assignment for benefit of creditors
Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor.
ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business.
ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations.
[Last updated in June of 2021 by the Wex Definitions Team ]
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- assignments benefits creditors abcs basics california
Assignments for the Benefits of Creditors - "ABC's" - The Basics in California
An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.
ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.
Assignors - Rights and Duties
Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.
ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.
Assets to be Assigned
Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.
Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.
Assignees - Rights and Duties
The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.
The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.
The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.
Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.
Preferential Claims and Avoidance
Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]
Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.
Creditors - Rights and Duties
While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.
Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.
ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.
- Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
- Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
- Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
- Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
- After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
- After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
- Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
- Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
- Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.
It normally takes about 12 months to conclude an ABC.
Effects of ABC
An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.
However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.
Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.
An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.
The Statutes: California Code of Civil Procedure
§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”
§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”
A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.
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Assignments For The Benefit Of Creditors: Simple As ABC?
Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."
A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.
One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.
- A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan.
- The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.
The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.
California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:
1802. (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c). (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets. That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest. (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.
In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.
ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .
Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:
- Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
- Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
- Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
- Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
- Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
- No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
- Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
- Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
- Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
- 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
- Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
- Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
- Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.
The Scenario Revisited. With this overview in mind, let’s return to our company in distress.
- The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
- In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
- Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
- If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
- If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
- If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
- While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods.
Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.
The ABC’s Of An Assignment For The Benefit Of Creditors
A flexible approach to managing debt outside of court, assignment for the benefit of creditors in washington.
Simply stated – an Assignment for the Benefit of Creditors assigns the assets and liabilities of the party making the assignment (the “Assignor”) to that party’s chosen representative (the “Assignee”). The Assignee then administers those assets for the benefit of creditors as the holder of a power of attorney from the Assignor.
The Regional Background of Assignments for the Benefit of Creditors
Prior to the enactment of the Bankruptcy Code in 1978, the National Association of Credit Management (“NACM”) frequently administered Assignments for the Benefit of Creditors in Spokane, Washington.
The Spokane Merchants Association was often the sponsor of these assignments, and enlisted the support of the distressed company with pressure from local trade creditors.
The NACM would prepare a written assignment to the management of the target company, with strong provisions for the operation of the company during the assignment.
The NACM would also form a committee of creditors to manage a plan for the repayment of creditors, while frequently obtaining a blanket lien against the assets of the company to render it “judgment-proof” from the claims of non-participating creditors.
Such an assignment effectively wrested control of a company away from its owners and managers, who often had few reasonable alternatives for continuing their business.
The dynamics of creditor intervention changed dramatically with the enactment of the Bankruptcy Code, and the provisions for restructuring business debt under Chapter 11 . With the protections of the automatic stay, and for the continuation of existing management of the Chapter 11 entity as a debtor in possession, an Assignment for the Benefit of Creditors through NACM became immediately less viable as a creditor remedy.
Although the statute was essentially dead letter law, the Washington statute governing Assignments for the Benefit of Creditors remained substantially unchanged until the enactment of the Washington Receivership Act in 2004.
The Enactment of the Washington Receivership Act
RCW 7.08, which is the statute governing Assignment for the Benefit of Creditors, was restated in 2004 to coordinate Assignment for the Benefit of Creditors with the Washington Receivership Act .
The revised statute provided for the appointment of the Assignee as a receiver following the execution of the assignment.
Under the revised statute , the Assignor may appoint an Assignee for the express purpose of having that party appointed as the receiver.
The Assignee is best selected by the assignor based on knowledge, trust, and expertise. The Assignee must consent to the assignment.
Individuals, acting in their personal capacity, may execute an Assignment for the Benefit of Creditors to provide for the administration of their personal assets. For example, a divorcing couple may initiate an assignment to administer their assets and liabilities as part of a property settlement agreement.
Individuals are entitled to exempt property in accordance with applicable law, and exclude that property from the assignment. Otherwise, the Assignor must assign all property to the Assignee.
The assignment must be substantially in the form set forth by statute at RCW 7.08.030. The assignment must attach a schedule of all known creditors, including the creditors’ mailing addresses; the amount and nature of their claims; and whether their claims are in dispute.
The schedule must also include a true list of all property, including the estimated liquidation value and location of that property, and legal descriptions for all real property.
These schedules of assets and liabilities, while detailed, are less comprehensive than the Official Bankruptcy Forms. It is often advisable to supplement the statutory form of schedules with a schedule of executory contracts and a schedule of co-debtors, so parties will receive a more complete presentation of financial information.
There is no disclosure of operating information or past transactions that is similar to the Statement of Financial Affairs that is required in a bankruptcy case.
What Are The Business Purposes Of An Assignment For The Benefit Of Creditors?
Most Assignors execute an Assignment for the Benefit of Creditors for one of two purposes.
