Legal Question in Business Law in California

First, keep in mind that creditors need more than just an indebtedness to be able to go after the debtor. They need a judgment, or a security agreement of some kind, or some other form of lien granted or allowed under the law. Just because X owed Y a pile of money doesn't usually give Y rights to enforce against X's assets. There are exceptions.

Next, as a result of the foregoing, the creditor usually must proceed either to attack the specific collateral given, or to get a judgment after trial (or by the debtor's default in court). The wording of a security agreement, personal guaranty, or judgment will often indicate what property may be levied upon to satisfy the indebtedness. So, reviewing your own paperwork may give you important clues to how the creditor may proceed.

If the creditors sues and obtains a judgment, and records a proper abstract of judgment thereafter, this allows enforcement against all of your property, except what is exempted from creditor seizure by the Code of Civil Procedure (see sections 704.010 et seq.). Generally speaking, the creditor would be allowed to take your stock, including both shares of publicly-traded corporations and stock in small businesses.

Unless your small corporation were also named as a defendant and included in the judgment, the creditor could not proceed against its assets directly. On the other hand, if the creditor has obtained all your stock, it has also obtained effective control of the corporation and its assets.

Valuation of the shares levied upon, where there is no public market, would be an open question and I don't know how it would be resolved, but a starting point might be to look at the corporation's books or tax returns to see what the book value per share was being reported as.

A final thought is that if assets are transferred to this corporation for less than fair value, and the effect is to lessen a creditor's chance to recover from you, the transfer might be found fraudulent under the Uniform Fraudulent Transfer Act (Civil Code sections 3439 - 3439.12) and could be set aside by a court, with penalties.

As a Franchise Attorney I agree with the above attorney answer entirely. You can also consider transferring your stock in the corporation to a third party for fair market value so it's no longer an asset. You probably have quite a while before the debtors sue you, the matter goes to trial and a judgment is rendered. If the debtors sue you, filing bankruptcy is another option to consider. Consult with a good business or franchise attorney in your area for specific advice.

Mr. Franchise - Kevin B. Murphy, B.S., M.B.A., J.D.

Franchise Foundations, a Professional Corporation