make assignment for the benefit of creditors

Business Law Today

November 2015

Assignment for the Benefit of Creditors: Effective Tool for Acquiring and Winding Up Distressed Businesses

David s kupetz.

Nov 15, 2015

12 min read

• Assignments for the benefit of creditors are an alternative to the formal burial process of a Chapter 7 bankruptcy.
• The ABC process may allow the parties to avoid the delay and uncertainty of formal federal bankruptcy court proceedings.
• ABCs can be particularly useful when fast action and distressed transaction and/or industry expertise is needed in order to capture value from the liquidation of the assets of a troubled enterprise.

An assignment for the benefit of creditors (ABC) is a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings. In many instances, an ABC can be the most advantageous and graceful exit strategy. This is especially true where the goals are (1) to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor and (2) to wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management.

The option of making an ABC is available on a state-by-state basis. During the meltdown suffered in the dot-com and technology business sectors in the early 2000s, California became the capital of ABCs. In discussing assignments for the benefit of creditors, this article will focus primarily on California ABC law.

Assignment Process

The process of an ABC is initiated by the distressed entity (assignor) entering an agreement with the party which will be responsible for conducting the wind-down and/or liquidation or going concern sale (assignee) in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, interest in, and custody and control of its property to the third-party assignee in trust. The assignee liquidates the property and distributes the proceeds to the assignor’s creditors.

In order to commence the ABC process, a distressed corporation will generally need to obtain both board of director authorization and shareholder approval. While this requirement is dictated by applicable state law, the ABC constitutes a transfer of all of the assignor’s assets to the assignee, and the law of many states provides that the transfer of all of a corporation’s assets is subject to shareholder approval. In contrast, shareholder approval is not required in order for a corporation to file a petition commencing a federal bankruptcy case. In some instances, the shareholder approval requirement for an ABC can be an impediment to the quick action ordinarily available in the context of an ABC, especially when a public company is involved as the assignor.

The board of directors of an insolvent company (a company with debt exceeding the value of its assets) should be particularly attentive to avoiding harm to the value of the enterprise and the interests of creditors. Under Delaware law, for example, the obligation is to maximize the value of the enterprise, which should result in protecting the interests of creditors.

It is not unusual for the board of a troubled company to determine that a going concern sale of the company’s business is in the best interests of the company and its creditors. However, generally the purchaser will not acquire the business if the assumption of the company’s unsecured debt is involved. Further, often the situation is deteriorating rapidly. The company may be burning through its cash reserves and in danger of losing key employees who are aware of its financial difficulties, and creditors of the company are pressing for payment. Under these circumstances, the company’s board may conclude than an ABC is the most appropriate course of action.

The Alternative of Voluntary Federal Bankruptcy Cases

Chapter 7 bankruptcy provides a procedure for the orderly liquidation of the assets of the debtor and the ultimate payment of creditors in the order of priority set forth in the U.S. Bankruptcy Code. Upon the filing of a Chapter 7 petition, a trustee is appointed who is charged with marshaling all of the assets of the debtor, liquidating the assets, and eventually distributing the proceeds of the liquidation to the debtor’s creditors. The process can take many months or even years and is governed by detailed statutory requirements.

Chapter 11 of the Bankruptcy Code provides a framework for a formal, court-supervised business reorganization. While the primary goals of Chapter 11 are rehabilitation of the debtor, equality of treatment of creditors holding claims of the same priority, and maximization of the value of the bankruptcy estate, Chapter 11 can be used to implement a liquidation of the debtor. Unlike the traditional common law assignment for the benefit of creditors (assignments are governed by state law and may differ from state to state), Chapter 7 and Chapter 11 bankruptcy cases are presided over by a federal bankruptcy judge and are governed by a detailed federal statute.

Advantages of an ABC

The common law assignment by simple transfer in trust, in many cases, is a superior liquidation mechanism when compared to using the more cumbersome statutory procedures governing a formal Chapter 7 bankruptcy liquidation case or a liquidating Chapter 11 case. Compared to bankruptcy liquidation, assignments may involve less administrative expense and are a substantially faster and more flexible liquidation process. In addition, unlike a Chapter 7 liquidation, where generally an unknown trustee will be appointed to administer the liquidation process, in an ABC the assignor can select an assignee with appropriate experience and expertise to conduct the wind-down of its business and liquidation of its assets. In prepackaged ABCs, where an immediate going concern sale will be implemented, the assignee will be involved prior to the ABC going effective. Further, in states that have adopted the common law ABC process, court procedures, requirements, and oversight are not involved. In contrast, in bankruptcy cases, the judicial process is invoked and brings with it additional uncertainty and complications, including players whose identity is unknown at the time the bankruptcy petition is filed, expense, and likely delay.

In situations where a company is burdened with debt that makes a merger or acquisition infeasible, an ABC can be the most efficient, effective, and desirable means of effectuating a favorable transaction and addressing the debt. The assignment process enables the assignee to sell the assignor’s assets free of the unsecured debt that burdened the company. Unlike bankruptcy, where the publicity for the company and its officers and directors will be negative, in an assignment, the press generally reads “assets of Oldco acquired by Newco,” instead of “Oldco files bankruptcy” or “Oldco shuts its doors.” Moreover, the assignment process removes from the board of directors and management of the troubled company the responsibility for and burden of winding down the business and disposing of the assets.

From a buyer’s perspective, acquiring a going concern business or the specific assets of a distressed entity from an Assignee in an ABC sale transaction provides some important advantages. Most sophisticated buyers will not acquire an ongoing business or substantial assets from a financially distressed entity with outstanding unsecured debt, unless the assets are cleansed either through an ABC or bankruptcy process. Such buyers are generally unwilling to subject themselves to potential contentions that the assets were acquired as part of a fraudulent transfer and/or that they are a successor to or subject to successor liability for claims against the distressed entity. Buying a going concern or specified assets from an assignee allows the purchaser to avoid these types of contentions and issues and to obtain the assets free of the assignor’s unsecured debt. Creditors of the assignor simply must submit proofs of claim to the assignee and will ultimately receive payment by the assignee from the proceeds of the assignment estate. Moreover, compared to a bankruptcy case, where numerous unknown parties (e.g., the bankruptcy trustee, the bankruptcy judge, the U.S. trustee, an unsecured creditors’ committee, and possibly others) will become part of the process and where court procedures and legal requirements come into play, a common law ABC allows for flexibility and quick action.

From the perspective of a secured creditor, in certain circumstances, instead of being responsible for conducting a foreclosure proceeding, the secured creditor may prefer to have an independent, objective third party with expertise and experience liquidating businesses of the type of the distressed entity act as an assignee. There is nothing wrong with an assignee entering into appropriate subordination agreements with the secured creditor and liquidating the assignor’s assets and turning the proceeds over to the secured creditor to the extent that the secured creditor holds valid, perfected liens on the assets that are sold.

As a common law liquidation vehicle that has been around for a very long time, ABCs have been used over the years for all different types of businesses. In the early 2000s, in particular, ABCs became an especially popular method for liquidating troubled dot-com, technology, and health-care companies. In large part, this was simply a reflection of the distressed nature of those industries. At the same time, ABCs allow for quick and flexible action that frequently is necessary in order to maximize the value that might be obtained for a business that is largely dependent on the know-how and expertise of key personnel. An ABC may provide a vehicle for the implementation of a quick transaction which can be implemented before key employees jump from the sinking ship.

The liquidation process in an ABC can take many different forms. In some instances, negotiations between the buyer and the assignee commence before the assignment is made and a prepackaged transaction is agreed on and implemented contemporaneously with the execution of the assignment. This type of turnkey sale can effectively allow the purchaser of a business to acquire the business without assuming the former owner’s unsecured debt in a manner where the business operations continue uninterrupted.

In certain instances, the assignee may operate the assignor’s business post-ABC with the intent of selling the business as a going concern even if an agreement has not been reached with a purchaser. However, the assignee must weigh the risks and costs of continuing to operate the business against the anticipated benefits to be received from a going concern sale.

In many cases, the distressed enterprise has already ceased operations prior to making the assignment or will cease its business operations at the time the ABC is entered. In these cases, the assignee may be selling the assets in bulk or may sell or license certain key assets and liquidate the other assets through auctions or other private or public liquidation sale methods. At all times, the assignee is guided by its responsibility to act in a reasonable manner designed to maximize value obtained for the assets and ultimate creditor recovery under the circumstances.

Disadvantages of an ABC

As discussed above, an ABC can be an advantageous means for a buyer to acquire assets and/or a business in financial distress. However, unlike in a bankruptcy case, because the ABC process in California is nonjudicial, there is no court order approving the sale transaction. As a result, a buyer who requires the clarity of an actual court order approving the sale will not be able to satisfy that desire through an ABC transaction. That being said, the assignee is an independent, third-party fiduciary who must agree to the transaction and is responsible for the ABC process. The buyer in an ABC transaction will have an asset purchase agreement and other appropriate ancillary documents that have been executed by the assignee.

Unlike in a formal federal bankruptcy case, executory contracts and leases cannot be assigned in an ABC without the consent of the counter party to the contract. Accordingly, if the assignment of executory contracts and/or leases is a necessary part of the transaction and, if the consent of the counter parties to the contracts and leases cannot be obtained, an ABC transaction may not be the appropriate approach. Further, ipso facto default provisions (allowing for termination, forfeiture, or modification of contract rights) based on insolvency or the commencement of the ABC are not unenforceable as they are in a federal bankruptcy case.

Secured creditor consent is generally required in the context of an ABC. There is no ability to sell free and clear of liens, as there is in some circumstances in a federal bankruptcy case, without secured creditor consent (unless the secured creditor will be paid in full from sale proceeds). Moreover, there is no automatic stay to prevent secured creditors from foreclosing on their collateral if they are not in support of the ABC. The lack of an automatic stay is generally not significant with respect to unsecured creditors since assets have been transferred to the assignee and unsecured creditors claims are against the assignor.

