ABC Statutory Law Basics

    • No single integrated set of statutory sections with respect to CA ABC’s – statutory provisions are dispersed through Code of Civil Procedure, Civil Code, and Uniform Commercial Code with provisions in a variety of other codes.
    • The CA ABC is denominated as a "common law" assignment, but the common law is "bolstered" by a variety of statutory provisions.
  3. Administration
  4. CCP § 493.010
  5. To key into other provisions, the assignment must be a "general" assignment. To qualify as such, assignment must:
    • - encompass all of debtor’s transferable assets not exempt from enforcement of a money judgment.
    • - be for the benefit of all of the debtor’s creditors
    • - not create any preference between creditors or class of creditors that is not a matter of law
    • Query: When is an asset not transferable?
      When is an asset not subject to enforcement of a money judgment?

      • this requirement reflects how closely ABC law is integrated with enforcement of judgments:
      • the assignee only takes title to property against which a judgment can be enforced
      • CCP 695.010 provides that all property of the judgment debtor is subject to enforcement of a money judgment except as otherwise provided by law. Sounds broad, but it is subject to exemptions and exclusions, which may be significant
      • e.g. CCP 695.060. a license issued by a public entity to engage in any business, profession, or activity is not subject to enforcement of a money judgment (CCP 708.630 has special rule for alcoholic beverage licenses)
  6. CCP § 493.020
    • - debtor can make a general assignment for benefit of creditors
    • - those provisions are silent on what corporate/entity authorization is required to effect the ABC
    • - broadly but not universally accepted notion is that as a transfer of substantially all of the assets, a corporate CA ABC requires both the requisite board and shareholder approval
  7. CCP § 1802
    • - this provisions provides some mechanics for administration
    • - debtor has to provide assignee with list of creditors with name, address and "anticipated" dollar amount of claim
    • - assignee has to give notice of assignment to creditors, equity and other parties in interest no later than 30 days after acceptance of assignment
    • - assignee has to establish bar date for claims between 150 and 180 days of notice of assignment
  8. CCP § 493.030
    • - effecting ABC terminates TPO and attachment liens created within 90 days
  9. CC § 1954.1
    • - permits assignee to continue to occupy premises for 90 days conditioned on paying the monthly rent during that period
  10. Preferences
  11. CCP § 1800
    • - modeled on and designed to track 11 USC 547
    • - broader than § 547: it enables trustee to avoid unperfected interests
  12. CCP § 3440
    • - makes transfers without delivery voidable
    • - assignee has standing as creditor
  13. Priorities
  14. CCP § 1204
    • - priorities for wage claims
  15. CCP § 1205
    • - lien for preferred wages on sale proceeds
  16. UCC § 9317
    • - assignee is a lien creditor

ABC Priority Scheme

  • No CA statute provides an integrated priority scheme for a CA ABC
  • CA statutes do address the priority of certain wage/compensation claims, but there is some uncertainty as to relative priorities
  • the priority scheme imposed by various statutes/laws, is similar to the priority scheme under the Bankruptcy Code
  • Priority Waterfall for CA ABC:
    • 1st Secured Claims not subject to avoidance
      • - But see, CCP § 1205 which creates a statutory lien on the proceeds of the sale and such preferred claims must be paid first from the proceeds of the sale or transfer.
      • - See Myzer v. Emark Corp., 45 Cal. App 4th 884 (1996) holding that preferred wage claims had priority over the secured creditor who foreclosed on the assets
      • - not clear how 1205 interacts with U.S. Priority Statute.
    • 2nd Claims of U.S. Government
      • - See, 31 U.S.C. 371 (the "U.S. Priority Statute")
      • - covers not only taxes, but other obligations owing to the U.S. government and its agencies: very broad but does not cover claim of a private creditor assigned to U.S. agency after ABC
    • 3rd Preferred Wage Claims
      CCP § 1204
    • 4th Claims for deposits for purchase/lease of realty or purchase of services for household use CCP § 1204.5
    • 5th CA Tax Liabilities
      CRTC § 3756

      • - expressly subordinated to CCP § 1204, which is presumed to apply to 1204.5
    • 6th Expenses of the Assignee
      • - there is no statutory provision which expressly addresses the priority of the assignee’s expenses
      • - § 1204(d) provides that the expenses of a receivership are to be paid prior to the preferred wage claims, but that provision has been by one court to be limited to a receiver and inapplicable to an assignee. See, Div. of Labor Law Enforce v. Stanley Restaurants, Inc. 228 F2d 420 (9th Cir. 1955)
      • - other cases similarly state that the assignee’s expenses are subordinate to the preferred wage claims. See, Bank of Vigalia v. Dillonwood Lumber Co., 148 Cal. 18 (1905); Meyer v. Bass, 281 F2d 728 (9th Cir 1960) (assignee surcharged for operating expense paid prior to payment of §1204 preferred wages)
    • 7th General Unsecured Claims
      • - paid pro rata

Extraterritorial Effect Of A CA ABC

Additional Facts to Hypothetical:

LA Quakes own spring training facilities and related personal property near Phoenix AZ and have significant AZ and other non-California creditors who are seeking to recover on their claims.

