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Assignment for the Benefit of Creditors - Defenses to Preference Suit By an Assignee

At one time or another, many of our commercial litigation clients have been sued by an “assignee for the benefit of creditors.” When our clients receive a summons and complaint notifying them they are being sued by an assignee, it may be unclear to them why they are being sued. The answer is often that our client’s former customer has made an "assignment for the benefit of creditors." The former customer has authorized a person or entity, often an attorney, to collect and liquidate the customer’s assets and sue our client in an attempt to obtain payments that the former customer previously made to our client. In other words, having been paid for goods sold or services performed, our client now faces the possibility of having its money earned taken away. This post aims to explain why this is a possibility and the potential defenses to such an action.

What Is An Assignment for the Benefit of Creditors?

In layman’s terms, an “assignment for the benefit of creditors” is when a company, usually suffering from financial difficulties, can sell off its assets to pay its creditors. It functions much like a bankruptcy proceeding, except it is based upon state law. In New Jersey, assignment for the benefit of creditors proceeding are governed by the Assignment for Benefit of Creditors Statute (the statute), N.J.S.A. 2A:19-1 to 50. The statute's purpose is to treat all creditors equally and avoid disproportionately favoring any single creditor. N.J.S.A. 2A:19-2.

What is an Assignee?

An “assignee” is an independent third party to whom the business distributing its assets, known as the “assignor”, conveys or assigns, all of its assets in trust.

What can an Assignee Do?

The assignee is empowered with two roles. Subject to certain exceptions, the assignee has the power to dispose of all of the property that the assignor owned at the time of the assignment. The assignment is the document that establishes the transfer of property from assignor to assignee. Pursuant to N.J.S.A. 2A:19-13, the assignee

[M]ay sue for and recover in his own name everything belonging or appertaining to the estate. He may compromise, settle and compound all claims, disputes and litigations of the assignor, refer the same to arbitration, agree with any person concerning the same, redeem all mortgages and conditional contracts, and generally act as and do whatsoever the assignor might have lawfully done in the premises.

In short the assignee may do anything with the property of the assignor that the assignor could do. The second role of the assignee is to represent all of the assignor’s creditors.

How Can the Assignee Take Money Away From My Business?

The answer to this question lies in the second role of the assignee. Because the assignee is obligated to represent all of the assignor’s debtors equally, the assignee has a limited right to recover payments made by the assignor to third parties within 4 months of the general assignment. N.J.S.A. 2A:19-3. In short, if your former customer is the assignor, and your former customer paid you, then made a general assignment less than 4 months later, the assignee can sue you in an attempt to force you to return the money. The reasoning behind this is that in making the original payment to you prior to making the assignment, the assignor has given you preferential treatment in comparison to the other creditors. This type of payment is known as a “preference.”

How Can I Stop the Assignee from Claiming Taking My Money As a Preference?

Whether or not you can stop an assignee from taking your money boils down to the whether you received the money as a preference. The statute governing assignment for the benefit of creditors is vague and there is a limited amount of case law interpreting the statute. There is no definition of “preference” in the assignment for the benefit of creditors statute. One must look elsewhere for answers to this question.

The New Jersey statutory scheme governing corporations does define “preference.” In addition, New Jersey’s Rules of Court provide that "The practice relating to assignments for the benefit of creditors under N.J.S.A. 2A: 19-1 et seq. shall conform as nearly as practicable to the procedure relating to insolvent corporations." Thus, the definition of “preference” in the statute governing corporations is a good place to look. There, a preference is deemed to arise when:

(a) a corporation which, while insolvent, and within four months of the commencement of a receivership action by or against it, transfers any property to or for the benefit of a creditor for or on account of an antecedent debt; and

(b) the effect of such transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class; and

(c) the creditor receiving or to be benefited by the transfer, or his agent acting with reference thereto, has, at the time when the transfer is made, reasonable cause to believe that the corporation is insolvent.

N.J.S.A. 14A:14-14(1). Payments made to satisfy pre-existing debts within 4 months of an assignment would constitute preferences under this definition if the effect is to prefer the recipient of the payment to other creditors and the creditor has reasonable cause to believe the debtor is insolvent. By contrast, payments not meeting this description would not be recoverable by an assignee. This suggests that bankruptcy defenses to a preference, like a contemporaneous exchange for new value, where payment is made to the creditor not to satisfy a pre-existing debt, but to pay for newly delivered goods or services, are also valid defenses against an assignee.