First, an Assignment for the Benefit of Creditors can provide a “stand-alone” procedure for liquidating assets under the independent management of the Assignee . Unlike a bankruptcy or a receivership case, there is no legal action required to commence an Assignment for the Benefit of Creditors, and no judge will oversee the actions taken by the assignee.
Accordingly, an Assignment for the Benefit of Creditors can be employed to test the willingness of creditors to participate in a voluntary settlement of the Assignor’s liabilities. If so, the Assignor and the creditors may avoid the time and expense of a receivership or bankruptcy proceedings.
As a non-judicial procedure, an Assignment for the Benefit of Creditors is also more private and confidential than a bankruptcy or receivership case. The owners of the assets can then devote their time and energy to other endeavors, and place some distance between themselves and the financial issues of their former business.
Second, an Assignment for the Benefit of Creditors contains the consent of the Assignor to the appointment of the Assignee as a general receiver over the Assignee’s property in accordance with chapter 7.60 RCW. This provision allows the use of an Assignment for the Benefit of Creditors as a “stepping-stone” to a general receivership, without the other procedural hurdles that are set forth in the receivership statute.
Either the Assignor, the Assignee, or any creditor of the Assignor may file a petition to appoint the Assignee as receiver of the assets of the Assignor. That petition, filed with the clerk of the superior court, must include a copy of the assignment; the schedules of assets and liabilities; and a request for the court to fix the amount of the receiver’s bond.
The amount of the bond may be low, since the Assignor selected the Assignee based on faith in the trustworthiness and integrity of the Assignee. If circumstances change, the Court can increase the amount of the bond as appropriate.
The superior court will then appoint the Assignee as general receiver of the Assignor’s property upon the filing of the petition.
The Washington Receivership Act would govern all further proceedings involving the administration of the Assignor’s property and the claims of the Assignor’s creditors.
There is no requirement to schedule a meeting of creditors. The court would only schedule such a meeting upon the motion of two or more creditors, if filed within thirty days following the date upon which the receiver mailed notice of the receivership to all known creditors.
At the meeting of creditors, the Court will determine whether to appoint a person other than the Assignee as the general receiver. A creditor may not vote at any meeting of creditors until the creditor has presented a proof of claim.
The filing of a motion to elect a new Assignee suspends the authority of the Assignee to sell or dispose of any property of the Assignor, except perishable property, whether or not the court has appointed the Assignee as the general receiver.
The failure of the creditors to select a new Assignee will reinstate that authority. Otherwise, the authority vests in the replacement Assignee, who then serves as the receiver.
More often, a party files a petition to appoint the Assignee as receiver to obtain the protections of the automatic receivership stay, and access to the court for the resolution of creditor disputes.
An Assignment for the Benefit of Creditors must be for the benefit of all creditors in proportion to the amount of their respective claims. All creditors are entitled to receive notice of the assignment.
The Assignment for the Benefit of Creditors irrevocably appoints the Assignee as the Assignor’s attorney in fact, with full power and authority to do all things that may be necessary to fulfill the assignment.
The Assignee can perform the same acts that the Assignor could do , including but not limited to the power to sue; the power to execute all necessary deeds, instruments, and conveyances, and the power to convey any or all of the real or personal property of the estate.
The Assignee must take possession of the assets, liquidate the assets, and collect all claims. The Assignee must pay and discharge all reasonable expenses, costs, and disbursements in connection with administration of the assignment.
To the extent that funds are available after payment of administrative expenses, the assignee must pay all of the Assignor’s debts and liabilities, according to their priority as established by law, on a pro rata basis within each class.
Unlike a bankruptcy or receivership, there is no provision for the assignee to exercise the rights of a hypothetical lien creditor to file suit for the recovery of fraudulent transfers, or for the recovery of preferential payments to creditors.
Although the Assignment for the Benefit of Creditors statute does not set forth the priority of creditors’ claims, the priorities established in the Washington Receivership Act should be applicable in an Assignment for the Benefit of Creditors .
These priorities do not elevate the claims of the federal government above the claims of state tax agencies. Nevertheless, the Internal Revenue Service may assert a first priority claim for payment under 31 U.S.C. 3713(a)(1) , which provides that a claim of the United State Government shall be paid first when a person indebted to the government is insolvent, and that person makes a voluntary assignment of property.
The Assignee must return any assets that remain after the payment of all debts and liabilities to the Assignor.
Assignments for the Benefit of Creditors: Overview | Practical Law
Assignments for the Benefit of Creditors: Overview
Practical law practice note overview w-006-7771 (approx. 19 pages).
