounting and the fiduciary duty analysis.

If the trustee of your family’s trust has filed bankruptcy, contact North Star Law Firm or schedule a consultation.

A dental practice in Havre, Montana, is an unlikely source of a rule that now guides bankruptcy judges in Riverside, Sacramento, and Fresno. On May 21, 2026, the Ninth Circuit issued Harada Family Dental Care, PC v. Kapitus Servicing, Inc., No. 25-6945 (9th Cir. May 21, 2026) (unpublished). A merchant cash advance funder had filed a $110,898.85 claim in the practice’s Subchapter V case, the practice objected on usury grounds, and the funder invoked its arbitration clause. The bankruptcy court kept the dispute, and the Ninth Circuit agreed.

For a California business owner holding one of these agreements, the question is practical: once the company is in bankruptcy court, can the funder pull the fight into arbitration? When the dispute concerns the funder’s own proof of claim, the answer in this circuit is usually no.

What happened in Harada v. Kapitus?

Harada Family Dental Care filed Subchapter V in the District of Montana in 2024. Kapitus filed a proof of claim for the unpaid balance of its advance. The debtor objected and counterclaimed, contending the “purchase of future receivables” was a disguised loan at a rate that violated Montana’s usury statute, with a penalty the debtor computed at more than double the claim.

Kapitus moved to compel arbitration. On July 1, 2025, the bankruptcy court denied the motion in Harada Family Dental Care, P.C. v. Strategic Funding Source, Inc., Adv. No. 4:25-ap-04001-BPH (Bankr. D. Mont.), reasoning that claim allowance is core and that the usury defense could not be separated from the claim objection.

Why does it matter that a claim objection is a “core” proceeding?

The Ninth Circuit’s framework comes from Continental Insurance Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011 (9th Cir. 2012). In a non-core proceeding, the bankruptcy court generally must enforce an arbitration clause. In a core proceeding, the court has “discretion to deny enforcement of an arbitration agreement” when arbitration “would conflict with the underlying purposes of the Bankruptcy Code.”

28 U.S.C. § 157(b)(2)(B) covers the “allowance or disallowance of claims against the estate,” and § 157(b)(2)(C) covers “counterclaims by the estate against persons filing claims against the estate.” An MCA funder that files a proof of claim has placed its contract inside both categories. Ackerman v. Eber (In re Eber), 687 F.3d 1123 (9th Cir. 2012), applied the same logic to a fraud-based discharge dispute. And as Morgan v. Sundance, Inc., 596 U.S. 411 (2022), put it, arbitration agreements are “as enforceable as other contracts, but not more so.”

On appeal, Kapitus argued the court could not assume delay without evidence of how long arbitration would take. Quoting Thorpe, the panel explained that arbitration of a creditor’s claim, “even if conducted expeditiously, prevents the coordinated resolution of debtor-creditor rights and can delay the confirmation of a plan.” The panel also corrected the district court, which had refused to hear the appeal: under 9 U.S.C. § 16(a)(1)(B), an order refusing arbitration is appealable as of right.

Which disputes stay in bankruptcy court and which go to arbitration?

The Central District applies Thorpe the same way. In In re Orchid Child Productions, LLC, Adv. No. 2:21-ap-01212-RK (Bankr. C.D. Cal. Apr. 22, 2024), the court refused to arbitrate a trustee’s counterclaims against a claimant because an arbitrator would otherwise be deciding claim allowance. Common MCA disputes tend to land as follows.

What California law can a debtor raise against an MCA funder?

For an Inland Empire or Sacramento debtor, the California overlay is where the money is. Cal. Const. art. XV, § 1 caps interest on non-consumer loans at 10 percent (or 5 points over the Federal Reserve discount rate) but exempts lenders licensed under the California Financing Law. A funder licensed under Fin. Code § 22100 can charge what a commercial contract says. An unlicensed funder whose “receivables purchase” is recharacterized as a loan has a serious problem. That turns on whether the reconciliation clause is real, whether the funder can accelerate when sales slow, and whether a guaranty makes the purchase risk-free. In a claim objection, the bankruptcy judge decides those questions.

Add Fin. Code § 22800 et seq., enacted as SB 1235 and implemented at 10 CCR § 900 et seq., which requires commercial financing providers, including sales-based financing, to disclose total cost, term, payment schedule, and an annualized rate at the offer stage. A missing disclosure is not a usury defense, but it is evidence of what the deal really was. (A 2024 registration bill for these providers, SB 1482, died on the Assembly inactive file.)

CCP § 1281.2(c), the third-party litigation exception, is usually displaced by the FAA and out-of-state law the contract selects. The fee-default statute, CCP § 1281.98, upheld against preemption in Hohenshelt v. Superior Court, S284498 (Cal. Aug. 11, 2025), covers only employment and consumer arbitration. For a business borrower, the bankruptcy court is often the only forum where the clause does not control.

