assignment for the benefit of creditors texas

Assignments for the Benefit of Creditors: Texas | Practical Law

Assignments for the Benefit of Creditors: Texas

Practical law state q&a w-035-5772  (approx. 26 pages).

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2022 Texas Statutes Business and Commerce Code Title 3 - Insolvency, Fraudulent Transfers, and Fraud Chapter 23 - Assignments for the Benefit of Creditors

• Subchapter A. General Provisions
• Subchapter B. The Assignment
• Subchapter C. Duties and Rights of Assignee
• Subchapter D. Duties and Rights of Creditors

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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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Texas Business and Commerce Code Chapter 23 – Assignments for the Benefit of Creditors

Terms used in texas business and commerce code chapter 23 - assignments for the benefit of creditors.

• Judgement that a criminal defendant has not been proved guilty beyond a reasonable doubt.
• A verdict of "not guilty."
• Advice and consent : Under the Constitution, presidential nominations for executive and judicial posts take effect only when confirmed by the Senate, and international treaties become effective only when the Senate approves them by a two-thirds vote.
• Affiliate : means a person who controls, is controlled by, or is under common control with another person. See Texas Business Organizations Code 1.002
• Amendment : A proposal to alter the text of a pending bill or other measure by striking out some of it, by inserting new language, or both. Before an amendment becomes part of the measure, thelegislature must agree to it.
• Appraisal : A determination of property value.
• Appropriation : The provision of funds, through an annual appropriations act or a permanent law, for federal agencies to make payments out of the Treasury for specified purposes. The formal federal spending process consists of two sequential steps: authorization
• Associate : when used to indicate a relationship with a person, means: (A) a domestic or foreign entity or organization for which the person: (i) is an officer or governing person; or (ii) beneficially owns, directly or indirectly, either individually or through an affiliate, 10 percent or more of a class of voting ownership interests or similar securities of the entity or organization; (B) a trust or estate in which the person has a substantial beneficial interest or for which the person serves as trustee or in a similar fiduciary capacity; (C) the person's spouse or a relative of the person related by consanguinity or affinity who resides with the person; or (D) a governing person or an affiliate or officer of the person. See Texas Business Organizations Code 1.002
• Association : means an entity governed as an association under Title 6 or 7. See Texas Business Organizations Code 1.002
• Assumed name : means a name adopted for use by a person. See Texas Business Organizations Code 1.002
• Bail : Security given for the release of a criminal defendant or witness from legal custody (usually in the form of money) to secure his/her appearance on the day and time appointed.
• Bailiff : a court officer who enforces the rules of behavior in courtrooms.
• Bankruptcy : Refers to statutes and judicial proceedings involving persons or businesses that cannot pay their debts and seek the assistance of the court in getting a fresh start. Under the protection of the bankruptcy court, debtors may discharge their debts, perhaps by paying a portion of each debt. Bankruptcy judges preside over these proceedings.
• Bequest : Property gifted by will.
• Business : means a trade, occupation, profession, or other commercial activity. See Texas Business Organizations Code 1.002
• Capital offense : A crime punishable by death.
• Case law : The law as laid down in cases that have been decided in the decisions of the courts.
• Certificate of formation : means : (A) the document required to be filed with the filing officer under Chapter 3 to form a filing entity; and (B) if appropriate, a restated certificate of formation and all amendments of an original or restated certificate of formation. See Texas Business Organizations Code 1.002
• Certificated ownership interest : means an ownership interest of a domestic entity represented by a certificate issued in bearer or registered form. See Texas Business Organizations Code 1.002
• Charge to the jury : The judge's instructions to the jury concerning the law that applies to the facts of the case on trial.
• Circumstantial evidence : All evidence except eyewitness testimony.
• Close corporation : means a for-profit corporation that elects to be governed as a close corporation in accordance with Subchapter Texas Business Organizations Code 1.002
• Common law : The legal system that originated in England and is now in use in the United States. It is based on judicial decisions rather than legislative action.
• Concurrent resolution : A legislative measure, designated "S. Con. Res." and numbered consecutively upon introduction, generally employed to address the sentiments of both chambers, to deal with issues or matters affecting both houses, such as a concurrent budget resolution, or to create a temporary joint committee. Concurrent resolutions are not submitted to the President/Governor and thus do not have the force of law.