Is It Worth Fighting An Assignee Trying to Recover a Preference From Me?

When the payment at issue is obviously a preference, it is likely not possible to stop the assignee from taking money that was made as part of a preferential transfer. In such situations, a careful analysis should be made as to whether or not it is more cost effective to fight a lawsuit filed by the assignee or agree to a settlement. However, where a payment is not clearly a preference, you may be able to stop the assignee from taking your money and there may be good reason to fight the assignee’s lawsuit.

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NEW JERSEY ASSIGNMENT FOR THE BENEFIT OF CREDITORS

Our bankruptcy attorneys can represent your business in an assignment for the benefit of creditors., business bankruptcy attorneys, filing business bankruptcy in north jersey, a new jersey assignment for the benefit of creditors (an “abc” or “assignment”) is a liquidation under statute. unlike a chapter 11 bankruptcy, an assignment for the benefit of creditors is not a reorganization process, and the business does not emerge from insolvency. rather, the subject business is liquidated through this state court process., how does an assignment for the benefit of creditors work in nj, assignments for the benefit of creditors have become increasingly well known. many insolvency professionals prefer liquidation of businesses through assignment for the benefit of creditors in lieu of liquidation through a chapter 7 bankruptcy . while individuals (people) can technically use assignment for the benefit of creditors for an individual liquidation, the vast majority of assignments for the benefit of creditors are commenced on behalf of corporate debtors.  , how is an assignment for the benefit of creditors started.

An assignment for the benefit of creditors is commenced by the execution of a Deed of Assignment by the liquidating company, referred to as the “assignor.” This deed is executed on behalf of the assignor with the express consent and authority to take that action, whether that’s a sole member of a limited liability company, several principals of a corporate, a board of directors and/or shareholders.

In either instance, the company’s governing documents must be reviewed, and corporate counsel, if any, must be consulted to ensure that a decision to make an assignment is done with proper corporate authority. In the instance of publicly traded companies, an assignment for the benefit of creditors can be utilized, but the potentially lengthy process of obtaining corporate approval from shareholders must be taken into consideration in advance.

Once corporate authority has been obtained, a Deed of Assignment is executed by a corporate officer. This Deed effectively transfers all of the rights, title and interests of the assignee to an independent, third-party fiduciary referred to as the “assignee.”

What Are The Duties Of An Assignee?

The assignee in an assignment for the benefit of creditors is analogous to a trustee in a Chapter 7 bankruptcy. If the assignee appointed by the assignor accepts the Deed of Assignment, the assignee has the duty to collect and account for all of the assignor’s assets, sell those assets, and to distribute the net proceeds for the benefit of the business’ creditors.

The assignee must ensure that the assignor has attached to the Deed of Assignment a list of assets and a list of creditors. The assignee then records the Deed of Assignment in the way real estate deeds are recorded. The assignee must also obtain a bond.

How Are Assets Sold In An Assignment For The Benefit Of Creditors?

Many assignments for the benefit of creditors involve the sale of the debtor company’s assets by the assignee. One significant benefit of an assignment for the benefit of creditors is that asset sales are generally faster than in Chapter 7 bankruptcy or Chapter 11 bankruptcy.

How Are Assets Distributed Among The Creditors?

If the assignee has collected funds for distribution to creditors, the assignee must distribute those funds to creditors which have filed timely claims in the assignment proceeding. Creditors receive distributions from the assignee pursuant to a priority schedule under applicable state law, including but not limited to a statute establishing the priority of one creditor over another.

Get in Touch With Our Experienced Attorneys

Attorney Melinda D. Middlebrooks &  Attorney Joseph M. Shapiro  have over 30 years of extensive bankruptcy experience. We handle cases from basic to the most complex. We offer a free, no-obligation consultation. From our office in Springfield, we work with clients throughout Union County and beyond by leading them through the legal process of numerous practice areas.

Call  973-218-6877  to speak with the experienced bankruptcy attorneys of Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.

At Middlebrooks Shapiro , our attorneys have over 30 years of bankruptcy law experience. From our office in Springfield, NJ, we help clients with the most basic or complex personal  and  business bankruptcy  cases by leading them through the legal process of numerous  practice areas .