  • This is fundamentally a conflict of laws issue: most bankruptcy professionals are not accustomed to conflict of law issues because federal law controls the majority of their issues
  • This issue is actually quite complicated and requires at a minimum 2 basis legal questions that are highly specific to the laws both from state of the assignment (CA) and the laws of the state where the property is situated;
  • What is the nature of the assignment; and
  • What are the rights of the assignee – given the nature of the assignment?
  • Four questions to ask to determine the rights of assignee to assets outside of the jurisdiction where the assignment is made (presumably California):
    1. What is the nature of the assignment: common law/ "voluntary" statutory/ "involuntary?"
    2. Distinction itself is not free from ambiguity. A "voluntary" assignment, i.e. the debtor voluntarily elects to effect the assignment is not dispositive: you can have a statutory/ "involuntary" assignment voluntarily commenced by the debtor.
      • Significance of difference:
        Common law / "Voluntary" Statutory / "Involuntary"
        as a conveyance of property entitled to full faith and credit (at least as to personal property) except to extent transfer may conflict with rights of local credits or public policy of state when enforcement is sought no extraterritorial effect unless jurisdiction where assets are located elects to recognize the foreign assignment (but will generally favor local creditors)
      • It is unclear whether the existing CA ABC falls into the "common law" or "statutory" category.
    3. 2. Is the property real property or personal property?
      • Personal Property: in the case of a common law assignment, the assignment will be effective to transfer title, although that title may remain subject to the claims of non-resident creditors.
      • Real Property: Uncertain. Assignment may transfer title subject to supervening rights, although it is unclear what assignee’s rights are as to real property outside of the home jurisdiction.
    4. 3. Assuming that a CA ABC is a common law assignment, does the assignment conflict with public policies of the state where the assets are located?Note AZ has abolished common law assignments and determined that all such common law assignments are "contrary to the public policy of the state" and that all ABCs are void and of no force and effect unless made" in accordance with the AZ statute.Is such a provision sufficient to void a CA ABC with respect to AZ assets?
    5. 4. Are rights of CA assignee subordinate to the rights of creditors (other than creditors subject to CA jurisdiction) with respect to property and rights outside of CA?
      • This appears to be a matter left to state law. See, e.g. Clark v. Williard, 294 U.S. 211 (1935)
      • Query: If a DE company effects a CA ABC, where are its accounts, intellectual property and other intangibles located for conflict of law purposes?

Treatment Of Intellectual Property In A California Abc

  1. Per 493.101, a qualifying ABC includes all of the "defendant’s assets that are transferable and not exempt from enforcement of a money judgment".

Thus, to answer the question of the treatment of IP in an ABC, you have to ask two questions:

  1. Are the assignor’s IP rights exempt from the enforcement of a money judgment?
  2. Are the assignor’s IP rights transferable?

Are IP Rights Subject to Enforcement of a Money Judgment?

  • Per CCP 695.010, all property of the judgment debtor (the assignor) is subject to enforcement of a money judgment
    • - While levying/executing on intellectual property poses challenges, there appears to be no basis to suggest that assignor owned patents, copyrights and trade secrets are not subject to enforcement of a money judgment
    • - Thus, no material question as to whether assignee succeeds to assignor’s ownership of patents and copyrights – although could be potential priority issues on a good faith transferee if assignee does not promptly file with the PTO and Copyright Office
    • - Trademarks may be more problematic since trademarks designate source/quality control, assignments of "bare" trademark without the assignor’s goodwill are not effective – the question then becomes is "goodwill" merely an accounting entry or property subject to enforcement of a money judgment
      • Practice Note: There are standard IP representations and warranties re title to IP and non-infringement that have value to a purchaser even if there is not a financial ability to respond to a breach of those representations and warranties. Problem with an ABC is that assignee will typically avoid giving those representations and warranties.

Are IP License Rights Transferable?

  • Subject to above, no material dispute as to transferability of Assignor owned IP. Assignor Licensed Rights(inbound) are a different matter.
  • There is a conflict between federal and state law authorities:
    • - Federal position: unless licensor has agreed otherwise, patent and copyright licenses not assignable (may be a distinction between exclusive and non-exclusive) (CFLC and Catapult)
    • - CA position: patent/copyright licenses may be assignable without consent
    • - Farmland Irrigation Co. v. Dopplmaier, 48 Cal. 2nd 208 (1957)
    • - SuperBrace, Inc. v. Tidwell, 124 Cal. App 4th 388 (2004)
    • - Thus, if assignee can keep issue in CA state court without removal to federal court, assignee may be able to assign certain IP licenses that could not be assigned in a bankruptcy proceeding
      • Practice Note: expect any buyer to assume that federal law will ultimately control the issue and price its deal accordingly.
  • Goods Subject to Licenses (patent, copyright, trademark)
    • - Analysis should be:
      • 1. What does license agreement say?
      • 2. Does assignment to assignee trigger the first sale/exhaustion doctrines?

Effect Of Abc On Fraudulant Transfer And Successor Liability Ricks To Purchaser

Practical: A well run ABC process will tend to defense creditor complaints and potential fraudulent conveyance actions

Legal: An ABC does not significantly diminish any potential fraudulent conveyance/successor liability.

  • The assignment under the ABC itself is generally not subject to attack as a fraudulent transfer (because it is for the benefit of all creditors without preference per CCP 493.010)
  • Nonetheless, if assignor ends up in bankruptcy, all property will be viewed as property of the estate, and any sale by assignee will be subject to Section 548 analysis
  • Similarly, a sale by assignee provides no legally cognizable insulation against a successor liability claim

Information Assignee Is Required To Disclose To Creditors

Legal: There is no statutory provision that requires the assignee to disclose any information to creditors

Practical: Assignees will typically provide some form of periodic reporting to creditors, but the detail of any such reporting can vary significantly

Issue: Must an assignee provide a creditor with the names and contact information of other creditors with knowledge that creditor may solicit other creditors to combine to file an involuntary bankruptcy petition?