• Continuance : Putting off of a hearing ot trial until a later time.
• Contribution : means a tangible or intangible benefit that a person transfers to an entity in consideration for an ownership interest in the entity or otherwise in the person's capacity as an owner or a member. See Texas Business Organizations Code 1.002
• Conversion : means : (A) the continuance of a domestic entity as a non-code organization of any type; (B) the continuance of a non-code organization as a domestic entity of any type; (C) the continuance of a domestic entity of one type as a domestic entity of another type; (D) the continuance of a domestic entity of one type as a foreign entity of the same type that may be treated as a domestication, continuance, or transfer transaction under the laws of the jurisdiction of formation of the foreign entity; or (E) the continuance of a foreign entity of one type as a domestic entity of the same type that may be treated as a domestication, continuance, or transfer transaction under the laws of the jurisdiction of formation of the foreign entity. See Texas Business Organizations Code 1.002
• Converted entity : means an organization resulting from a conversion. See Texas Business Organizations Code 1.002
• Converting entity : means an organization as the organization existed before the organization's conversion. See Texas Business Organizations Code 1.002
• cooperative association : means an association governed as a cooperative association under Chapter 251 . See Texas Business Organizations Code 1.002
• Corporation : means an entity governed as a corporation under Title 2 or 7. See Texas Business Organizations Code 1.002
• Counterclaim : A claim that a defendant makes against a plaintiff.
• Defense attorney : Represent defendants in criminal matters.
• Director : means an individual who serves on the board of directors of a foreign or domestic corporation. See Texas Business Organizations Code 1.002
• Dismissal : The dropping of a case by the judge without further consideration or hearing. Source:
• Domestic : means , with respect to an entity, that the entity is formed under this code or the entity's internal affairs are governed by this code. See Texas Business Organizations Code 1.002
• Domestic entity : means an organization formed under or the internal affairs of which are governed by this code. See Texas Business Organizations Code 1.002
• Electronic transmission : means a form of communication, including communication by use of or participation in one or more electronic data systems, that: (A) does not directly involve the physical transmission of paper; (B) creates a record that may be retained, retrieved, and reviewed by the recipient; and (C) may be directly reproduced in paper form by the recipient through an automated process. See Texas Business Organizations Code 1.002
• Embezzlement : In most states, embezzlement is defined as theft/larceny of assets (money or property) by a person in a position of trust or responsibility over those assets. Embezzlement typically occurs in the employment and corporate settings. Source: OCC
• Entity : means a domestic entity or foreign entity. See Texas Business Organizations Code 1.002
• Ex officio : Literally, by virtue of one's office.
• Fictitious name : means an assumed name: (A) that a foreign filing entity adopts for use because the name of the entity as stated in the entity's certificate of formation or similar organizational instrument is not available for use under the laws of this state; and (B) under which the foreign filing entity is registered to transact business in this state, in accordance with Chapter 9 . See Texas Business Organizations Code 1.002
• Filing entity : means a domestic entity that is a corporation, limited partnership, limited liability company, professional association, cooperative, or real estate investment trust. See Texas Business Organizations Code 1.002
• Filing instrument : means an instrument, document, consent, or statement that is required or authorized by this code to be filed by or for an entity with the filing officer in accordance with Chapter 4 . See Texas Business Organizations Code 1.002
• Filing officer : means : (A) with respect to an entity other than a domestic real estate investment trust, the secretary of state; or (B) with respect to a domestic real estate investment trust, the county clerk of the county in which the real estate investment trust's principal office is located in this state. See Texas Business Organizations Code 1.002
• Fiscal year : The fiscal year is the accounting period for the government. For the federal government, this begins on October 1 and ends on September 30. The fiscal year is designated by the calendar year in which it ends; for example, fiscal year 2006 begins on October 1, 2005 and ends on September 30, 2006.
• For-profit corporation : means a corporation governed as a for-profit corporation under Chapter 21 . See Texas Business Organizations Code 1.002
• For-profit entity : means an entity other than a nonprofit entity. See Texas Business Organizations Code 1.002
• Foreclosure : A legal process in which property that is collateral or security for a loan may be sold to help repay the loan when the loan is in default. Source: OCC
• Foreign : means , with respect to an entity, that the entity is formed under, and the entity's internal affairs are governed by, the laws of a jurisdiction other than this state. See Texas Business Organizations Code 1.002