Call  973-218-6877 to speak with the experienced bankruptcy attorneys at Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the right guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.

Parsippany: (973) 538-4700

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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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IN THE MATTER OF THE GENERAL ASSIGNMENT FOR THE BENEFIT OF CREDITORS OF VILLAGE SUNDRIES & TOBACCO, INC.

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R.1:36-3.

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0

IN THE MATTER OF THE

GENERAL ASSIGNMENT FOR

THE BENEFIT OF CREDITORS

OF VILLAGE SUNDRIES &

TOBACCO, INC., d/b/a

VILLAGE DISTRIBUTORS, TO

BARRY W. FROST.

___________________________________

April 21, 2017

Submitted October 25, 2016 Decided

Before Judges Reisner and Rothstadt.

On appeal from Superior Court of New Jersey, Chancery Division, Ocean County, Docket No. 191663.

Ronald Horowitz, attorney for appellants Direct Coast to Coast, LLC and Selective Transportation Corporation.

Trenk, DiPasquale, Della Fera & Sodono, P.C., attorneys for respondent Village Sundries & Tobacco, Inc. (Anthony Sodono, III, of counsel; Michele M. Dudas, on the brief).

Brian W. Hofmeister, attorney for respondent Barry W. Frost.

Appellants, Direct Coast to Coast, LLC (Direct), and Selective Transportation, Corp. (Selective), are creditors of Village Sundries and Tobacco, Inc. (Village), the debtor in this assignment for the benefit of creditors (ABC) action.1 They appeal from the Chancery Division's March 18, 2015 order allowing commissions to Village's assignee, Barry W. Frost, and attorney's fees to special counsel, Trenk, DiPasquale, Della Fera & Sodono, P.C. (Trenk). The court previously authorized Frost to retain Trenk for the purpose of pursuing counterclaims in litigation that had been filed against Village. Appellants argue the award of a full commission to Frost was unconscionable "considering that the [a]ssignee did very little, if anything, in this matter" and that Frost "did not present any evidence whatsoever of work he performed for the estate." As to the court's fee award to Trenk, they argue the application was procedurally defective, as "not a single factor enumerated by R.P.C. 1.5 [was] addressed . . . by [Trenk's] [a]ffidavit of [s]ervices." According to appellants, the defects should have resulted in the denial of the application. Finally, they contend that their counsel was entitled to a fee award. We disagree and affirm.

The history leading to this dispute can be summarized as follows. Trenk, as counsel to Village, initiated the ABC on May 31, 2011, establishing Barry W. Frost as assignee.2 At the time of the assignment, Trenk had been representing Village in a federal district court matter that was pending in the Southern District of New York in which Village was named as a defendant (New York action).3 The Chancery judge in the ABC action entered an order on April 27, 2012, authorizing Frost to retain Trenk as "special counsel . . . for the purpose of representing the [a]ssignee in pursuing counterclaims against [plaintiff] in [the New York action]." On January 7, 2013, the district court entered a judgment against Village in favor of the plaintiff in the New York action in the amount of $558, 179.98 and administratively closed the matter due to the remaining defendants having sought relief in bankruptcy.4

Frost filed an application in this action on December 1, 2014, seeking approval of his final accounting, allowing payment of his commissions, approval of fees and costs for payment of professional administrative claims, and final approval of the proposed distribution of Village's estate. Appellants filed objections to the assignee being awarded the maximum commission allowed under N.J.S.A. 2A:19-43 and to Trenk being awarded the amount of fees contained in its application. They asserted "the total [attorney's] fees [and] the total commission should be deemed as unconscionable if not outrageous." Appellants claimed that the amount collected by the assignee on the accounts receivable did not warrant an award of a full commission or counsel fees. Appellants also challenged the reasonableness of the $400 per hour rate charged by Trenk.

The Chancery judge considered oral argument on January 28, 2015, and requested additional submissions from counsel. The additional materials submitted by Frost included copies of Trenk's detailed billing records, denoting the exact services rendered and time expended. In addition a certification of counsel was submitted that included a curriculum vitae (CV) for the attorney handling the matter. The CV described counsel's experience in the field of debtor/creditor's rights and related matters.

