California’s CCP 3432 – A Debtor’s dream

August 9, 2023


California’s Civil Code section 3432 reads: A debtor may pay one creditor in preference to another, or may give to one creditor security for the payment of his demand in preference to another.

One of many judgment articles: I am a judgment broker, and not a lawyer, and this article is my opinion based on my experience, please consult with a lawyer if you need legal advice.

For post-judgment recovery attempts in California, what if your proposed charging order (or some other type of order) is approved by the court, and then an (individual or entity) debtor tries to claim that CCP 3432 and their financial situation only allows them to pay some of their creditors, but not you?

If the California debtor wins their CCP 3432 argument that they are unable to pay all their debts, are they allowed to pay some creditors and leave you and their other creditors hanging?

What if the California debtor is a company that uses CCP 3432 to argue that they need to pay dividends to their investors, however cannot pay their creditors? Would that argument fail because dividends paid to investors are not considered debts, and are supposed to come out of profits; and if you have not paid your debts, you do not really have profits to distribute?

Logically, an obligation to pay out dividends would be considered a debt, however that obligation would not actually arise until and unless there were actual profits to distribute.

If your California business debtor tries to use CCP 3432, which CCP code section(s) could you use to try to stop them? Of course, in the case of a business paying dividends but not creditors might be considered a fraudulent transfer, because even if you call the transfers “profits”, they were distributed without fair market value in return, and left the business unable to pay its regular creditors.

In the case of a debtor’s fraud, one could search for case law which mentions both 3432 and fraudulent transfers. Equity investors are not creditors although bondholders are. The debt has to be legitimate, or else the payment could be considered a fraudulent transfer.

If it is not a business debtor, or not a fraudulent transfer situation; it will probably be difficult to fight a CCP 3432 argument, may your judgment debtor never bring it up. I am not a lawyer, and my opinion for countering a CCP 3432 argument, is to suggest a repayment arrangement over time. If the debtor claims they cannot pay you because they are paying someone else, suggest they pay a little each month, and try to make that a court-endorsed stipulated order.

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