While there is a risk of an involuntary bankruptcy petition being filed against the assignor, experience has shown that this risk should be relatively small. Further, when an involuntary bankruptcy petition is filed, it is generally dismissed by the bankruptcy court because an alternative insolvency process (the ABC) is already underway. In the context of an out-of-court workout or liquidation, there is always the risk that an involuntary bankruptcy petition may be filed against the debtor. Such a risk is substantially less, however, in connection with an assignment for the benefit of creditors because the bankruptcy court is likely to abstain when a process (the assignment) is already in place to facilitate liquidation of the debtor’s assets and distribution to creditors. A policy is in place that favors allowing general assignments for the benefit of creditors to stand.

Distribution Scheme in ABCs

ABCs in California are governed by common law and are subject to various specific statutory provisions. In states like California, where common law (with specific statutory supplements) governs the ABC process, the process is nonjudicial. An assignee in an assignment for the benefit of creditors serves in a capacity that is analogous to a bankruptcy trustee and is responsible for liquidating the assets of the assignment estate and distributing the net proceeds, if any, to the assignor’s creditors.

Under California law, an assignee for the benefit of creditors must set a deadline for the submission of claims. Notice of the deadline must be disseminated within 30 days of the commencement of the assignment and must provide not less than 150 and not more than 180 days’ notice of the bar date. Once the assignee has liquidated the assets, evaluated the claims submitted, resolved any pending litigation to the extent necessary prior to making distribution, and is otherwise ready to make distribution to creditors, pertinent statutory provisions must be followed in the distribution process. Generally, California law ensures that taxes (both state and municipal), certain unpaid wages and other employee benefits, and customer deposits are paid before general unsecured claims.

Particular care must be taken by assignees in dealing with claims of the federal government. These claims are entitled to priority by reason of a catchall-type statute which entitles any agency of the federal government to enjoy a priority status for its claims over the claims of general unsecured creditors. In fact, the federal statute provides that an assignee paying any part of a debt of the person or estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government. As a practical result, these payments must be prioritized above those owed to all state and local taxing agencies.

In California, there is no comprehensive priority scheme for distributions from an assignment estate like the priority scheme in bankruptcy or priority schemes under assignment laws in certain other states. Instead, California has various statutes which provide that certain claims should receive priority status over general unsecured claims, such as taxes, priority labor wages, lease deposits, etc. However, the order of priority among the various priority claims is not clear. Of course, determining the order of priority among priority claims becomes merely an academic exercise if there are sufficient funds to pay all priority claims. Secured creditors retain their liens on the collateral and are entitled to receive the proceeds from the sale of their collateral up to the extent of the amount of their claim. Thereafter, distribution in California ABCs is made in priority claims, including administrative expenses, obligations owing to the federal government, priority wage and benefit claims, state tax claims, including interest and penalties for sales and use taxes, income taxes and bank and corporate taxes, security deposits up to $900 for the lease or rental of property, or purchase of services not provided, unpaid unemployment insurance contribution, including interest and penalties, and general unsecured claims. Interest is paid on general unsecured claims only after the principal is paid for all unsecured claims submitted and allowed and only to the extent that a particular creditor is entitled under contract or judgment to assert such claim for interest.

If there are insufficient funds to pay the unsecured claims in full, then these claims will be paid pro rata. If unsecured claims are paid in full, equity holders will receive distribution in accordance with their liquidation rights. No distribution to general unsecured creditors should take place until the assignee is satisfied that all priority claims have been paid in full.

Assignments for the benefit of creditors are an alternative to the formal burial process of a Chapter 7 bankruptcy. Moreover, ABCs can be particularly useful when fast action and distressed transaction and/or industry expertise is needed in order to capture value from the liquidation of the assets of a troubled enterprise. The ABC process may allow the parties to avoid the delay and uncertainty of formal federal bankruptcy court proceedings. In many instances involving deteriorating businesses, management engages in last-ditch efforts to sell the business in the face of mounting debt. However, frequently the value of the business is diminishing rapidly as, among other things, key employees leave. Moreover, the parties interested in acquiring the business and/or assets will move forward only under circumstances where they will not be taking on the unsecured debt of the distressed entity along with its assets. In such instances, especially when the expense of a Chapter 11 bankruptcy case may be unsustainable, an assignment for the benefit of creditors can be a viable solution.

Sulmeyerkupetz

David Kupetz specializes in troubled transactions, crisis avoidance consultation, workouts, restructurings, reorganizations, bankruptcies, receiverships, assignments for the benefit of creditors, municipal debt adjustment and...

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• assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

• Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
• Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
• Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
• Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
• After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
• After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
• Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
• Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
• Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

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assignment for benefit of creditors

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Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

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Assignments for the Benefit of Creditors – an often-overlooked state law alternative to Chapter 7 bankruptcy

For some folks the three letters ABC are a reminder of elementary school and singing a song to learn the alphabet.  For others, it is a throw back to the early 70’s when the Jackson Five and its lead singer Michael, still with his adolescent high voice, sang a catchy love song.  Then there is a select group of people in the world of corporate workouts, liquidations and bankruptcies, who know those three letters to stand for the A ssignment for the B enefit of C reditors – a voluntary state law liquidation process that may arguably offer a hospitable and friendly alternative to federal bankruptcy.  This article is a brief summary of this potentially attractive alternative to bankruptcy.

 The Assignment for the Benefit of Creditors (“ABC”), also known as a General Assignment, is a state law procedure governed by state statute or common law.  Over 30 states have codified statutes, and the remainder of states rely on common law.  See Practical Issues in Assignments for the Benefit of Creditors , by Robert Richards & Nancy Ross, ABI Law Review Vol. 17:5 (2009) at p. 6 (listing state statutes).  In some states, the statutory authority and common law can coexist.  At its most basic, the ABC process involves the transfer of all assets by a financially distressed debtor (the assignor) to an individual or entity (the assignee) with fiduciary obligations who then liquidates the assets and pays creditors.  The assignment agreement is essentially a contract involving the transfer and control of property, in trust, to a third party.  In some states that have enacted a statute, state courts may supervise the process (and at different levels of involvement depending on the statute).  The statutory scheme in other states such as California and Nevada, and in states where common law govern, do not provide for judicial oversight..  

ABCs are promoted as less expensive and more flexible than a chapter 7 liquidation and may proceed substantially faster than bankruptcy liquidation. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 8 (citations omitted).  In addition, the ABC process may provide four other noteworthy benefits not available in a bankruptcy.  First, the liquidating company chooses the assignee, there is no appointment of a random trustee or formal election required like in a bankruptcy.  This freedom of choice allows the assignor to evaluate the reputation and experience of proposed assignees, as well as select an assignee with familiarity in the nature of the assignor’s business and/or with more expansive contacts in the industry to facilitate the sale/liquidation.  Second, the ABC process generally falls under the radar of the media (particularly in states that do not require court supervision), and the assignor may avoid publicity, often negative, that can be associated with bankruptcy proceedings.  Third, with an ABC, the assignee has the ability to sell the assets without the imposition of potentially cumbersome requirements of Section 363 of the Bankruptcy Code, and in some cases, can conduct a sale the same day as the general assignment.  Finally, the ABC process generally authorizes the sale of assets free of unsecured creditor debt.  In essence, in an ABC, a company buying assets from a distressed business does not acquire the debt of the assignor.

On the down side, ABCs do not provide the protection of the automatic stay that is triggered upon the filing of a bankruptcy petition.  In some situations, the debtor entity needs to stop the pursuit of creditors immediately, and a bankruptcy proceeding will supply this relief.  Unlike bankruptcy, the sale through an ABC: i) is not free and clear of liens; ii) unexpired leases cannot be assumed and assigned without the consent of the contract counter-party; and iii) insolvency can trigger a default under an unexpired lease or executory contract. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 20. In general, an ABC is not a good choice for debtors that have secured creditors that do not consent because there is no mechanism for using cash collateral or transferring assets free and clear of liens without the secured creditors’ consent.  In cases where junior lienholders are out of the money, there is no incentive for those creditors to voluntarily release their liens.  In addition, while unsecured creditors do not have to consent to the general assignment for it to be valid, choosing this alternative forum may cause concern for creditors (particularly those used to the transparency of a court-supervised bankruptcy or receivership proceeding) and invite the filing of an involuntary bankruptcy. Therefore, it is prudent to involve major creditors in the process, and perhaps even in the pre-assignment planning. In addition, if an involuntary petition is filed, the assignee could request that the bankruptcy court abstain in order to proceed with the ABC.

Using the ABC state process in lieu of filing for bankruptcy in federal court may result in a more streamlined, efficient liquidation process that is less expensive and likely completed quicker than a federal bankruptcy proceeding.  In some jurisdictions, such as New Jersey, workout professionals note anecdotally that corporate clients fare better under this state law alternative rather than the lengthy, more complicated federal bankruptcy proceedings.

Many bankruptcy professionals are unfamiliar with the procedures of ABC and are reluctant to recommend it as a method for liquidating assets and administering claims.  This lack of familiarity may be a disservice to potential clients.  

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Assignment For The Benefit Of Creditors: An Overview

Contributor.

What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

• an ABC does not afford a debtor an automatic stay from creditor collection; and
• a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Insolvency/Bankruptcy/Re-Structuring

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Assignment for the Benefit of Creditors: General Overview

If you are considering bankruptcy for your insolvent business, an Assignment for the Benefit of Creditors (“ABC”) might be your answer.  An ABC is a less expensive, quicker, quieter, and simpler alternative to traditional bankruptcy.  An ABC is a state law procedure utilized to liquidate a failed, insolvent, or no longer viable business.   Fla. Stat. § 727.101 .   An ABC is normally much simpler and usually less expensive than a comparable bankruptcy proceeding.  This savings means larger payouts to both unsecured and secured creditors.  This blawg provides a general overview of the ABC process, and highlights a few benefits of ABC as compared to a Chapter 7 bankruptcy.