What does this look like for a Fontana trucking company in Subchapter V?

Consider a Fontana drayage carrier running fourteen tractors between the Port of Long Beach and Inland Empire warehouses. In March 2026 it takes a $150,000 advance against $210,000 of “future receivables,” a 1.40 factor rate, repaid by a $1,000 ACH debit every business day under a contract with New York law, an arbitration clause, and a personal guaranty. By August, freight rates have fallen and the debit eats a third of collections. The company files Subchapter V in the Riverside Division on September 8, 2026, owing $88,000.

The funder files a proof of claim for $88,000 plus default fees. The debtor objects under Fed. R. Bankr. P. 3007 and counterclaims. Over ten months on a declining balance, the $60,000 charge is an annualized rate above 90 percent. If the deal is a loan and the funder holds no California Financing Law license, the objection seeks to disallow the interest, recover interest paid, and obtain treble recovery under Civ. Code § 1916-3. When the funder moves to compel arbitration, Harada lets the judge deny it: the objection and counterclaim are core, and the unsecured class’s recovery turns on the answer.

The calendar is tight. The 11 U.S.C. § 1188 status conference comes within 60 days, and the plan is due within 90 days under § 1189(b), which for a September 8 filing means December 7, 2026. A debtor without a claim objection on file by then negotiates from weakness.

What goes wrong in practice, and what does the CPA side see?

The most common mistake is waiting. A funder that never files a proof of claim has not submitted its contract to the claims process, and a debtor’s affirmative suit against it looks much more like a non-core matter bound for arbitration. A guaranty also lets the funder pursue the owner in New York while the company’s case proceeds.

The accounting side is usually ignored. If the MCA is recharacterized as a loan, the $60,000 charge is interest, and a business that booked the debits as “bank fees” should correct the deduction. A claim disallowed because the debt was never valid produces no cancellation of debt income, but a compromise that writes down a valid claim usually does, subject to the § 108(a)(1)(A) bankruptcy exclusion.

Frequently Asked Questions

Can a merchant cash advance company force my California business into arbitration after it files bankruptcy?

Not always. Under the Ninth Circuit’s Thorpe Insulation rule, applied in Harada v. Kapitus in May 2026, a bankruptcy court may refuse to enforce an arbitration clause when the dispute is core, such as an objection to the funder’s proof of claim, and arbitration would conflict with the Bankruptcy Code’s purposes.

Does an MCA count as a loan under California usury law?

It depends on how the contract actually works. Courts look at whether repayment is truly contingent on receivables, whether the reconciliation clause is real, and whether a guaranty removes the funder’s risk. If the deal is recharacterized as a loan, California’s constitutional interest cap and the California Financing Law licensing requirement come into play.

What is a core proceeding in bankruptcy?

Core proceedings are matters listed in 28 U.S.C. § 157(b)(2), including claim allowance, estate counterclaims against claimants, avoidance actions, and stay and discharge matters. The bankruptcy court enters final judgments in them and may keep them out of arbitration.

Does the funder filing a proof of claim change anything?

Yes. Filing a proof of claim submits the funder’s contract to the claims process, which is core under § 157(b)(2)(B), and any estate counterclaim against that funder is core under § 157(b)(2)(C). A funder that never files a claim keeps a stronger argument that a debtor’s affirmative suit belongs in arbitration.

Can the funder appeal an order denying arbitration right away?

Yes. Section 16(a)(1)(B) of the Federal Arbitration Act allows an immediate appeal from an order refusing to compel arbitration, and the Ninth Circuit in Harada held that a district court cannot refuse to hear it. The bankruptcy case does not automatically stop during the appeal.

How fast does a Subchapter V debtor have to act on an MCA claim?

The plan is due 90 days after the petition under 11 U.S.C. § 1189(b), and the status conference comes within 60 days. A claim objection under Bankruptcy Rule 3007 should be filed early enough that the court can rule, or at least estimate the claim, before confirmation.

How North Star Law Firm Can Help

North Star Law Firm represents Inland Empire and Sacramento-area businesses in Subchapter V reorganizations, in SBA loan and business debt restructurings, and in claim objections and adversary proceedings against merchant cash advance funders. Phillip Zagotti is a California attorney and a CPA, admitted to the United States Bankruptcy Court for the Central District of California, so the firm handles both the litigation and the tax side of a disputed MCA. The firm also reviews financing agreements before signing through its contract review practice. See also the firm’s post on what happens when a defendant files Subchapter V.

If a funder is debiting your account daily and threatening arbitration while your company struggles, contact North Star Law Firm or schedule a consultation.