• Foreign entity : means an organization formed under, and the internal affairs of which are governed by, the laws of a jurisdiction other than this state. See Texas Business Organizations Code 1.002
• Foreign filing entity : means a foreign entity, other than a foreign limited liability partnership, that registers or is required to register as a foreign entity under Chapter 9 . See Texas Business Organizations Code 1.002
• Foreign governmental authority : means a governmental official, agency, or instrumentality of a jurisdiction other than this state. See Texas Business Organizations Code 1.002
• General election : means an election, other than a primary election, that regularly recurs at fixed dates. See Texas Election Code 1.005
• General partner : means : (A) each partner in a general partnership; or (B) a person who has become, and has not ceased to be, a general partner in a limited partnership in accordance with the governing documents of the limited partnership or this code. See Texas Business Organizations Code 1.002
• General partnership : means a partnership governed as a general partnership under Chapter 152 . See Texas Business Organizations Code 1.002
• Governing authority : means a person or group of persons who are entitled to manage and direct the affairs of an entity under this code and the governing documents of the entity, except that if the governing documents of the entity or this code divide the authority to manage and direct the affairs of the entity among different persons or groups of persons according to different matters, "governing authority" means the person or group of persons entitled to manage and direct the affairs of the entity with respect to a matter under the governing documents of the entity or this code. See Texas Business Organizations Code 1.002
• Governing documents : means : (A) in the case of a domestic entity: (i) the certificate of formation for a domestic filing entity or the document or agreement under which a domestic nonfiling entity is formed; and (ii) the other documents or agreements adopted by the entity under this code to govern the formation or the internal affairs of the entity; or (B) in the case of a foreign entity, the instruments, documents, or agreements adopted under the law of its jurisdiction of formation to govern the formation or the internal affairs of the entity. See Texas Business Organizations Code 1.002
• Governing person : means a person serving as part of the governing authority of an entity. See Texas Business Organizations Code 1.002
• holder of shares : means : (A) the person in whose name shares issued by a for-profit corporation, professional corporation, or real estate investment trust are registered in the share transfer records maintained by or on behalf of the for-profit corporation, professional corporation, or real estate investment trust; or (B) the beneficial owner of shares issued by a for-profit corporation, whose shares are held in a voting trust or by a nominee on the beneficial owner's behalf, to the extent of the rights granted by a nominee statement on file with the for-profit corporation in accordance with Sections Texas Business Organizations Code 1.002
• Indemnification : In general, a collateral contract or assurance under which one person agrees to secure another person against either anticipated financial losses or potential adverse legal consequences. Source: FDIC
• Individual : means a natural person. See Texas Business Organizations Code 1.002
• Injunction : An order of the court prohibiting (or compelling) the performance of a specific act to prevent irreparable damage or injury.
• Insolvency : means the inability of a person to pay the person's debts as they become due in the usual course of business or affairs. See Texas Business Organizations Code 1.002
• Insolvent : means a person who is unable to pay the person's debts as they become due in the usual course of business or affairs. See Texas Business Organizations Code 1.002
• Intangible property : Property that has no intrinsic value, but is merely the evidence of value such as stock certificates, bonds, and promissory notes.
• Interest exchange : means the acquisition of an ownership or membership interest in a domestic entity as provided by Subchapter Texas Business Organizations Code 1.002
• Interest rate : The amount paid by a borrower to a lender in exchange for the use of the lender's money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures. Source: OCC
• Internal Revenue Code : means the Internal Revenue Code of 1986, as amended. See Texas Business Organizations Code 1.002
• Jurisdiction of formation : means : (A) in the case of a domestic filing entity, this state; (B) in the case of a foreign entity for which a certificate of formation or similar organizational instrument is filed in connection with its formation, the jurisdiction in which the entity's certificate of formation or similar organizational instrument is filed; or (C) in the case of a domestic nonfiling entity or a foreign entity for which a certificate of formation or similar organizational instrument is not filed in connection with its formation: (i) the jurisdiction the laws of which are chosen in the entity's governing documents to govern its internal affairs if that jurisdiction bears a reasonable relation to the owners or members or to the entity's business and affairs under the principles of this state that otherwise would apply to a contract among the owners or members; or (ii) if Subparagraph (i) does not apply, the jurisdiction in which the entity has its chief executive office. See Texas Business Organizations Code 1.002