On March 18, 2015, the Chancery judge rejected appellants contentions for the reasons stated in an oral decision placed on the record that day.5 The judge entered an order awarding Frost the full statutory commission of twenty percent, totaling $32,098.11. He awarded Trenk $12,811.87 in fees and $19.20 in costs.

In his decision, the Chancery judge stated he found it inappropriate to entertain appellants' argument, which he considered a "blanket objection" that lacked reference to specific case law and supporting certifications. The judge also found that due to the poor condition of Village's financial records, counsel was required to expend more time than would otherwise be necessary to pursue Village's claims, especially when the time expended was compared to the amounts recovered. He stated

[O]n the issue as to the success ultimately achieved versus the percentage of fees -- professional fees and commission[] cost[s] sought, the Court notes that due diligence and a fair, reasonable and appropriate period of service for the assignment of the benefit of creditors was necessary.

No one objected to the characterization, representation made on the record . . . on numerous occasions . . . that [Village] did not maintain accurate or even what one might characterize as good, appropriate records. Rather, they were sloppy, they were difficult to ascertain and sort through. . . .

And the fact of the matter is, as is often the case in sometimes modest estate litigation, the hours spent and the fair, reasonable entitlement to fees, costs, [and] commissions do not necessarily equate automatically with the amount recovered. The services were fair[,] reasonable[,] and appropriate, commensurate with the fact of [Village] not keeping records.

Turning to appellants' objection to Trenk's $400 per hour rate, the judge found the rate sought was reasonable and commensurate with those charged by "probate attorneys" throughout the State of New Jersey. He noted the extensive experience of counsel in probate matters and observed that, even if he were to adjust the hourly fee downward to $300, the reduction in overall fees would be offset by new fees incurred in generating the updated accounting. He also confirmed that the court carefully reviewed counsel's submissions to make sure they were accurate in their calculation of their fee, stating that they had "been double [-]checked." The judge concluded counsel took fair, reasonable steps to recover accounts receivable; and, accordingly, "counsel's entitled to compensation for those efforts, for those legal services rendered, as well as for hiring of [Trenk] . . . and the cost disbursements rendered on behalf of the client."

This appeal followed.

"[T]he allowance of assignee's commissions and attorney's fees ordinarily rests within [the trial judge's] sound discretion and should be upset only if the exercise thereof is manifestly erroneous." In re Assignment for Benefit of Creditors of Munson-Lied Co., 68 N.J. Super.281, 289 (App. Div. 1961). We will disturb a trial court's allowance of commissions and award of counsel fees "only on the rarest of occasions[.]" Litton Indus., Inc. v. IMO Indus., Inc., 200 N.J. 372, 386 (2009) (quoting Packard-Bamberger & Co., Inc. v. Collier, N.J. 427, 444 (2001)).

Applying this standard, we conclude the Chancery judge did not abuse his discretion in awarding Frost the full statutory commission or Trenk the full amount of the counsel fees and costs it applied for as special counsel. We affirm substantially for the reasons expressed by the Chancery judge. We add only the following comments.

An ABC proceeding "is a state court-administered liquidation proceeding similar to a Chapter 7 bankruptcy proceeding whereby an individual, partnership, or corporation in financial distress can liquidate its assets in an orderly fashion to equitably pay its creditors." 44 New Jersey Practice, Debtor-Creditor Law and Practice 3.1, at 109 (Michael D. Sirota & Michael S. Meisel) (2000) (citing Gilroy v. Somerville Woolen Mills, 67 N.J. Eq. 479 (Ch. 1904)). ABC proceedings in New Jersey are governed by N.J.S.A.2A:19-1 to -50. The statute's purpose is to treat all creditors equally and avoid any disproportionate payments to a favored creditor. N.J.S.A.2A:19-2.

In an ABC proceeding, "an individual, partnership or corporation, known as the 'assignor,' voluntarily assign[s] by transfer or conveyance all of its assets in trust to an independent third party, known as the 'assignee.'" New Jersey Practice, supra, 3.1. at 110. The assignee acts in a "dual capacity" pursuant to powers set forth in N.J.S.A.2A:19-13 and N.J.S.A.2A:19-14. The assignee "'stands in the shoes' of the assignor with general powers to act in his stead as his 'successor,'" In re Gen. Assignment for Benefit of Creditors of Brill's Hardware Co., 67 N.J. Super.289, 292 (Cty. Ct. 1961) (citations omitted), and has "full power and authority to dispose of all of the assignor's property . . . as the assignor had at the time of the general assignment." N.J.S.A.2A:19-13. The assignee also "represent[s] the assignor's entire creditor constituency." New Jersey Practice, supra, 3.31 supra, at 118. In that capacity, the assignee has "the same power to set aside conveyances and to recover or reach assets for the benefit of the creditors as a creditor would have who was the holder of a judgment and levy against the assignor and his property at the date of the assignment." N.J.S.A. 2A:19-14.