An ABC is a conveyance by an assignor of substantially all of the assignor’s property to an assignee for the purpose of applying the property or its proceeds to the payment of the assignor’s debts and returning any surplus to the assignor after administration.  ABCs share some similarities with federal bankruptcy: ABCs ensure full reporting to creditors, and require equal distribution of an assignor’s assets.  However, there are several clear differences between the two, and each has its own advantages and disadvantages.

One of the biggest advantages of an ABC in comparison to traditional bankruptcy is that the assignor chooses the assignee.   Fla. Stat. § 727.104 ;  11 U.S.C. § 702 .  This is significant for a few reasons.  Two problems with Chapter 7 bankruptcies, as compared to ABCs, are (1) many bankruptcy trustees appointed by the court are lawyers or accountants who operate independently, they are assigned cases in large numbers, and do not maintain staffs of people experienced in operating a business; and (2) when the trustee takes over, the debtor will be foreclosed from participating in the liquidation process.  In an ABC, a professional assignee, chosen by the assignor, is not only an expert in liquidating assets, but is also best suited to operate a business as long as need be to maximize return by realizing some form of going-concern value.  Another major advantage of an ABC over Chapter 7 bankruptcy is that the assignor can decide largely what is going to happen before and during the ABC.

The ABC proceeding is commenced with the execution of an irrevocable assignment in writing.  Upon execution of this assignment, the legal estate in the assigned property passes to the assignee, and the assignor loses all power over the property.  Then, the assignee records the original assignment in the public records and files a petition with the clerk of the court commencing the assignment proceeding.

Most of the powers of the assignee parallel those of the bankruptcy trustee.  The assignee has many duties, including, but not limited to, collection of the assets and reducing them to money, giving notice to creditors, conducting the business of the assignor for limited periods, if appropriate, hiring professionals as may be necessary, and submitting a final report.  The assignee is required to provide notice of the assignment by publication in a newspaper of general circulation published in the county where the petition is filed, once a week for four consecutive weeks, within ten days of filing of the petition, and by mailing notice to all known creditors within twenty days after filing of the petition.   Fla. Stat. § 727.107 .  The assignee may reject leases of both real and personal property under which the assignor is the lessee.  If the rejection creates a claim for damages, the lessor may claim the back rent plus future rent not to exceed the greater of one year’s rent or fifteen percent of the rent remaining term, plus attorney’s fees and costs.   Fla. Stat. § 727.112 .  The assignee may collect any asset by suit in any court of competent jurisdiction.  The assignee has the power to enforce tort claims regardless of any generally applicable law concerning the non-assignability of tort claims.  The assignee may assign causes of action to a second party pursuant to the assignee’s business judgment and subject to notice.   Fla. Stat. 727.111 .

The ability to operate the business is one of the most important of the assignee’s powers.  Assets sold off piece by piece normally bring far lower return.  The assignee may conduct the assignor’s business, without court approval for a limited period not to exceed 45 days.  If no timely objection is filed with the court after seeking court approval, the assignee may continue to operate the assignor’s business for an additional 90 days.  The court may even extend the 90-day period if it finds an extension to be in the best interest of the estate.   Fla. Stat. § 727.108 .

The assignee is empowered to maintain an action to avoid any conveyance or transfer void or voidable by law.  Fla. Stat. § 727.110 .  This clearly contemplates avoidance of transfers under Florida’s Uniform Fraudulent Transfer Act.   Fla. Stat. Ch. 726 .  Importantly, it has been held that only an assignee has standing to pursue fraudulent transfers, preferential transfers, or other derivative claims.   Moffat & Nichol v. B.E.A ., 48 So.3d 896 (Fla. 3d DCA 2010) .

ABCs do not impose an automatic stay in favor of assignors, do not grant an assignee authority to avoid preferential transfers, and do not provide a discharge of any debt.  This last reason is why many individuals and partnerships do not elect ABCs.  However, this presents minimal disadvantage to a corporation or limited liability company, as Chapter 7 bankruptcy does not offer discharge to corporations or limited liability companies.  While there is no automatic stay in an ABC, for practical reasons the ABC filing has the effect of an automatic stay—actions to reach the assets are stopped while the assignee acts to liquidate the assets.  The assignor no longer has any assets to pursue.

In an ABC, unsecured creditors must file a proof of claim and are prohibited from commencing proceedings against the assignee.  However, consensual lienholders may pursue collection by levy, execution, attachment or foreclosure of its collateral.   Fla. Stat. § 727.105 .  This means that if substantial assets are subject to a consensual lien, and if continued use is important to the estate, as where the assignee intends to continue operating the business for a limited time, the lack of an automatic stay could be a severe disadvantage to creditors.  Here, it is important that the assignee work with the secured creditor, persuading it to trust that continued operation of the business will result in a greater return to that creditor.  It is common for the assignor and assignee to arrive at an agreement with dominant secured creditors before or concurrently with executing the assignment, agreeing that secured creditors will be patient and comply with the ABC.

Last, but certainly not least, any Florida corporation considering “closing its doors” should examine ABC as a cost-effective, clean and simple part of the wind-down process.  Closing a business can lead to personal liability for the owner.  The ABC process can be used to take the weight off of the business owner and minimize an owner’s liability potential.  ABC gives your business a proper burial, tight and neat.

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Assignment for the Benefit of Creditors

• January 16, 2020
•  •   Business Law

When a business is unfortunately forced to shut down due to debt, there are a variety of paths that can be taken to wind up the business. While bankruptcy is a well-known approach, businesses have another option known as the Assignment for the Benefit of Creditors.

What is an Assignment for the Benefit of Creditors?

An Assignment for the Benefit of Creditors, commonly referred to as ABC, is an alternative to bankruptcy in which the business turns over its assets to creditors. An ABC is similar in many ways to bankruptcy but is often a cheaper and faster process. Additionally, an ABC permits the liquidating business to retain more control over the process than it would in a bankruptcy. Specifically, the liquidating business selects the assignee to oversee the process.

How does the Assignment for the Benefit of Creditors Process work?

In Florida, an ABC process is governed by statutes §§ 727.101-727.117. First, the business that wishes to liquidate its assets, selects an assignee to act in a capacity similar to a bankruptcy trustee. This assignee is typically a professional, such as a lawyer or accountant, familiar with the ABC process. Once an assignee is selected, an Assignment document containing, amongst other things, a list of creditors and the debtor’s assets is filed with the clerk of court in which the debtor is located. Once the Assignment is file, the assignee must file notice of the Assignment by publication in a newspaper once a week for four consecutive weeks. Additionally, the assignee must mail notice to all known creditors within twenty days after filing the Assignment petition. Like the trustee in bankruptcy, the assignee then is responsible for liquidating the business assets and distributing them to creditors. The statutes outline the order for distributing assets and various procedures the assignee must follow.

Overall, the Assignment for the Benefit of Creditors process is a faster and quicker way for businesses to wind-down their business without the stigma of bankruptcy.

EPGD Business Law is located in beautiful Coral Gables. Call us at (786) 837-6787 , or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Assignment for the Benefit of Creditors: A Remedy to Avoid Bankruptcy

May 24, 2021

When it comes to California contract law, ABC contracts are a well-established tool that can help individuals and entities avoid a formal bankruptcy filing. “ABC” stands for “Assignment for the Benefit of Creditors,” and the term describes a contract in which an economically troubled “Assignor” transfers control of its assets and property to an independent third party. This third party is called the “Assignee,” and they liquidate and wind-up the entity. 

How Do ABCs Work?

When a business is struggling financially without much hope of recovery, bankruptcy isn’t the only option. ABC contracts can help the entity avoid traditional or formal bankruptcy proceedings. 

These contracts work when there are significant assets that are ready to be liquidated. If the entity doesn’t have valuable assets, then an ABC contract is not typically a realistic option. However, in these circumstances where there are significant assets, the Assignor transfers all custody, control, and title to a neutral third party. 

This neutral third party navigates and facilitates the liquidation of assets and transfer of funds to the assignor’s creditors. 

Benefits of Using an ABC

There are several benefits to using an ABC. 

One of the biggest factors for most entities is avoiding Chapter 11 or Chapter 7 bankruptcy. Because ABCs are governed by state law, not federal law, struggling companies can pursue an ABC contract on their own without going through the courts. 

Working with a neutral third party can take away a lot of the stress that accompanies economic difficulties. Instead of trying to liquidate assets and transfer funds to creditors, struggling companies can pass those challenges on to the Assignee. 

Lastly, Assignors get to choose their own Assignees. That means that they are not at the mercy of the court to assign a bankruptcy trustee they don’t know or trust. When a company pursues an ABC contract, they maintain more control over process and costs. 

Going through financial difficulties can lead to feelings of helplessness and a loss of control, but this is something that you continue to have control over. 

Responsibilities of an Assignee

When the Assignor assigns property to the Assignee, that can include all corporate property, both tangible and intangible, as well as accounts, rights, and credits, including law and equity credits. 

The Assignee liquidates and sells these assets. (Note that the Assignee cannot sell the corporation or the stock.) Importantly, the corporation continues to exist during this process, even though there are no assets left by the end of the process.

The Assignee typically sells all assets without any representation or warranty. An as-is sale allows things to proceed quickly; ABCs are known for being one of the fastest ways to address significant debt issues. 

Assignees protect the assets of the estate or corporation. They are required to administer those assets fairly and in the interest of the Assignor and its creditors. 

How to Choose an Assignee

Choosing an Assignee is about finding the right third party representative. We recommend that you look for the following characteristics in your chosen Assignee:

• Experience: Choose an Assignee who has significant experience with managing and liquidating assets for struggling businesses.
• Reputation: These days, reputation means everything. It’s easy to find out through some searching if a potential Assignee is qualified and reputable. 
• Knowledge: A knowledgeable Assignee will be able to answer your questions about the process and chart out likely outcomes.  