• Jurisprudence : The study of law and the structure of the legal system.
• Juror : A person who is on the jury.
• Law : means , unless the context requires otherwise, both statutory and common law. See Texas Business Organizations Code 1.002
• Liabilities : The aggregate of all debts and other legal obligations of a particular person or legal entity.
• License : means a license, certificate of registration, or other legal authorization. See Texas Business Organizations Code 1.002
• Limited liability company : means an entity governed as a limited liability company under Title 3 or 7. See Texas Business Organizations Code 1.002
• Limited liability limited partnership : means a partnership governed as a limited liability partnership and a limited partnership under Title 4. See Texas Business Organizations Code 1.002
• Limited liability partnership : means a partnership governed as a limited liability partnership under Title 4. See Texas Business Organizations Code 1.002
• Limited partner : means a person who has become, and has not ceased to be, a limited partner in a limited partnership in accordance with the governing documents of the limited partnership or this code. See Texas Business Organizations Code 1.002
• Limited partnership : means a partnership that is governed as a limited partnership under Title 4 and that has one or more general partners and one or more limited partners. See Texas Business Organizations Code 1.002
• Litigation : A case, controversy, or lawsuit. Participants (plaintiffs and defendants) in lawsuits are called litigants.
• Manager : means a person designated as a manager of a limited liability company that is not managed by members of the company. See Texas Business Organizations Code 1.002
• Managerial official : means an officer or a governing person. See Texas Business Organizations Code 1.002
• Measure : means a question or proposal submitted in an election for an expression of the voters' will. See Texas Election Code 1.005
• Member : means : (A) in the case of a limited liability company, a person who has become, and has not ceased to be, a member in the limited liability company as provided by its governing documents or this code; (B) in the case of a nonprofit corporation, a person who has membership rights in the nonprofit corporation under its governing documents; (C) in the case of a cooperative association, a member of a nonshare or share association; (D) in the case of a nonprofit association, a person who has membership rights in the nonprofit association under its governing documents; or (E) in the case of a professional association, a person who has membership rights in the professional association under its governing documents. See Texas Business Organizations Code 1.002
• Membership interest : means a member's interest in an entity. See Texas Business Organizations Code 1.002
• Merger : means : (A) the division of a domestic entity into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or non-code organizations; or (B) the combination of one or more domestic entities with one or more domestic entities or non-code organizations resulting in: (i) one or more surviving domestic entities or non-code organizations; (ii) the creation of one or more new domestic entities or non-code organizations; or (iii) one or more surviving domestic entities or non-code organizations and the creation of one or more new domestic entities or non-code organizations. See Texas Business Organizations Code 1.002
• Mortgagee : The person to whom property is mortgaged and who has loaned the money.
• National securities exchange : means an exchange registered as a national securities exchange under Section 6, Securities Exchange Act of 1934 ( 15 U. See Texas Business Organizations Code 1.002
• Nolo contendere : No contest-has the same effect as a plea of guilty, as far as the criminal sentence is concerned, but may not be considered as an admission of guilt for any other purpose.
• Non-code organization : means an organization other than a domestic entity. See Texas Business Organizations Code 1.002
• Non-United States entity : means a foreign entity formed under, and the internal affairs of which are governed by, the laws of a non-United States jurisdiction. See Texas Business Organizations Code 1.002
• Non-United States jurisdiction : means a foreign country or other foreign jurisdiction that is not the United States or a state of the United States. See Texas Business Organizations Code 1.002
• Nonfiling entity : means a domestic entity that is not a filing entity. See Texas Business Organizations Code 1.002
• Nonprofit association : means an association governed as a nonprofit association under Chapter 252 . See Texas Business Organizations Code 1.002
• Nonprofit corporation : means a corporation governed as a nonprofit corporation under Chapter 22 . See Texas Business Organizations Code 1.002
• Nonprofit entity : means an entity that is a nonprofit corporation, nonprofit association, or other entity that is organized solely for one or more of the purposes specified by § 2. See Texas Business Organizations Code 1.002