Compensation for an assignee is left to the court's discretion, but may not exceed "[twenty percent] on all sums received by the said assignee." N.J.S.A.2A:19-43. In determining the amount, "the court should look to the nature of the [assignor's] business and its attendant problems." In re Francilli Carriers, Inc., 77 N.J. Super.522, 526 (Ch. Div. 1962). "[T]he [twenty] percent limitation . . . is confined to sums awarded directly to the assignee and does not include items of expense paid out of the estate for which court approval is sought, that is, attorney fees, auctioneer fees and the like. Id.at 526. See alsoIn re General Assignment for Benefit of Creditors of Shay, 75 N.J. Super. 421, 439-40 (App. Div. 1962).

An assignee's engagement of an attorney to provide professional services "can only be accomplished by motion and affidavit seeking a court order . . . ." In re Xaviers, Inc., 66 N.J. Super. 561, 567 (App. Div. 1961). Court approval of the retention is a condition to any award of counsel fees for services performed on behalf of the assignee. See Francilli, supra, 77 N.J. Super. at 526. Applications for an award of counsel fees from the assignor's estate must be supported by a certification of services containing the information required by Rule 4:42-9(b), including "the factors enumerated by [R.P.C. 1.5(a)]." R. 4:42-9(b)(emphasis added). However, "an award of counsel fees may be affirmed even if the affidavit of services is deficient." Elizabeth Bd. of Educ. v. N.J. Transit Corp., 342 N.J. Super. 262, 272-73 (App. Div. 2001).

Applying these guiding principles, we discern no reason to vacate the Chancery judge's award of the commission or counsel fees. Turning first to Frost's commission, the judge properly considered the nature of Village's business, the involvement of approximately thirty creditors, and the problems arising from Village's poor maintenance of its business records. Contrary to appellants assertions, the fact that the amounts recovered by the assignee were not substantial in relation to the creditors' claims and that there were no billing records associated with the assignees efforts, the assignee was still entitled to a commission up to the statutory cap.

We are not persuaded otherwise by appellants' reliance on Munson-Lied. In that case, unlike the present matter, in addition to the statutory commission, the assignee received an award for attorneys fees for legal services he performed. Munson-Lied, supra, 68 N.J. Super.at 578. Here, the assignee was awarded his twenty percent commission separate and distinct from the fees awarded to Trenk or to other firms that acted as counsel to the assignee. There was no evidence that the assignee received a double award.

As to the award of counsel fees to Trenk, although the information required by Rule4:42-9(b) was not expressly included in counsel's certification of services,6the Chancery judge had adequate information available to him to assess many if not all the factors in order to reach his conclusion about Trenk's entitlement to the fees claimed. Specifically, the judge noted the time, labor and difficulty of the questions involved, the results obtained, the length of relationship with the client, the fee customarily charged in the locality, and the experience, reputation, and ability of the lawyer or lawyers performing the services. See R.P.C. 1.5(a)(1),(3),(4),(5),(6), and (7). Accordingly, while Trenk's application was procedurally deficient, the judge was able to make findings based upon billing statements, representations made by counsel, and the resumes of the attorney's seeking fees that address the necessary factors. Moreover, in making his award, the judge limited it to those fees incurred for services "which benefited [the] creditors." Francilli, supra, 77 N.J. Super. at 529 (allowing fees "to the attorney for the assignor for his services performed in the successful effectuation of the assignment in question").7

Finally, appellants aver that if Trenk is entitled to a fee award, then they too should be compensated for paying legal fees to their attorneys whose work benefited all the creditors. While we agree that a creditor's attorney may be entitled to fees where the attorney renders "valuable services . . . for the benefit of all the creditors," In re Gen. Assignment, supra, 75 N.J. Super.at 424-25 (finding "attorney's objections to the commissions, counsel fees and disbursements operated materially to the benefit of the estate and the ultimate benefit of the creditors generally . . . entitl[ing attorney] to the reasonable counsel fee awarded to him by the trial court"), we find no evidence that such an application was made to the Chancery judge or that such services were in fact provided by appellants' counsel in this case. Without the issue being properly raised before the Chancery judge, we have no cause to determine the issue. SeeNieder v. Royal Indem. Ins. Co., 62 N.J.229, 234 (1973).