Do You Need an Assignee? 

Griswold Law regularly manages and sells business assets. We serve as court-appointed receivers as well as ABC-contracted Assignees. To learn more about ABCs and how we can help you avoid bankruptcy, reach out today .

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What are assignments for the benefit of creditors?

Assignments for the benefit of creditors (ABCs) are an alternative to formal bankruptcy proceedings. Under Florida law, an ABC is a voluntary, out-of-court process where a debtor transfers their assets to an assignee, who then liquidates these assets and distributes the proceeds to the debtor’s creditors.

For example, a struggling business in Florida may pursue an ABC instead of filing for bankruptcy. This choice can be advantageous because it is often faster, less expensive, and less public than a formal bankruptcy filing. The business would transfer its assets to an assignee responsible for selling these assets and distributing the proceeds to the creditors following the priorities established by Florida law.

Need a bankruptcy law advocate? Schedule your consultation today with a top bankruptcy and restructuring attorney.

Which Florida laws and regulations apply to assignments for the benefit of creditors?

The primary source of law governing ABCs in Florida is Chapter 727 of the Florida Statutes . This chapter outlines the process for initiating an ABC, the assignee’s role, and the creditors’ rights. Additionally, the Florida Rules of Civil Procedure may apply to certain aspects of an ABC, such as serving notice to creditors and managing creditor claims.

Federal laws, such as the Bankruptcy Code , generally do not apply to ABCs because they are state law alternatives to bankruptcy. However, it is essential to note that federal laws may still impact an ABC in certain situations, such as when a debtor’s assets are subject to federal tax liens or other federal claims. In these cases, debtors must consult a knowledgeable attorney to navigate the interplay between state and federal laws.

How do assignments for the benefit of creditors connect to the bankruptcy process?

The connection between pursuing an ABC and bankruptcy legal services for debtors lies in their shared goal of providing relief to financially distressed individuals or businesses. Both processes involve the liquidation of assets and the distribution of proceeds to creditors. However, ABCs are generally less formal, less expensive, and more private than bankruptcy filings, making them an attractive option for debtors seeking to avoid the stigma and complexities associated with bankruptcy.

In an ABC, a debtor voluntarily transfers their assets to an assignee who liquidates them and distributes the proceeds to creditors. This process differs from a bankruptcy proceeding, where a court-appointed trustee oversees the operation. Furthermore, while strict federal rules and procedures bind bankruptcy cases, ABCs offer more flexibility, allowing parties to tailor the process to their needs.

When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.

What are the prerequisites for debtors to pursue assignments for the benefit of creditors?

Consider the following:

• Voluntary action: The debtor must willingly initiate an ABC, as this process is a voluntary alternative to bankruptcy.
• Valid assignment: The debtor must properly execute and deliver the assignment to a qualified assignee, who is often an attorney, accountant, or insolvency professional.
• Recording the assignment: The assignee must record the assignment in the county’s public records containing the debtor’s principal place of business.
• Filing notice: The assignee must file a notice of the assignment with the circuit court clerk in the county where the debtor recorded the assignment.
• Notifying creditors: The assignee must provide written notice to all known creditors of the debtor within 20 days of the assignment, informing them about the ABC process and their rights.

By satisfying these requirements, the debtor can effectively pursue an ABC in Florida, which allows for a more personal and flexible approach to resolving financial difficulties compared to bankruptcy.

Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.

Frequently Asked Questions

• Can a debtor choose any person as an assignee for an ABC?

No, not just anyone can be an assignee. The assignee must be a disinterested person who is not an insider of the debtor and is qualified to manage the debtor’s assets and affairs. Assignees are typically professionals, such as attorneys, accountants, or insolvency experts.

• Does an ABC in Florida prevent creditors from pursuing legal action against the debtor?

Unlike bankruptcy, an ABC does not automatically halt legal actions by creditors. However, creditors may agree to a standstill or moratorium on legal actions while the ABC process is ongoing. This outcome may depend on the specific circumstances and the willingness of the creditors to cooperate.

• How does an ABC affect the debtor’s credit rating?

Although an ABC may be less public and stigmatizing than bankruptcy, it can still harm the debtor’s credit rating. Credit reporting agencies may treat an ABC as a similar event to a default, which can lower the debtor’s credit score and make it more difficult for them to obtain future credit or loans. However, the impact on the credit rating may vary depending on the specific circumstances of the case and the debtor’s credit history before the ABC. Therefore, debtors must work closely with financial advisors and credit counselors to rebuild their credit after an ABC process.

Have more questions about how bankruptcy services could positively impact your business operations and relationships?

Crucially, this overview of assignments for the benefit of creditors does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation .

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Is an Assignment for the Benefit of Creditors like a Bankruptcy?

At first, an assignment for the benefit of creditors (ABC) may seem similar to a bankruptcy claim. However, upon a deeper look, it is clear that an assignment for the benefit of creditors is different. Similar to liquidation proceedings in chapter 7 or chapter 11 bankruptcy proceedings, an ABC can be used by either an individual or a business if they are going through significant financial difficulties. In both cases, the struggling debtor sells off all its assets in order to pay back its outstanding debts to its creditors. This mechanism helps to maximize the return for creditors.

An assignment for the benefit of creditors is distinct from bankruptcy proceedings because it is a much less formal process governed by state law rather than federal law. The informal nature of these proceedings means that it is faster and easier to marshal a debtor’s assets, liquidate same, and distribute proceeds equitably to creditors under an assignment rather than under federal bankruptcy law. Furthermore, an ABC often requires less court involvement and provides more flexibility to the assignee to make liquidation decisions as required. This is generally beneficial for both creditors and debtors because it is faster, less expensive, and more private than traditionally afforded bankruptcy liquidations.

Understanding Assignment for the Benefit of Creditors in New Jersey

In New Jersey, an assignment for the benefit of creditors is governed by New Jersey statutes that codify the preexisting common law. The proceedings are voluntary processes whereby the debtor designates an assignee who is empowered to marshal and liquidate (sell) the assets of the debtor and then distribute the proceeds of the sale to the debtor’s creditors. The assignee must ensure that all of the financial liquidations are done for the benefit of the creditors and with the sole goal of repaying outstanding debts. This is significant because in New Jersey, the debtor can choose its assignee rather than relying on a court-appointed trustee in bankruptcy who may not understand the nuances of the debtor’s finances. The ability to choose the assignee can be beneficial because an assignee with an understanding of the debtor’s finances can expedite the liquidation process rather than spend valuable time learning the ropes.

An ABC in New Jersey is generally cheaper than filing formal bankruptcy proceedings because it is faster and usually requires less litigation. The expeditious nature cuts down on the debtor’s and creditor’s legal bills and other costs associated with ongoing litigation. Still, creditors should be counseled to make sure that the liquidation is being conducted properly, and that the assignee is obtaining a fair return on the sale of the assets to maximize the recovery of the debts owed to the creditors.

FSKS is on Your Side

At FSKS, our attorneys are experienced in both bankruptcy and assignments for the benefit of creditors in New Jersey. We have a strong track record of success in the area of creditor’s rights and pride ourselves on being one of the strongest and most successful Creditors’ Rights firms in New Jersey, New York, and Pennsylvania. We’re ready to give you trusted advice and help maximize your return.

If you require assistance with or have questions regarding an assignment for the benefit of creditors in New Jersey, please contact Vincent DiMaiolo, Jr. ( [email protected] ), Nicholas Canova ( [email protected] ), or Tammy L. Terrell-Benoza ( [email protected] ) at (973) 538-4700 .

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Corporate trust, what is assignment for the benefit of creditors, explaining an emerging alternative to bankruptcy to resolve distress.

What is an ABC?

Assignment for the benefit of creditors (ABC) is a state law winddown procedure that allows for the orderly winddown of a company. The ABC provides for the appointment of an independent fiduciary representative – known as an assignee. The assignee manages the orderly wind down of the business and monetizes the company’s assets for the benefit of the company’s creditors. The assignee will then distribute the proceeds generated from the sale of the company’s assets to the company’s creditors according to state law.

Important pre-approval considerations :

• The decision must be approved by both the board and shareholders.
• Jurisdiction matters – 35 states have some form of an ABC in its laws. Each state will have different considerations and procedures to follow.

What are the benefits of an ABC?

• Choice: Unlike a receivership or a Chapter 7 Case, the board has the ability to select the assignee.
• Time: A bankruptcy case is a lengthy process with many procedural requirements. Most ABCs are significantly less time-consuming than a bankruptcy case or a receivership.  
• Savings: The shortened engagement time for ABCs means billing is leaner – many times, ABCs can provide higher returns.
• Distributions to Creditors: Since the cost of an ABC is usually less than a bankruptcy case or a receivership, the actual return to creditors is usually greater in an ABC than in a bankruptcy case or a receivership. In addition, due to the expedited nature of an ABC, distributions to creditors will usually occur sooner in an ABC than in a bankruptcy case or a receivership.

What else should be considered in ABCs?

ABCs have some key differences from bankruptcies which should be carefully considered. For example, there are no automatic stays or statutory caps for landlord claims or employment claims in ABC. Leases and other executory contracts may be more difficult to assign in an ABC than in a bankruptcy case. In addition, ABCs can only be used for a winddown or sale of the business, not reorganization of the business

Interested in learning more?

Resolute’s team of experts include Steve O’Neill , who has more than 35 years of legal experience in ABCs, complex bankruptcy cases, and sale/winddown of companies; and Jeremiah Foster , who has served bankruptcy trustee and liquidating trustee in a variety of ventures.

Please contact us if you would if you’d like to learn more about ABCs or explore your company’s options.