• Officer : means an individual elected, appointed, or designated as an officer of an entity by the entity's governing authority or under the entity's governing documents. See Texas Business Organizations Code 1.002
• Oral argument : An opportunity for lawyers to summarize their position before the court and also to answer the judges' questions.
• Organization : means a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign. See Texas Business Organizations Code 1.002
• Oversight : Committee review of the activities of a Federal agency or program.
• Owner liability : means personal liability for a liability or other obligation of an organization that is imposed on a person: (A) by statute solely because of the person's status as an owner or member of the organization; or (B) by a governing document of an organization under a provision of this code or the law of the organization's jurisdiction of formation that authorizes the governing document to make one or more specified owners or members of the organization liable in their capacity as owners or members for all or specified liabilities or other obligations of the organization. See Texas Business Organizations Code 1.002
• Ownership interest : means an owner's interest in an entity. See Texas Business Organizations Code 1.002
• Parent : means an organization that, directly or indirectly through or with one or more of its subsidiaries: (A) owns at least 50 percent of the outstanding ownership or membership interests of another organization; or (B) possesses at least 50 percent of the voting power of the owners or members of another organization. See Texas Business Organizations Code 1.002
• Partner : means a limited partner or general partner. See Texas Business Organizations Code 1.002
• Partnership : means an entity governed as a partnership under Title 4. See Texas Business Organizations Code 1.002
• Partnership interest : means a partner's interest in a partnership. See Texas Business Organizations Code 1.002
• Party to the merger : means a domestic entity or non-code organization that under a plan of merger is divided or combined by a merger. See Texas Business Organizations Code 1.002
• Person : means an individual or a corporation, partnership, limited liability company, business trust, trust, association, or other organization, estate, government or governmental subdivision or agency, or other legal entity, or a protected series or registered series of a domestic limited liability company or foreign entity. See Texas Business Organizations Code 1.002
• Plaintiff : The person who files the complaint in a civil lawsuit.
• Plan of conversion : means a document that conforms with the requirements of § 10. See Texas Business Organizations Code 1.002
• Plan of exchange : means a document that conforms with the requirements of § 10. See Texas Business Organizations Code 1.002
• Plan of merger : means a document that conforms with the requirements of Sections Texas Business Organizations Code 1.002
• Political subdivision : means a county, city, or school district or any other governmental entity that: (A) embraces a geographic area with a defined boundary; (B) exists for the purpose of discharging functions of government; and (C) possesses authority for subordinate self-government through officers selected by it. See Texas Election Code 1.005
• Power of attorney : A written instrument which authorizes one person to act as another's agent or attorney. The power of attorney may be for a definite, specific act, or it may be general in nature. The terms of the written power of attorney may specify when it will expire. If not, the power of attorney usually expires when the person granting it dies. Source: OCC
• Precedent : A court decision in an earlier case with facts and law similar to a dispute currently before a court. Precedent will ordinarily govern the decision of a later similar case, unless a party can show that it was wrongly decided or that it differed in some significant way.
• President : means the: (A) individual designated as president of an entity under the entity's governing documents; or (B) officer or committee of persons authorized to perform the functions of the principal executive officer of an entity without regard to the designated name of the officer or committee. See Texas Business Organizations Code 1.002
• Presiding officer : A majority-party Senator who presides over the Senate and is charged with maintaining order and decorum, recognizing Members to speak, and interpreting the Senate's rules, practices and precedents.
• Primary election : means an election held by a political party under Chapter 172 to select its nominees for public office, and, unless the context indicates otherwise, the term includes a presidential primary election. See Texas Election Code 1.005
• Professional corporation : has the meaning assigned by § 301. See Texas Business Organizations Code 1.002
• Professional entity : has the meaning assigned by § 301. See Texas Business Organizations Code 1.002
• Professional limited liability company : has the meaning assigned by § 301. See Texas Business Organizations Code 1.002
• Professional service : has the meaning assigned by § 301. See Texas Business Organizations Code 1.002
• Property : includes tangible and intangible property and an interest in that property. See Texas Business Organizations Code 1.002
• Prosecute : To charge someone with a crime. A prosecutor tries a criminal case on behalf of the government.