1 Appellants, who had filed a complaint in March 2011 to recover monies owed by Village, were among approximately thirty creditors who filed claims in this action. The allowed claims totaled in excess of approximately three million dollars.

2 On July 7, 2011, the Chancery Division entered an order authorizing the assignee to retain the law firm of Teich Groh as attorneys for Frost, as assignee. Frost was a partner at Teich Groh until the firm ceased operating on December 31, 2013. A second firm assumed the role of counsel to the assignee.

3 The action was captioned Strategic Funding Source, Inc. v. Petegorsky, Docket No. 11 Civ. 7376.

4 It is not clear from the record whether this dismissal was the result of Trenk's efforts.

5 Appellants did not provide us with a transcript of that argument. We glean from the judge's decision the nature of the arguments raised by the parties.

6 Trenk argues that its fee application was not subject to the requirements of Rule 4:42-9(b) because it was seeking fees payable from a fund in court under Rule 4:42-9(a). We disagree. Rule 4:42-9(b) is applicable to all fee applications where the court is called upon to make a determination of the amount based on reasonableness.

7 We discern from the record that some of the fees associated with Trenk's pursuit of the counterclaim in the New York action were for services performed prior to the entry of the order appointing it as special counsel. However, we conclude that the Chancery judge did not abuse his discretion by awarding those fees because they were incurred for the purpose approved by the court.

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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.

Get Information on Assignments For The Benefit Of Creditors;  call Michael McLaughlin, LLC, for  an initial consultation  at  (908) 373-8500 and get the legal answers you seek.

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Assignment for the Benefit of the Creditors? One Creditor's Experience With an Archaic State Insolvency Process

Day Pitney Litigation Senior Associate Michael J. Fitzpatrick and Partner Mark Salah Morgan authored an article titled, "Assignment for the Benefit of the Creditors? One Creditor's Experience With an Archaic State Insolvency Process," for the New Jersey Law Journal . The article is an interview with Neil Glasser, Chief Financial Officer for MJH Life Sciences, which is one of the largest privately held healthcare communications companies in the U.S., regarding his experience with an Assignment for the Benefit of Creditors (ABC) and his perspective on the law.

Read the full article here .

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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.  

[ View source .]

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ABC: Preference Litigation vs. Bankruptcy Preference Litigation

While the process for an assignment for the benefit of creditors (commonly referred to as "ABC") and a business bankruptcy are similar, corporate bankruptcy lawyers are quick to point out that there are some fundamental differences.

One of the areas where bankruptcy and an ABC are different are the rules governing the recovery of preference payments. In an assignment for the benefit of creditors in New Jersey, the preference period is four months prior to when the deed of assignment was executed. However, in a bankruptcy the preference period is 90 days prior to when the bankruptcy petition is filed. In preference litigation within an assignment for the benefit of creditors, the assignee must prove that there was intent to prefer the creditor over other creditors, but in a bankruptcy proof of intent to prefer a creditor is not necessary in preference litigation.

One of the advantages in bankruptcy for creditors is that they have statutory defenses at their disposal. However, in an assignment for the benefit of creditors there are no statutory defenses to preference litigation.

Contact a Corporate Bankruptcy Lawyer

If you are operating an insolvent business or are involved in insolvency litigation, contact a corporate bankruptcy lawyer so you can be guided accordingly as to what your options are and what option is best for you. The insolvency process can be difficult to navigate, so it is important that you have someone representing you who is familiar with the process to make sure everything goes smoothly.

David E. Sklar

Prior to joining Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, David Sklar graduated from Rutgers University-Newark School of Law with a J.D., Cum Laude. Mr. Sklar was the recipient of a Pro Bono Award and was honored by the New Jersey Bar Association for his commitment to the Street Law Program by being awarded the Street Law Prize.

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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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