• Assignment for the Benefit of Creditors

Helping Florida business owners exit gracefully and move on with less time and hassle than bankruptcy

An assignment for the benefit of creditors (ABC) is one way for an insolvent company to wind down its operations in an orderly fashion. Like a Chapter 7 business bankruptcy, an ABC involves selling the company’s assets and using the proceeds to pay off creditors, but without the stigma of a bankruptcy on their credit report or the mind of the public.

The business attorneys at Edelboim Lieberman have successfully helped many South Florida companies with an assignment for the benefit of creditors. Learn more about ABCs below, and call Edelboim Lieberman in Miami or Fort Lauderdale to find out if an ABC is right for you.

How does an ABC work?

The owner of the company (the assignor) makes an assignment, or transfer, of company assets and debts to another company or law firm (the assignee). The assignee is then responsible to sell the assets and use the proceeds to pay off the creditors. By using an ABC, the assignor gets to move on quickly from the insolvent company without having to personally go through the process of liquidating assets and paying creditors or going through the Chapter 7 bankruptcy process.

ABCs Under Florida Law

Unlike a Chapter 7 bankruptcy, which takes place in federal bankruptcy court and is supervised by a federal bankruptcy trustee, ABCs are filed in and supervised by the Florida state courts. Florida Statutes Chapter 727 governs an assignment for the benefit of creditors.

Following are some important points about the way ABCs operate in Florida:

• ABCs must be in writing. Florida statutes provide a sample form of assignment; the ABC should be in substantially the same form.
• An ABC represents an irrevocable assignment.
• The assignee files the assignment with the court, publishes a notice of the assignment as required by law and also notifies creditors of the assignment.
• In certain situations, the assignee can carry on the business for a period to maximize return.
• The assignee can reject an unexpired lease.
• The assignee can hire professionals as needed, such as accountants, appraisers, auctioneers, and attorneys, to assist in the liquidation of assets.
• The assignee can examine the validity and priority of claims and litigate disputed claims.
• The assignee can sue to enforce claims the assignee may have by virtue of the assignment or assign a cause of action to another party.
• The assignee must file interim and final reports with the court.
• Any monies left over after creditors are paid goes back to the assignor.

Is an ABC better than bankruptcy?

An ABC liquidates assets and winds down business operations similar to a Chapter 7 bankruptcy, and an ABC is conducted under court supervision like Chapter 7. However, an ABC can offer advantages over Chapter 7 in many instances. Importantly, an assignee typically gets a greater return when selling assets since the assignee is frequently knowledgeable about the industry and is often a skilled and experienced negotiator. Additionally, an assignee can continue to run the business as a going concern for a while and even sell it as such, which a bankruptcy trustee won’t do.

ABCs also offer more privacy to the assignor, as opposed to going through the public court filings of a bankruptcy. And the ABC is faster for the assignor. The assignor makes the assignment and is done, rather than going through bankruptcy which can take months or years depending on the assets to be liquidated.

On the other hand, an assignor does not get the benefit of the automatic stay afforded by bankruptcy, which might encourage a company to file for bankruptcy instead. Yet one could argue there is no reason a creditor would go after an assignor after the ABC has been executed, knowing the assignor no longer has assets. Generally speaking, ABCs are usually a less litigious process than Chapter 7 for businesses.

Is an ABC right for me?

If you have racked up a large amount of debt with a lot of different creditors and you see that your business is not going to make it, an assignment for the benefit of creditors might be the smart move. Especially if you have a large number of assets, liquidating the business to pay off your creditors can take months or even years. An ABC lets you transfer all your assets and debts at once, allowing you to move on immediately while the assignee takes on the burden of handling the liquidation and paying off creditors.

Since there are pros and cons to both Chapter 7 bankruptcy and ABCs, and there may be other unexplored alternatives as well, the best thing to do is sit down with an experienced business bankruptcy attorney to analyze your situation and look at all your options, so you can choose the best path forward that makes sense for you.

Get Help Today With an Assignment for the Benefit of Creditors in Miami and South Florida

For help with an Assignment for the Benefit of Creditors or other aspects of business bankruptcy in South Florida, contact Edelboim Lieberman at their offices in Miami and Fort Lauderdale by calling 305-768-9909 for a no-cost, confidential consultation.

Practice Areas

• Business Bankruptcy
• Commercial Litigation
• Real Estate
• Adversary Proceedings
• Creditor Rights and Representation
• Morgan B. Edelboim
• Brett D. Lieberman
• Edan Weiner
• Rebecca Waldman de la Zerda

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Assignments for the Benefit of Creditors in Minnesota

Understanding how an ABC works is essential to a creditor re-establishing control of the debt collection process.

In August 2012, Minnesota enacted a new, more user-friendly statute governing the once seldom-used tool of Assignments for the Benefit of Creditors (“ABC”). [Disclaimer: Jeffrey Ansel served on the committee that was tasked with re-writing Minnesota’s receivership laws]. Since then, ABC’s have become more common. Unlike receiverships, [1] ABC’s are typically initiated by debtors, giving the debtor control over when an ABC is commenced, the assets included in the ABC, and selection of the “administrator” or assignee. Creditors, including (and especially) lenders are rightly concerned about the debtor having control over these options. Understanding how an ABC works, however, is essential to a creditor re-establishing control of the debt collection process.

GENERAL PURPOSE OF AN ABC

An ABC is commenced by the filing of a written assignment agreement in a form substantially similar to the form included in the statute. Minn. Stat. §577.12 and .13. The Assignment must be filed with the court administrator of the district court in the county where the assignor, or any of them if there is more than one, resides or has its principal of business. Minn. Stat. §577.12.  An ABC provides a debtor with an opportunity to use neutral party and a court‑supervised process to liquidate some or all of its assets in an orderly fashion to satisfy creditor claims. This process can insulate the debtor from having to deal directly with creditors and avoid any claims that the debtor preferred one creditor over another. As a court-supervised process, an ABC can help to narrow disputes and give all parties closure.

CAST OF CHARACTERS IN AN ABC

The cast of characters in an ABC includes the assignor, the assignee, the creditors of the assignor, the Court, and potentially holders of equity interests in the assignor. [2] Unlike a receivership, where a party, typically a creditor or shareholder, recommends and the Court selects and appoints a receiver, in an ABC the assignor is authorized to select the assignee. However, the assignee must be eligible to serve as receiver and therefore must meet the same criteria required of a receiver. See Minn. Stat. §577.12 [3]   To determine whether a proposed assignee is eligible to serve, the Court will evaluate the proposed assignee’s qualifications and independence. See Minn. Stat. §576.26. [4] The assignor may assign assets to one or more assignees. Minn. Stat. §577.12.  For example, an assignor can assign real property to an assignee with particular experience in liquidating real estate while assigning other assets to a different assignee.

The assignee takes possession and control of the assigned assets (the “Assignment Property”); gives notice to those statutorily entitled to the same pursuant to Minn. Stat. § 576.34,   and liquidates the Assignment Property for purposes of paying the assignor’s creditors. The assignee serves the same purpose as a general receiver under Minnesota’s receivership laws, Minn. Stat. § 576. [5]

Creditors of the assignor, both secured and unsecured, may receive distributions from the liquidation process. Creditors may be required to file claims forms detailing what is owed to them and why. See Minn. Stat. §576.49 and .50. Certain creditors are stayed from pursuing certain claims against the assignor, the assignee, or the Assignment Property outside of the ABC process. See, Minn. Stat. §576.45.

The Court in which the ABC is filed has jurisdiction over the Assignment Property, the assignee, and the ABC proceedings.

THE ASSIGNMENT PROPERTY

The language of the assignment form as set forth in Minn. Stat. §577.13, [6] and the statute provides that the assignor can assign all or some of its assets to the assignee. [7] The assets so assigned are the Assignment Property pursuant to Minn. Stat. §577.11(c).  The Court then has jurisdiction over the Assignment Property, and the assignee is given control over the assets, but not the entity which owns the assets (i.e., the assignor).

INITIAL ORDER

The Assignment agreement does not contain all of the usual terms and provisions of a typical receivership order. Accordingly, best practice suggests that the assignee upon appointment, or as soon thereafter as practical, should seek a court order approving and validating the assignment and otherwise delineating the powers, duties, and process for the ABC.  This order could also include the provisions typical in a receivership appointment order (e.g., duties of and restrictions on the other parties involved in the ABC, a periodic reporting protocol for the assignee with an objection process and statement that failure to timely object is a waiver of the objection as to matters described in the report, as set forth in Minn. Stat. §576.36, lay out the claims process, including claim form exemplars, claim administration, objections to allowance of claims, extend the limited stay if appropriate, and other matters relevant to the case), as well as other provisions specific to the particular situation.

SALES OF ASSIGNMENT PROPERTY

Typically the assignee is required to sell real and personal property as part of the ABC process. If the sale of such property is in the ordinary course of the assignor’s business, the assignee can sell such property without Court authorization. Minn. Stat. § 576.29, Subd. 1(b)(4). If, however, the sale of such property is not in the ordinary course of business (such as an auction, for example), the assignee is required to obtain prior Court approval. Minn. Stat. § 576.29, Subd. 1(b)(5). Depending on the nature and value of the property, the assignee may want to seek such approval before having a buyer identified or may want to wait until it has received a purchase offer.

The assignee may sell Assignment Property [8] subject to liens or free and clear of liens, except liens for unpaid real estate taxes or assessments or liens airing under federal law. Minn. Stat. § 576.46, Subd. 1. Any owner of property or lien holder may object to a proposed sale. If the Court determines that the amount likely to be realized from the sale is less than the objecting party would realize in the absence of the sale, the Court will not permit the sale to go forward. Upon the sale of property free and clear of liens, all liens encumbering the property shall transfer and attach to the proceeds of the sale, less reasonable expenses incurred in the disposition of the property. Minn. Stat. § 576.46, Subd. 1(c). The Court may then authorize the assignee to pay secured creditors out of the sale proceeds.