• Protected series : means a series of a domestic limited liability company that is established as a protected series in accordance with § 101. See Texas Business Organizations Code 1.002
• Public defender : Represent defendants who can't afford an attorney in criminal matters.
• Quorum : The number of legislators that must be present to do business.
• Real estate investment trust : means an entity governed as a real estate investment trust under Title 5. See Texas Business Organizations Code 1.002
• Registered series : means a series of a domestic limited liability company that is formed as a registered series in accordance with § 101. See Texas Business Organizations Code 1.002
• Rescission : The cancellation of budget authority previously provided by Congress. The Impoundment Control Act of 1974 specifies that the President may propose to Congress that funds be rescinded. If both Houses have not approved a rescission proposal (by passing legislation) within 45 days of continuous session, any funds being withheld must be made available for obligation.
• Secretary : means the: (A) individual designated as secretary of an entity under the entity's governing documents; or (B) officer or committee of persons authorized to perform the functions of secretary of an entity without regard to the designated name of the officer or committee. See Texas Business Organizations Code 1.002
• Service of process : The service of writs or summonses to the appropriate party.
• Share : means a unit into which the ownership interest in a for-profit corporation, professional corporation, real estate investment trust, or professional association is divided, regardless of whether the share is certificated or uncertificated. See Texas Business Organizations Code 1.002
• Signature : means any symbol executed or adopted by a person with present intention to authenticate a writing. See Texas Business Organizations Code 1.002
• Social purposes : means one or more purposes of a for-profit corporation that are specified in the corporation's certificate of formation and consist of promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment. See Texas Business Organizations Code 1.002
• Special election : means an election that is not a general election or a primary election. See Texas Election Code 1.005
• Statute of limitations : A law that sets the time within which parties must take action to enforce their rights.
• Subscriber : means a person who agrees with or makes an offer to an entity to purchase by subscription an ownership interest in the entity. See Texas Business Organizations Code 1.002
• Subscription : means an agreement between a subscriber and an entity, or a written offer made by a subscriber to an entity before or after the entity's formation, in which the subscriber agrees or offers to purchase a specified ownership interest in the entity. See Texas Business Organizations Code 1.002
• Subsidiary : means an organization for which another organization, either directly or indirectly through or with one or more of its other subsidiaries: (A) owns at least 50 percent of the outstanding ownership or membership interests of the organization; or (B) possesses at least 50 percent of the voting power of the owners or members of the organization. See Texas Business Organizations Code 1.002
• Succeeding : means immediately following. See Texas Government Code 312.011
• Swear : includes affirm. See Texas Government Code 311.005
• Tort : A civil wrong or breach of a duty to another person, as outlined by law. A very common tort is negligent operation of a motor vehicle that results in property damage and personal injury in an automobile accident.
• Treasurer : means the: (A) individual designated as treasurer of an entity under the entity's governing documents; or (B) officer or committee of persons authorized to perform the functions of treasurer of an entity without regard to the designated name of the officer or committee. See Texas Business Organizations Code 1.002
• Uncertificated ownership interest : means an ownership interest in a domestic entity that is not represented by an instrument and is transferred by: (A) amendment of the governing documents of the entity; or (B) registration on books maintained by or on behalf of the entity for the purpose of registering transfers of ownership interests. See Texas Business Organizations Code 1.002
• Uniform election date : means an election date prescribed by § 41. See Texas Election Code 1.005
• Verdict : The decision of a petit jury or a judge.
• Vice president : means the: (A) individual designated as vice president of an entity under the governing documents of the entity; or (B) officer or committee of persons authorized to perform the functions of the president of the entity on the death, absence, or resignation of the president or on the inability of the president to perform the functions of office without regard to the designated name of the officer or committee. See Texas Business Organizations Code 1.002
• Week : means seven consecutive days. See Texas Government Code 311.005
• written : means an expression of words, letters, characters, numbers, symbols, figures, or other textual information that is inscribed on a tangible medium or that is stored in an electronic or other medium that is retrievable in a perceivable form. See Texas Business Organizations Code 1.002

