Legal Question in Business Law in California

Re: how do judgments against a business affect the sale of the business

The answer depends to some extent on the form of the business (corporation, partnership, etc.).

A corporation that wants to escape some or all of its debts may only do so via bankruptcy. If the owners try to sell only the assets of the corporation, they must use the sale proceeds to pay its liabilities. If they try to keep the proceeds (or if they "sell" the business for substantially less than it is worth), they may be held personally liable for all the debts which the corporation could have paid had the buyer purchased it for its fair value.

If the business is a partnership or a sole proprietorship, then the owners can be held personally responsible for its unpaid debts whether they sell the business or not. Minimizing this exposure is the reason corporations exist.

Re: how do judgments against a business affect the sale of the business

Absolutely not! Owners and managers of a business must be "in fear" of the judgment creditor coming after aferything and everyone within cannon range. One cannot know exactly what steps a judgment creditor, the erstwhile plaintiff, may take in the future to collect the judgment, and the possible or likely steps depend somewhat on the form of organization of the business (proprietorship, partnership, LLC, corporation, etc.), but judgment creditors have an arsenal of very powerful and far-reaching tools to enforce payment of the judgment on anyone in sight, including former stockholders, officers and/or directors of corporations that dissolve and liquidate without attending to payment of judgments. No corporate veil is too thick and coarse to fend off a hungry and aggressive judgment creditor.

Someone who has gone to the trouble and expense of obtaining a judgment against a business is unlikely to drop the pursuit of the money owed just because the business has turned off the lights and shuffled on. Not always, not everyone, but many will pursue all involved with the former business to the ends of the earth.

If a business is truly penniless and cannot pay its creditors, it can fold up neatly and cleanly by a careful liquidation in which all creditors get paid before any insider gets a penny - of loan repayment, salary, return of property, Aunt Minnie's antique table used in the reception area, the business ideas, trademarks, logos, customer lists, etc. - or it can submit to the jurisdiction of the bankruptcy court.

If ANYTHING of value is taken out of the business by an insider before the creditors all get paid 100 cents on the dollar, that's a fraud.