The Court may not authorize the sale free and clear of a co‑owner’s interest in property. Minn. Stat. § 576.46, Subd. 2. Rather, the assignee shall have the assignor’s rights and powers afforded by state and federal law, including any rights of partition.

A secured creditor may credit bid at a sale provided that the creditor tenders cash sufficient to pay the reasonable expenses incurred in the disposition of the property and all senior liens. Minn. Stat. § 576.46, Subd. 3.

CLAIM PROCESS

Not surprisingly, the claims process is usually the most time-consuming portion of the ABC. Unlike the more formal claims process in federal bankruptcy proceedings, the ABC/receiver statute provides the assignee and the Court with a great deal of latitude with respect to the claims process. Minn. Stat. § 576.49. The assignee is to “submit to the Court a recommendation concerning a claims process appropriate to the particular” ABC proceeding. The Court is then required to establish a claims process addressing specific topics in the statute. [9]

In some ABC proceedings, it makes sense for the assignee to immediately submit a claims process recommendation to the Court. Sometimes, however, it makes more sense for the assignee to wait until the assignee has a better understanding of the value of the Assigned Property and the claims the assignee anticipates will be filed. For example, if the value of the Assigned Property is unlikely to result in a distribution to general unsecured creditors, it does not make sense to immediately recommend a claims process that requires unsecured creditors to file claims and requires the assignee to evaluate, and potentially object to, those claims. See Minn. Stat. § 576.51 (establishing a priority schedule for allowed claims to receive distributions). Rather in such a circumstance, it might make sense to require secured creditors to file claims immediately and wait to determine whether to require unsecured creditors to file claims until more is known about whether a distribution to unsecured creditors is likely.

Likewise, in some proceedings it may make sense to have creditors file claims with the Court, whereas in other proceedings it may make sense to have creditors file claims with the assignee or claims processing agent retained by the assignee, depending on: (1) the anticipated number of claims; (2) the sophistication of the creditor, will creditors have the ability to electronically file claims with the Court; and (3) whether sensitive or confidential information is likely to be included along with claim forms.

The assignee should also evaluate the information it received from the assignor to determine whether claims should be allowed without requiring the specific creditor to file a proof of claim. For example, the assignor may have kept detailed books and records that show the assignor owed specific creditors specific amounts. The assignee should determine whether it is necessary for those creditors to file a proof of claim.

Once claims have been filed, the assignee and “any party in interest” may object to specific claims. Minn. Stat. § 576.50. The objection must state the grounds for the objection and comply with any other Court imposed requirements. Generally, objections must be filed with the Court and served on certain identified parties at least 30 days before a hearing on the objection. The Court is allowed to estimate claims if fixing or liquidating such claims would unduly delay the administration of the ABC process. Minn. Stat. § 576.50, Subd. 3.

Finally, unlike the claims process in bankruptcy proceedings, the ABC claims process does not include a cap on landlord claims associated with commercial leases. In bankruptcy proceedings, a debtor can reject a lease and a landlord’s resulting bankruptcy claim is capped by 11 U.S.C. § 502(b)(6) up to the rent reserved by the lease for the greater of one year or 15%, not to exceed three years, of the remaining term. In certain circumstances, the difference between lease rejection claims under the bankruptcy code and the Minnesota ABC process may be of sufficient size that it impacts the decision of whether to file bankruptcy or an ABC proceeding.

DISTRIBUTION

The ABC/Receiver statute provides the assignee and the Court with a great deal of flexibility in  the distribution to creditors of Assignment Property. Minn. Stat. §576.53. The assignee is permitted to make interim and final distributions after filing a proposed distribution schedule. The assignee is required to give notice of filing the proposed distribution schedule on all persons on the master service list and all persons that filed proofs of claims. Provided that no objections to the proposed distribution schedule are filed within 21 days of notices, the Court may enter an order authorizing the proposed distribution. If there are objections to the proposed distribution schedule, the Court will rule on those objections and then a distribution can be made.

The assignee’s proposed distribution schedule must comport with the statutory order of priority: (1) secured claims, subject to reimbursing the assignee for the reasonable and necessary expenses of preserving, protecting or disposing of the collateral, including allowed fees and expenses of the assignee and its professionals; (2) other expenses incurred during the ABC process; (3) wages incurred within 90 days of the filing of the ABC, capped at $13,650 (see 11 U.S.C. § 507(a)(4)); (4) security deposits for the purchase, lease or rental of non‑commercial property, capped at $3,025 (see 11 U.S.C. § 507(a)(7)); (5) past due domestic support obligations; (6) unsecured claims of governmental units for taxes that accrued before the commencement of the ABC; (7) all other unsecured claims; and (8) interest on unsecured claims. Minn. Stat. § 576.51.

Notwithstanding this priority schedule, the United States government claims the right to be paid first. See 31 U.S.C. § 3713. This can include tax claims, contract claims, and even claims where the United States is recovering funds on behalf of others. Moreover, the United States claims the right to recover, personally, from any party that makes distributions to others, including paying ABC expenses (including the assignee’s fee) before paying the United States.

Since the ABC/receivership statute was re‑written in 2012, there have not been any reported decisions in Minnesota addressing the conflict between these two statutes. Assignees as well as recipients of distributions should be careful and proactive in evaluating United States government claims before making or taking any distributions. Under the correct circumstances, the United States government may chose not to demand payment first. The United States government may permit secured creditors and/or the assignee to be paid before the United States government. It may also permit certain other creditor classes to be paid.

EFFECT OF AN ABC PROCEEDING-STAYS, PREFERENCES, AND DISCHARGE

The filing of the ABC triggers two separate stays. The first stay acts as a stay against acts to obtain possession of or exercise control over Assignment Property or to create or perfect a lien against Assignment Property. Minn. Stat. § 576.42, Subd. 3. This first stay is permanent. The second stay acts as a stay of commencement or continuation of legal actions against the assignor or the receiver/assignee that were or could have been commenced before the ABC filing and commencement or continuation of a legal action to enforce a lien having priority over the assignee. Minn. Stat. §576.42, Subd. 4. This second stay expires 30 days after the filing unless extended by the Court. In order to extend the stay, the assignee or other party in interest must file a motion seeking extension of the stay within the initial 30 day period. The filing of such a motion extends the stay for an additional 30 days. In order to extend the stay, the Court must do so within 60 days of the filing of the ABC proceeding. [10]

Unlike bankruptcy proceedings, the commencement of an ABC proceeding does not give the assignee the right to recover “preference payments” ‑ payments made within 90 days of the filing to satisfy a pre‑existing debt. Depending on the circumstances, the assignor and other parties in interest will want to evaluate whether the pursuit of preference claims will benefit the process.

Significantly, an ABC proceeding does not conclude with the assignor receiving a discharge from its obligations (as a debtor can obtain by filing for bankruptcy). Rather, creditors continue to have claims against the assignor to the extent such clams are not paid through the distribution process. This may not be a particularly relevant concern for an entity filing an ABC proceeding as part of a liquidation of all its assets, but is certainly relevant for an individual or an entity that hopes to continue operating.

TERMINATION AND REMOVAL OF THE ASSIGNEE

At the conclusion of the ABC, the assignee will file a final report and seek approval of the final report and a discharge. Minn. Stat. § 576.38. The final report shall include a description of the activities of the assignee, a schedule of all Assignment Property as of the commencement of the ABC proceeding, a list of expenditures, a list of unpaid expenses incurred during the ABC proceeding, a list of all dispositions of Assignment Property, a list of all distributions, and, if not done separately, a request for payment of fees and expenses of the assignee. Minn. Stat. § 576.38, Subd. 3. The final report may incorporate the prior interim reports by reference. A discharge of the assignee excuses the assignee from further performance of any duties and discharges any lis pendens recorded by the assignee.

An assignee can also be removed if: the assignee fails to execute and file the bond required by the Court; the assignee resigns, refuses or fails to serve for any reason; or for other good cause. Minn. Stat. § 576.37. Upon removing the assignee, the Court shall determine whether a successor assignee should be appointed. A removed assignee is required to file a final report within 14 days of removal for matters up to the date of the removal.

Since the ABC statute was amended in 2012, there has been a significant increase in the number of ABC proceedings in Minnesota. In the right circumstances, ABC proceedings can be more advantageous than a bankruptcy or a lender exercising its rights under its loan documents. There are, however, limitations and disadvantages that all parties should be aware of prior to proceeding with an ABC. As a relatively new method of handling the assets of an insolvent entity, there is much uncertainty about the advantages and disadvantages of these proceedings. The authors hope that this article has helped clarify those considerations.

[1] ABC’s are governed by Minnesota Statute § 577.11‑.18 and once commenced are conducted similar to general receiverships as described in Minnesota Statute §576.21‑.53.

[2] Some of these terms are defined in Minn. Stat. §577.11, which provides as follows: (a) The definitions in this section and in section 576.21 apply throughout this chapter unless the context requires otherwise. (b) “Assignee” means the person to whom the assignment property is assigned. (c) “Assignment property” means the property assigned pursuant to the provisions of this chapter. (d) “Assignor” means the person who assigns the assignment property. (e) “Time of assignment” means the date and time endorsed by the court administrator pursuant to section 577.14

[3] See Minn. Stat. §577.12 [3] (“Every assignment for the benefit of creditors subject to this chapter made by an assignor of the whole or any part of the assignor’s property, real or personal, for the benefit of creditors, shall be: (1) to a person eligible to be a receiver under section 576.26, . . .).

[4] The Court will consider, among other things, whether the proposed assignee has: sufficient knowledge and experience; the financial ability to post the necessary bond; been previously disqualified from serving as a receiver or assignee; been convicted of a felony or other crime involving moral turpitude; and been found liable in civil court for fraud, breach of fiduciary duty, civil theft or similar conduct. In evaluating the proposed assignee’s independence, the Court will consider, among other things: the relationship the proposed assignee has to the parties and the property proposed in the ABC; whether the proposed assignee has a material financial interest in the outcome of the underlying dispute; and whether the proposed assignee is a creditor or holder of any equity interest in any of the parties to the ABC.