Winning the trial is the part clients celebrate. Collecting is the part that decides whether the win was worth it. Ice cream maker Van Leeuwen learned that this summer. A federal court in Brooklyn awarded it $23,785,000 of Rebel Creamery’s profits over copycat packaging in Van Leeuwen Ice Cream LLC v. Rebel Creamery LLC, No. 1:21-cv-02356 (E.D.N.Y. July 16, 2026). On August 14, Rebel filed Chapter 11 in Utah, where its schedules reportedly list the judgment as disputed. The case isn’t in California, but the pattern plays out in Riverside Superior Court and the Central District of California all the time: a business wins a judgment, the defendant can’t or won’t bond an appeal, and a bankruptcy petition lands before the first levy. California’s enforcement statutes and the Ninth Circuit’s bankruptcy decisions give creditors here a different set of tools, and a few traps, than creditors in New York or Texas.

What should a California judgment creditor do the day judgment is entered?

Create liens immediately, because the bankruptcy clock runs from the date a lien attaches. An abstract of judgment recorded with the county recorder attaches to real estate the debtor owns or later acquires in that county under Code of Civil Procedure § 697.310, lasting ten years from entry of judgment and renewable. Filing a notice of judgment lien with the Secretary of State under § 697.510 creates a five-year lien on a business debtor’s accounts receivable, equipment, inventory, and certain other personal property located in California. Serving an order for examination under § 708.110 creates a one-year lien on the debtor’s personal property, and it forces the debtor’s officer to explain under oath where the money is. The judgment accrues interest at 10% a year under § 685.010 in most commercial cases, compared with the much lower federal post-judgment rate under 28 U.S.C. § 1961.

Each of those steps is cheap. Every day of delay pushes the 90-day preference window later, and a filing before that window closes can undo the lien.

What happens to those liens if the defendant bonds the appeal instead?

They disappear, but the creditor gets something better. To stay enforcement of a money judgment pending appeal, § 917.1 requires an undertaking of twice the judgment, or one and a half times the judgment if an admitted surety insurer issues it. Under § 697.040, once enforcement is stayed by an undertaking, existing enforcement liens are extinguished and no new ones can be created. A surety bond worth 150% of the judgment is stronger security than a recorded abstract, so creditors rarely object. The practical point is the fork it creates. A defendant that can post a bond usually does. A defendant that can’t often files bankruptcy, and that’s when the age of the creditor’s liens matters most.

Can a bankruptcy filing wipe out a judgment lien?

Yes, if the lien attached within 90 days before the petition. Getting a judicial lien counts as a transfer for an old debt, the debtor is presumed insolvent throughout that period, and 11 U.S.C. § 547 lets the trustee avoid it. In Subchapter V, § 1184 gives the debtor in possession the same power, and the avoided lien is preserved for the estate’s benefit rather than returned to the creditor.

Here’s how that plays out. A Temecula winery wins a $1.8 million judgment under the California Uniform Trade Secrets Act against a competing Riverside County LLC on June 1, 2026: $1 million of actual loss and unjust enrichment, $500,000 of exemplary damages under Civil Code § 3426.3(c), and $300,000 of attorney’s fees. The winery records its abstract on June 15. The competitor can’t post a $2.7 million surety bond and files Subchapter V in the Riverside Division on July 30, 45 days after recording. The competitor’s tasting room parcel is worth $1.5 million with a $900,000 first deed of trust, so the abstract would have secured $600,000 of equity. Because it attached inside the 90-day window, the debtor can avoid it. If the petition had come 91 or more days after recording, the winery would hold a $600,000 secured claim entitled to full value under the plan. With prepetition interest of about $29,100, the winery’s claim is roughly $1,829,000. Add the competitor’s $900,000 bank loan and $250,000 of trade debt, and total debt of about $2.98 million keeps it under the $3,424,000 Subchapter V limit.

Can a business in Subchapter V discharge a judgment for intentional misconduct?

In the Ninth Circuit, probably yes, which puts California at odds with the three circuits that have ruled. Under § 1192, a Subchapter V debtor confirmed without creditor consent receives a discharge that excepts debts “of the kind specified in section 523(a),” which includes debts for willful and malicious injury. The Fourth Circuit in In re Cleary Packaging, LLC, 36 F.4th 509 (4th Cir. 2022), the Fifth Circuit in In re GFS Industries, L.L.C., 99 F.4th 223 (5th Cir. 2024), and the Eleventh Circuit in BenShot, LLC v. 2 Monkey Trading, LLC (11th Cir. 2025) all read that exception to cover corporate debtors. The Ninth Circuit Bankruptcy Appellate Panel went the other way in Lafferty v. Off-Spec Solutions, LLC (In re Off-Spec Solutions, LLC), 651 B.R. 862 (9th Cir. BAP 2023), holding that § 523(a) applies only to individuals. The Ninth Circuit Court of Appeals hasn’t ruled, and BAP decisions don’t bind district courts, so a creditor should still file a protective nondischargeability complaint. But a California creditor shouldn’t build its strategy on that complaint.