United States: ABC: Assignments For The Benefit Of Creditors

What's an ABC?  If you ask ChatGPT, “ABC” is an acronym that can have multiple meanings, depending on the context—for example, referring to the alphabet. But here we are talking about a type of business liquidation process in the United States known as an Assignment for the Benefit of Creditors (“ABC”). An ABC is governed by state law and has long been viewed as an alternative to a liquidation under Chapter 7 of the US Bankruptcy Code. Although the ABC process has existed for more than a century, it now has increased interest in certain market environments due to its speed, flexibility, and comparatively lower expense than a bankruptcy proceeding.

When Does an ABC Make Sense?  As a potential buyer, you want to assess potential legal risks if a target's liabilities exceed (or are reasonably expected to exceed) its assets. In such a situation, third parties may later seek to assert that the purchase price you paid for the assets of the target was below fair value and to unwind the transaction or impose continuing liability under successor liability and fraudulent conveyance theories, among others. Unlike a direct asset purchase in such circumstances, in an ABC it's less likely that individual creditors will bring claims against you on fraudulent transfer, successor liability, or other theories because the assets are purchased from an independent fiduciary through a legally recognized wind-down process rather than directly from the distressed company. As a company in distress, you may want to avoid the length and expense of the federal bankruptcy process.

The Basics.  The specifics of the ABC process vary by state, but it generally involves four main steps, as follows:

• A company authorizes (through board and any necessary shareholder consent) the shutdown of its operations and assignment of all of its assets to a third-party assignee for the benefit of the company's creditors. The assignee, who is functionally similar to a bankruptcy trustee, is an independent fiduciary selected by the company and typically has experience in insolvency matters, the relevant industry, or both. In many states, such as California, Texas, and Illinois, the ABC process ordinarily is initiated and undertaken with little or no court involvement. Other states, such as Delaware and New York, provide for varying levels of court involvement with the ABC process, though generally substantially less than a bankruptcy proceeding. Once the ABC commences (which includes the appointment of the independent fiduciary), the company's board has no further role in the ABC process.
• The assignee provides notice of the assignment to creditors and other parties in interest and requests submission of claims within a certain time. The time period in which notice must be given and claims must be filed varies by state and is based on specific statutory requirements (such as in California) or, in the absence of specific statutory requirements, may be based on local practice or custom (such as in Delaware and Illinois). 
• The assignee liquidates the assets, seeking to maximize the value it obtains. In some cases, the assets are sold as a going concern shortly following commencement of the ABC, pursuant to definitive documentation that has been negotiated with the proposed buyer prior to commencement of the ABC. The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods. 
• The assignee distributes the net proceeds of sale to the company's creditors in accordance with priorities under applicable law.

The Buyer's Perspective.  As a potential buyer, you may already be in discussions with the target company prior to the ABC process or you may become involved through the assignee. Although there are some similarities with a Section 363 sale (like a shorter period for due diligence and the potential to lose key personnel through the process), the ABC process differs in several notable respects from a bankruptcy proceeding: 

• The commencement of an ABC does  not  (i) give rise to an automatic stay of collection or enforcement actions against the company or its property, (ii) prevent creditors from attempting to commence an involuntary bankruptcy case against the company, or (iii) invalidate contractual provisions allowing for counterparties to terminate or modify a contract. 
• Unlike a sale conducted under Section 363 of the Bankruptcy Code, the assignee generally cannot sell assets “free and clear” of liens and security interests—if you are buying assets subject to a security interest, the secured party will need to be paid in full or agree to release its lien. Some states that provide for judicial approval of a sale, such as Florida and Minnesota, may provide some ability for an assignee to obtain relief similar to a “free and clear” sale order in an ABC process. 
• Anti-assignment provisions in leases or contracts cannot be overridden. So, any consents required under contracts that the buyer wants to assume will need to be obtained. 

How We Can Help.  We have successfully navigated the ABC process for our clients in a variety of states and industries, including technology, finance, chemicals, and manufacturing and maximized the advantages that acquiring assets through an ABC can provide to buyers. Although sales are usually done on an “as-is, where-is” basis, with limited ability to obtain operational or asset-level representations and warranties and without any indemnity rights in favor of the buyer, we have advised buyers in transactions where additional rights have been obtained (without the use of representation and warranty insurance).

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Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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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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