[5] Minn. Stat. §577.18 provides: “Except as otherwise provided in this chapter, an assignee shall be treated as a general receiver, the assignment property shall be treated as receivership property, and all proceedings following the filing of the assignment shall be governed by sections 576.21 to 576.53 .”

[6] The statute says in pertinent part:: “. . . the assignor, . . . hereby assigns to the assignee, . . . the assignor’s property, . . . which property is set forth on Schedule A attached hereto

[7] Minn. Stat. §577.12 states that the assignor can assign “the whole or any part of the assignor’s property, real or personal, for the benefit of creditors,. . .”

[8] The receivership statute provides that a receiver cannot sell agricultural land or homesteaded property unless the owner of the property has consented to the sale following the time of appointment. Minn. Stat. § 576.46, Subd. 1. Because an ABC proceeding is commenced by the assignor transferring to the assignee title to the Assignment Property, this provision should not prevent the sale of such property. That said, some title companies have been reluctant to insure title to real property being sold out of an ABC proceeding without having the assignor consent to the specific sale at issue.

[9]  The statutory requirements to be included in the claims process are: (1) whether proofs of claims must be submitted; (2) the deadline or deadlines for submitting proofs of claims; (3) where the claims are filed ‑ with the Court or the assignee; (4) whether to permit claims based on the amounts established in the books and records of the assignor without requiring the filing of formal claims; and (5) other matters bearing on the claims process.

[10] The Court is empowered to modify both stays upon the motion of a party in interest. Minn. Stat. §576.42, Subd. 5. Moreover, the stay is inapplicable to certain types of proceedings, including, criminal proceedings against the assignor, actions by a governmental unit to enforce its police or regulatory power or to establish tax liability, actions related to establishing paternity, actions to establish or modify an order for alimony, maintenance or support, setoff, acts to maintain or continue the perfection of a lien, or commencement of bankruptcy case. Minn. Stat. § 576.42, Subd. 6.

September 25, 2020

Jeffrey R. Ansel

Creditors’ Remedies, Bankruptcy & Work-Out

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Assignment for the Benefit of Creditors

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• Distressed M&A >

Our Business Restructuring, Creditors’ Rights & Bankruptcy practice group regularly advises clients in a broad range of industries nationally on issues relating to financial distress, insolvency and the exercise of associated rights and remedies. Our extensive experience and substantial knowledge of the law enables us to develop innovative business strategies and solutions for our clients’ most difficult challenges.

In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.

Client feedback lauds our practice group as “five-star” for providing “a very high level of client service” and for going “above and beyond to assist the client.” We are also known for being “proactive and attentive. Always accessible. Creative and forward with advice.”

A representative sample of our completed ABC transactions include:

Health, Life Sciences & Wellness

• Representing the assignee in the ABC for a life sciences company specializing in cancer treatment options.
• Representing the assignee in the ABC for a provider of musculoskeletal wellness and soft tissue illness treatment and prevention solutions to employers.
• Representing the assignee in the ABC for a manufacturer of radiation protective products for the health care, dental, veterinary and nuclear industries.

Technology & Software

• Representing the assignee in the ABC for a developer of three-dimensional long-range facial recognition technology.
• Representing an assignee in a motion technologies company’s ABC in the Delaware Court of Chancery.
• Representing the assignee in the ABC for a developer of technology in the cable television industry.
• Representing the assignee in the ABC for a developer of marker-less motion capture software and systems.

Manufacturing

• Representing the assignee in the ABC for a developer of energy conversion systems for wind energy and industrial markets, including advising our client on liquidation of assets and distribution to creditors.
• Representing three assignees in the ABC for the world’s largest privately held designer, manufacturer and marketer of winch systems.

Media, Entertainment & Leisure

• Representing the senior lender in the ABC for a nationwide religious bookstore.
• Representing the assignee in the ABC for a developer of interactive video games and digital content.
• Representing the assignee in the ABC for a vacation rental distributor.
• Representing the assignees in multiple ABCs involving a national trampoline park.

Consumer Products

• Representing a special purpose entity in the ABC for an online grocery provider.
• Representing the assignees in the ABCs for an online estate auction house.

Real Estate & Other Services

• Representing the assignees in the ABCs for an office leasing company with 22 U.S. locations.
• Representing a secured lender’s interest in an ABC involving a government contract-related dispute.
• Representing the assignee in the ABC for a provider of advertising material.
• Representing three assignees in the ABC for an SAS company.
• Representing the assignee in the ABC for a provider of a mobile delivery network software development kit.
• Representing the assignees in multiple ABCs for a software company based in Denver, Colorado.
• Representing the assignee in the ABC for a software company based in Missoula, Montana.

The ABC’s Of An Assignment For The Benefit Of Creditors

A flexible approach to managing debt outside of court, assignment for the benefit of creditors in washington.

Simply stated – an Assignment for the Benefit of Creditors assigns the assets and liabilities of the party making the assignment (the “Assignor”) to that party’s chosen representative (the “Assignee”).  The Assignee then administers those assets for the benefit of creditors as the holder of a power of attorney from the Assignor.

The Regional Background of Assignments for the Benefit of Creditors

Prior to the enactment of the Bankruptcy Code in 1978, the National Association of Credit Management (“NACM”) frequently administered Assignments for the Benefit of Creditors in Spokane, Washington.  

The Spokane Merchants Association was often the sponsor of these assignments, and enlisted the support of the distressed company with pressure from local trade creditors.

The NACM would prepare a written assignment to the management of the target company, with strong provisions for the operation of the company during the assignment.

The NACM would also form a committee of creditors to manage a plan for the repayment of creditors, while frequently obtaining a blanket lien against the assets of the company to render it “judgment-proof” from the claims of non-participating creditors.

Such an assignment effectively wrested control of a company away from its owners and managers, who often had few reasonable alternatives for continuing their business.

The dynamics of creditor intervention changed dramatically with the enactment of the Bankruptcy Code, and the provisions for restructuring business debt under Chapter 11 .   With the protections of the automatic stay, and for the continuation of existing management of the Chapter 11 entity as a debtor in possession, an Assignment for the Benefit of Creditors through NACM became immediately less viable as a creditor remedy.

Although the statute was essentially dead letter law, the Washington statute governing Assignments for the Benefit of Creditors remained substantially unchanged until the enactment of the Washington Receivership Act in 2004.

The Enactment of the Washington Receivership Act

RCW 7.08, which is the statute governing Assignment for the Benefit of Creditors, was restated in 2004 to coordinate Assignment for the Benefit of Creditors with the Washington Receivership Act .

The revised statute provided for the appointment of the Assignee as a receiver following the execution of the assignment.

Under the revised statute , the Assignor may appoint an Assignee for the express purpose of having that party appointed as the receiver.  

The Assignee is best selected by the assignor based on knowledge, trust, and expertise.  The Assignee must consent to the assignment.

Individuals, acting in their personal capacity, may execute an Assignment for the Benefit of Creditors to provide for the administration of their personal assets.   For example, a divorcing couple may initiate an assignment to administer their assets and liabilities as part of a property settlement agreement.  

Individuals are entitled to exempt property in accordance with applicable law, and exclude that property from the assignment.   Otherwise, the Assignor must assign all property to the Assignee.

The assignment must be substantially in the form set forth by statute at RCW 7.08.030. The assignment must attach a schedule of all known creditors, including the creditors’ mailing addresses; the amount and nature of their claims; and whether their claims are in dispute.  

The schedule must also include a true list of all property, including the estimated liquidation value and location of that property, and legal descriptions for all real property.

These schedules of assets and liabilities, while detailed, are less comprehensive than the Official Bankruptcy Forms. It is often advisable to supplement the statutory form of schedules with a schedule of executory contracts and a schedule of co-debtors, so parties will receive a more complete presentation of financial information.

There is no disclosure of operating information or past transactions that is similar to the Statement of Financial Affairs that is required in a bankruptcy case.

What Are The Business Purposes Of An Assignment For The Benefit Of Creditors?

Most Assignors execute an Assignment for the Benefit of Creditors for one of two purposes.

First, an Assignment for the Benefit of Creditors can provide a “stand-alone” procedure for liquidating assets under the independent management of the Assignee .   Unlike a bankruptcy or a receivership case, there is no legal action required to commence an Assignment for the Benefit of Creditors, and no judge will oversee the actions taken by the assignee.

Accordingly, an Assignment for the Benefit of Creditors can be employed to test the willingness of creditors to participate in a voluntary settlement of the Assignor’s liabilities. If so, the Assignor and the creditors may avoid the time and expense of a receivership or bankruptcy proceedings.

As a non-judicial procedure, an Assignment for the Benefit of Creditors is also more private and confidential than a bankruptcy or receivership case. The owners of the assets can then devote their time and energy to other endeavors, and place some distance between themselves and the financial issues of their former business.

Second, an Assignment for the Benefit of Creditors contains the consent of the Assignor to the appointment of the Assignee as a general receiver over the Assignee’s property in accordance with chapter 7.60 RCW. This provision allows the use of an Assignment for the Benefit of Creditors as a “stepping-stone” to a general receivership, without the other procedural hurdles that are set forth in the receivership statute.

Either the Assignor, the Assignee, or any creditor of the Assignor may file a petition to appoint the Assignee as receiver of the assets of the Assignor. That petition, filed with the clerk of the superior court, must include a copy of the assignment; the schedules of assets and liabilities; and a request for the court to fix the amount of the receiver’s bond.

The amount of the bond may be low, since the Assignor selected the Assignee based on faith in the trustworthiness and integrity of the Assignee.    If circumstances change, the Court can increase the amount of the bond as appropriate.