Even for an individual debtor, a state court judgment only helps as much as its findings. In Plyam v. Precision Development, LLC (In re Plyam), 530 B.R. 456 (9th Cir. BAP 2015), a punitive damages award under Civil Code § 3294 phrased in the alternative, malice, oppression, or fraud, didn’t establish the willfulness required for § 523(a)(6). Trial counsel who expect a collection fight should ask for special findings on intent to injure.

What leverage does the creditor have inside the bankruptcy case?

More than it may seem, starting with the appeal. The automatic stay freezes the debtor’s own appeal of a judgment entered against it. The Ninth Circuit held in Ingersoll-Rand Financial Corp. v. Miller Mining Co., 817 F.2d 1424 (9th Cir. 1987), that the stay covers all appeals in cases originally brought against the debtor, whichever side is appealing. So the debtor needs stay relief to pursue the appeal, and the creditor gets a voice in the timing. Bankruptcy courts in the circuit weigh the factors collected in In re Kronemyer, 405 B.R. 915 (9th Cir. BAP 2009).

Bad faith is another lever, though a narrow one. In re Marsch, 36 F.3d 825 (9th Cir. 1994), upheld dismissal of a Chapter 11 filed to avoid posting an appeal bond by a debtor that could pay the judgment in full. A debtor that genuinely couldn’t bond won’t fit that holding. Creditors can also challenge Subchapter V eligibility within 30 days after the meeting of creditors concludes under Bankruptcy Rule 1020(b), and anyone whose claim is scheduled as disputed must file a proof of claim, because § 1111(a) doesn’t deem those claims filed.

Finally, every plan must pay each dissenting creditor at least what it would receive in a Chapter 7 liquidation. In a Chapter 7, § 726(a)(4) pushes punitive and exemplary damages behind ordinary unsecured claims. If the winery’s opponent would net $830,000 for unsecured creditors in a Chapter 7, the $500,000 exemplary award gets nothing, and after sharing with $250,000 of trade claims, the winery’s floor is about $696,000 on its compensatory award and fees, ignoring interest for simplicity. The Ninth Circuit BAP’s May 2026 decision in Camara v. Matheson Flight Extenders (In re Matheson Flight Extenders, Inc.), arising from a Sacramento-area case, confirms that courts can look behind a settlement to characterize a debt as punitive, but held that the confirmation-stage tools don’t apply after confirmation.

Frequently Asked Questions

Does a bankruptcy filing stop collection of a California judgment?

Yes. The automatic stay halts levies, garnishments, and lien enforcement immediately, and in the Ninth Circuit it also stops the debtor’s own appeal of the judgment until the bankruptcy court grants relief.

Is my judgment lien safe if the debtor files bankruptcy?

A lien that attached more than 90 days before the petition is generally safe as a secured claim to the extent of the property’s value. A lien created within 90 days can usually be avoided as a preference.

What happens to my liens if the defendant posts an appeal bond?

Under Code of Civil Procedure § 697.040, a stay backed by an undertaking extinguishes existing enforcement liens, but the bond itself, typically 150% of the judgment through an admitted surety, becomes your security.

Can a company discharge a willful and malicious injury judgment in Subchapter V?

In the Ninth Circuit, the Bankruptcy Appellate Panel held in Off-Spec that the § 523(a) exceptions don’t apply to corporate debtors, which differs from the Fourth, Fifth, and Eleventh Circuits. The Ninth Circuit hasn’t ruled.

Do I need to file a proof of claim if the debtor listed my judgment?

If the debtor scheduled it as disputed, contingent, or unliquidated, yes. Only undisputed scheduled claims are deemed filed in Chapter 11.

Are punitive damages paid in bankruptcy?

In a Chapter 7, punitive and exemplary damages are paid after ordinary unsecured claims. In Chapter 11, that ranking shapes the minimum a creditor must receive under the best interests test.

How North Star Law Firm Can Help

North Star Law Firm represents judgment creditors, vendors, and business owners in bankruptcy cases in the Central District of California, including Subchapter V eligibility fights, plan objections, lien disputes, and nondischargeability litigation. Phillip Zagotti is a California attorney and a CPA, and in these cases the liquidation analysis and the debtor’s projections often decide the outcome as much as the legal arguments do. See the firm’s Subchapter V practice, its preference and clawback work, and the overview of its bankruptcy services. For a related path distressed companies use to avoid court altogether, read the firm’s post on California assignments for the benefit of creditors.

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?

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.

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.