The superior court will then appoint the Assignee as general receiver of the Assignor’s property upon the filing of the petition.

The Washington Receivership Act would govern all further proceedings involving the administration of the Assignor’s property and the claims of the Assignor’s creditors.

There is no requirement to schedule a meeting of creditors.   The court would only schedule such a meeting upon the motion of two or more creditors, if filed within thirty days following the date upon which the receiver mailed notice of the receivership to all known creditors.

At the meeting of creditors, the Court will determine whether to appoint a person other than the Assignee as the general receiver.   A creditor may not vote at any meeting of creditors until the creditor has presented a proof of claim.

The filing of a motion to elect a new Assignee suspends the authority of the Assignee to sell or dispose of any property of the Assignor, except perishable property, whether or not the court has appointed the Assignee as the general receiver.

The failure of the creditors to select a new Assignee will reinstate that authority.   Otherwise, the authority vests in the replacement Assignee, who then serves as the receiver.

More often, a party files a petition to appoint the Assignee as receiver to obtain the protections of the automatic receivership stay, and access to the court for the resolution of creditor disputes.

An Assignment for the Benefit of Creditors must be for the benefit of all creditors in proportion to the amount of their respective claims.   All creditors are entitled to receive notice of the assignment.

The Assignment for the Benefit of Creditors irrevocably appoints the Assignee as the Assignor’s attorney in fact, with full power and authority to do all things that may be necessary to fulfill the assignment.  

The Assignee can perform the same acts that the Assignor could do , including but not limited to the power to sue; the power to execute all necessary deeds, instruments, and conveyances, and the power to convey any or all of the real or personal property of the estate.

The Assignee must take possession of the assets, liquidate the assets, and collect all claims.   The Assignee must pay and discharge all reasonable expenses, costs, and disbursements in connection with administration of the assignment.

To the extent that funds are available after payment of administrative expenses, the assignee must   pay all of the Assignor’s debts and liabilities, according to their priority as established by law, on a pro rata basis within each class.  

Unlike a bankruptcy or receivership, there is no provision for the assignee to exercise the rights of a hypothetical lien creditor to file suit for the recovery of fraudulent transfers, or for the recovery of preferential payments to creditors.

Although the Assignment for the Benefit of Creditors statute does not set forth the priority of creditors’ claims, the priorities established in the Washington Receivership Act should be applicable in an Assignment for the Benefit of Creditors .  

These priorities do not elevate the claims of the federal government above the claims of state tax agencies. Nevertheless, the Internal Revenue Service may assert a first priority claim for payment under 31 U.S.C. 3713(a)(1) , which provides that a claim of the United State Government shall be paid first when a person indebted to the government is insolvent, and that person makes a voluntary assignment of property.

The Assignee must return any assets that remain after the payment of all debts and liabilities to the Assignor.

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Assignments For The Benefit Of Creditors

What Is Assignment For The Benefit Of Creditors

An assignment for the benefit of creditors is a state court-administered proceeding somewhat similar to a Chapter 7 bankruptcy proceeding whereby an individual, a partnership, or a corporation in financial difficulty is able to liquidate its assets in an orderly manner and pay its creditors a pro-rata share of their individual claims. However there are significant differences between an assignment for the benefit of creditors, a state court receivership or a bankruptcy proceeding, that must be taken into account when an attorney is advising a client in financial distress. These differences will be highlighted in this presentation.

An Assignment is voluntary and is commenced by the “assignor” executing a formal “Deed of Assignment” in favor of an “assignee”. In substance it is similar to a deed of real estate and must be recorded in the county clerk’s office of the county of the assignor or the clerk of the Superior Court. The contents of the Deed of Assignment should confirm to N.J.S.A. 2A:19-4, and contain an inventory of assets. (See 44 New Jersey Practice Series Form 3.111) The deed effectively transfers all the assets of the assignor to the assignee who is empowered to liquidate the assets after receiving court approval, for the best prices available, at auction, or otherwise, in the assignee’s discretion, all, however for the benefit of the creditors of the assignor who will receive their pro-rata dividend depending on the amount of their claim, after payment of administration expenses.

History of Assignment for the Benefit of Creditors.

Assignments have an interesting history. They originated in the Middle Ages and were utilized by merchants who belonged to Guilds. When a merchant found himself in financial trouble he would voluntarily turn over all his assets to a member of the Guild who would make arrangements for sale and disposition of the property and pay the debtor’s creditors a fair share of the proceeds. The concept then was that members of Guild were the most knowledgeable people in the industry and could produce the most at a sale. For example, if the debtor was a jeweler, a furrier, or a cabinet maker, the Guild members who knew the market for the products would be able to get the best prices. The assignee would be a member of the Guild and the members would have confidence in that person to fairly and effectively liquidate the debtor’s assets.

The concept of a voluntary assignment was retained through the ages and ultimately was codified by statute. In New Jersey assignments are governed by N.J.S.A. 2A:19-1 et seq. The interesting thing about the codification of the common law is that the law retained the provision that the assignor can select his own assignee. In a state court receivership or a bankruptcy preceding the person designed to liquidate the assets is a “Receiver” or “Trustee”, and in each of these cases the debtor has no say in who is to be designated to liquidate the assets. The court makes the decision. This is an important concept to take into account when an attorney is considering what avenue to recommend when advising his/her client who is in financial difficulty.

Some General Observations

An assignment is rarely appropriate for an individual because, unlike a bankruptcy proceeding, the assignor does not receive a discharge. Accordingly, unless the attorney for the debtor was able to negotiate a release of the creditor’s claims in advance, and an agreement to the assignment, this avenue would not be appropriate. However, it should be mentioned that since Assignments generally proceed much quicker, more efficiently, and often produce better results and a higher dividend for creditors, in a given case, especially where the debtor has had a good relationship with his creditors the attorney should consider seeking the approval of the creditor body for the assignment and obtain agreement in writing from each of the creditors to accept the dividend in full satisfaction of their claim. When the attorney for the debtor decides to take the assignment route he should select an attorney as assignee who is familiar with liquidation proceedings, knows how to protect the assets pending their disposition by sale or otherwise, and knows experienced appraisers and  auctioneers who are familiar with the markets, who will properly appraise the assets and advertise the assets in a manner designed to command the best prices.

Assignee’s Powers and Duties & Administration of the Estate

Execution of the deed vests in the assignee legal title to all the assignor’s real and personal property, including property located outside of New Jersey. In effect, the assignee stands in the shoes of the assignor and has the right to commence actions on behalf of the estate, settle claims and take any other action relative to the handling of the assets that the assignor could have done had he/she not make the assignment. The assignee will immediately inspect the premises of the debtor, obtain insurance if necessary to protected the assets, change locks at the debtor’s place of business, deal with the utilities, the landlord, arrange with the postmaster for forwarding mail to the assignee, and in general do all that is necessary to protect the assets, just as the assignor would have done. All these steps are taken on an emergent basis, another reason why the debtor’s attorney should select an experienced attorney knowledgeable about the process of dealing with insolvent estates, someone who deals with locksmiths, landlords, impatient creditors, taxing authorities, lien holders, all clamoring for payment of their overdue bills. When necessary the assignee will seek court approval for retention of experts, such as accountants, appraisers, and auctioneers, and any other experts the assignee deems necessary for the proper administration of the estate.

The assignee will give proper notice to the creditors of the estate and advise them that their claims must be filed by a certain date or be barred from participation in any dividend.

The assignee with meet with the assignor for the purpose of familiarizing himself with the nature of the business, determining what causes of action should be investigated, as well as the validity of claims filed by creditors .

In unusual circumstances it might be advisable to continue the assignee’s business for a limited period of time either to wind down certain operations, collect receivables , or some other valid reason. The assignee must receive formal approval from the court in order to take this step.

After taking possession of the debtor’s property and making a determination of the extent of the assets of the debtor’s estate, the assignee, before disposing of the debtor’s property by private or public sale, must immediately conduct proper searches to learn whether there are any valid liens on the property. This search includes a title search if real estate is involved, a Uniform Commercial Code search to see if there are any encumbrances on inventory or accounts receivable. Tax searches and a judgment search must be made to see if there are any private or governmental  liens on the debtor’s property. Having conducted all the proper searches the assignee should promptly proceed to liquidate the assignor’s property and convert it to cash, terminate any leases and surrender the property to the landlord.

It is common to liquidate the assets of the estate at a public auction, and the assignee will take steps to select an appraiser, and auctioneer that he is familiar with, and advertise the date of the public sale of assets and give notice to the creditors. On occasion a private sale might be appropriate, but in this instance court approval should be obtained and notice should be given to creditors. These are all steps which are, subject to court sanction, within the powers of the assignee.

Other powers of the assignee are recovery of fraudulent transfers and preferential transfers. There are significant differences in the time periods involved here that are different from the bankruptcy statutes and must be taken into account by the assignor’s attorney when deciding if an assignment is appropriate for the client. For example, the preference period under the assignment statute is 120 days, one month longer than that provided for in the Bankruptcy Code. Another important difference between an Assignment and a Bankruptcy proceeding is the limit of the recovery of former employees for unpaid wage, benefit, or vacation time. Under the Bankruptcy Code an employee may recover up to $11,725.00 for any unpaid wage claim; the limit under the Assignment Act is $400.00 These two factors alone might be important consideration in deciding which proceeding to employ.

Assignee’s Final Account and Procedure

Once all assets have been liquidated, all claims examined and approved, the assignee makes a final accounting with the court, on notice to creditors and the procedure is not essentially different from that in a state court receivership or a bankrupcty court, except the forms and the time periods are different. If the court approves the accounts, formal papers are filed to complete the case and creditors are given their dividends. The Surrogate of the county examines and approves the final accounting of the assignee. The judge assigned to the case awards fees to the assignee from the proceeds of the sale of assets. After payment of dividends to the creditors this concludes the case.

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