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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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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Assignment for the Benefit of Creditors
Unlike several other states, California’s assignment for the benefit of creditors (ABC) statute law provides for a robust and effective out-of-court procedure for smoothly terminating a business. This process is preferred by many technology companies, startups and entrepreneurs because it helps principals to easily move on to new projects.
An ABC provides for several advantages. For example, an ABC is initiated by the business itself, not by its creditors, and the business can set the stage for a controlled termination. Specifically, the business evaluates and selects its own general assignee to handle the termination, and the professionals who will be involved are known in advance. (By contrast, the trustee appointed in a Chapter 7 bankruptcy case is unknown, and the trustee’s investigation of assets and financial affairs can be expensive and uncomfortable.) Moreover, the business has the opportunity to plan, prepare and marshal its resources prior to initiating the ABC.
A chief advantage is that an ABC allows the business to take steps to maximize value, including by potentially selling assets as a going concern and identifying potential asset purchasers in advance. Approaches to asset sales can be tailored to maximize value, including strategic marketing, private sales, and simple or highly structured auctions. An ABC is also a low-profile, out-of-court procedure that minimizes the principals’ exposure to unwanted scrutiny. Other advantages of an ABC include:
- Streamlined process for finally resolving claims
- Priority claims for employees
- Opportunity to undo certain transactions (fraudulent transfers and preferences)
- Avoidance of unperfected liens
Our lawyers represent businesses, general assignees and creditors in ABCs. Specifically, in one example, we represented a creditor in a large technology company’s ABC. Through careful and practical negotiation, we were able to obtain a carve-out agreement such that our client was entitled to be paid certain funds that would have gone to the former principal of the company while simultaneously preserving key business relationships.
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What are assignments for the benefit of creditors?
Assignments for the benefit of creditors (ABCs) are an alternative to formal bankruptcy proceedings. Under Florida law, an ABC is a voluntary, out-of-court process where a debtor transfers their assets to an assignee, who then liquidates these assets and distributes the proceeds to the debtor’s creditors.
For example, a struggling business in Florida may pursue an ABC instead of filing for bankruptcy. This choice can be advantageous because it is often faster, less expensive, and less public than a formal bankruptcy filing. The business would transfer its assets to an assignee responsible for selling these assets and distributing the proceeds to the creditors following the priorities established by Florida law.
Need a bankruptcy law advocate? Schedule your consultation today with a top bankruptcy and restructuring attorney.
Which Florida laws and regulations apply to assignments for the benefit of creditors?
The primary source of law governing ABCs in Florida is Chapter 727 of the Florida Statutes . This chapter outlines the process for initiating an ABC, the assignee’s role, and the creditors’ rights. Additionally, the Florida Rules of Civil Procedure may apply to certain aspects of an ABC, such as serving notice to creditors and managing creditor claims.
Federal laws, such as the Bankruptcy Code , generally do not apply to ABCs because they are state law alternatives to bankruptcy. However, it is essential to note that federal laws may still impact an ABC in certain situations, such as when a debtor’s assets are subject to federal tax liens or other federal claims. In these cases, debtors must consult a knowledgeable attorney to navigate the interplay between state and federal laws.
How do assignments for the benefit of creditors connect to the bankruptcy process?
The connection between pursuing an ABC and bankruptcy legal services for debtors lies in their shared goal of providing relief to financially distressed individuals or businesses. Both processes involve the liquidation of assets and the distribution of proceeds to creditors. However, ABCs are generally less formal, less expensive, and more private than bankruptcy filings, making them an attractive option for debtors seeking to avoid the stigma and complexities associated with bankruptcy.
In an ABC, a debtor voluntarily transfers their assets to an assignee who liquidates them and distributes the proceeds to creditors. This process differs from a bankruptcy proceeding, where a court-appointed trustee oversees the operation. Furthermore, while strict federal rules and procedures bind bankruptcy cases, ABCs offer more flexibility, allowing parties to tailor the process to their needs.
When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.
To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.
What are the prerequisites for debtors to pursue assignments for the benefit of creditors?
Consider the following:
- Voluntary action: The debtor must willingly initiate an ABC, as this process is a voluntary alternative to bankruptcy.
- Valid assignment: The debtor must properly execute and deliver the assignment to a qualified assignee, who is often an attorney, accountant, or insolvency professional.
- Recording the assignment: The assignee must record the assignment in the county’s public records containing the debtor’s principal place of business.
- Filing notice: The assignee must file a notice of the assignment with the circuit court clerk in the county where the debtor recorded the assignment.
- Notifying creditors: The assignee must provide written notice to all known creditors of the debtor within 20 days of the assignment, informing them about the ABC process and their rights.
By satisfying these requirements, the debtor can effectively pursue an ABC in Florida, which allows for a more personal and flexible approach to resolving financial difficulties compared to bankruptcy.
Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.
Frequently Asked Questions
- Can a debtor choose any person as an assignee for an ABC?
No, not just anyone can be an assignee. The assignee must be a disinterested person who is not an insider of the debtor and is qualified to manage the debtor’s assets and affairs. Assignees are typically professionals, such as attorneys, accountants, or insolvency experts.
- Does an ABC in Florida prevent creditors from pursuing legal action against the debtor?
Unlike bankruptcy, an ABC does not automatically halt legal actions by creditors. However, creditors may agree to a standstill or moratorium on legal actions while the ABC process is ongoing. This outcome may depend on the specific circumstances and the willingness of the creditors to cooperate.
- How does an ABC affect the debtor’s credit rating?
Although an ABC may be less public and stigmatizing than bankruptcy, it can still harm the debtor’s credit rating. Credit reporting agencies may treat an ABC as a similar event to a default, which can lower the debtor’s credit score and make it more difficult for them to obtain future credit or loans. However, the impact on the credit rating may vary depending on the specific circumstances of the case and the debtor’s credit history before the ABC. Therefore, debtors must work closely with financial advisors and credit counselors to rebuild their credit after an ABC process.
Have more questions about how bankruptcy services could positively impact your business operations and relationships?
Crucially, this overview of assignments for the benefit of creditors does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.
Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.
Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.
If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation .
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The Road to an Assignment for the Benefit of Creditors (ABC): A Case Study
- August 29, 2022
- / Alternatives to Business Bankruptcy
- / Howard Korenthal
- Tags: Assignment for the Benefit of Creditors ,
How Does a Company Decide to Enter an Assignment for the Benefit of Creditors?
This is how a troubled company considered its duties and options before executing a strategy using an assignment for the benefit of creditors (ABC) . They successfully mitigated potential losses. The guarantor’s liability was minimized, the bank and going-concern buyer got what they wanted, and the enterprise continued. This story puts meat onto skeletal discussions of ABC rules and how they compare with competing resolution structures under the Bankruptcy Code and Uniform Commercial Code (UCC) .
A family-owned business in Illinois had lost large amounts of money for 3 years. Trade creditors had been stretched, and some were cutting the company off. Several breach of contract lawsuits were working their way through the courts, but no judgments had been entered. Some trade creditors received payments to induce them to continue shipping. The company had only paid some of their federal and state withholding taxes. It struggled to keep current on debt obligations to the bank, which had good liens on inventory, accounts receivable, and equipment, as well as a mortgage on the company’s real estate. Following difficult discussions with the bank, the board of directors and the majority shareholder/CEO — who had guaranteed the company’s debt to the bank — concluded that the company should sell or liquidate its assets. The board and shareholder agreed that a sale of the company as a going concern would generate more proceeds than would a liquidation. A sale would further pay down the bank loan and diminish the shareholder’s liability on his personal guarantee.
The shareholder had been quietly marketing the company for several months and was negotiating a letter of intent with a strategic buyer to purchase the assets of the business. The asset the buyer most desired was the company’s large but perishable customer base. The buyer believed it could retain that customer base if the sale closed quickly. The buyer also agreed to purchase the inventory and equipment but did not want the accounts receivable or environmentally challenged real estate. The buyer offered to purchase the inventory at 50% of book value and the equipment at 80% of orderly liquidation value. As part of the deal, the buyer would assist the company in collecting on accounts receivable for a period of time. The company and shareholder estimated that the purchase price, plus proceeds from the liquidation of the accounts receivable and real estate, could potentially yield net proceeds exceeding the debt to the bank.
The buyer planned to retain the shareholder/CEO for his strong relationships with a number of large customers. The buyer intended to move the business to an out-of-state facility, which meant termination of employment for most of the company’s 100 workers. The buyer would offer permanent future employment to a few employees, but most would be needed only for a limited post-sale transition period to ensure continuous operation.
The bank was willing — if such a sale would get the debt paid. Importantly, the shareholder, concerned for his reputation, wanted to keep financial issues as quiet as possible. He thought it better to sell assets on the “down low,” as it were.
After consulting insolvency counsel, the board recognized that insolvency gave the board fiduciary obligations to the creditors. The board had to preserve the assets and sell them for the highest value possible. The shareholder was anxious to address guarantee and federal withholding tax issues with net proceeds remaining after payment to the bank. They considered the following options.
Chapter 11 Bankruptcy
The company could operate in chapter 11 as a debtor-in-possession . As such, the automatic stay would bar progress in the trade creditor suits. Company assets could be sold to the highest bidder through a sale under section 363 of the Bankruptcy Code. Such a sale could get the buyer title to the assets, free and clear of liens, claims, and encumbrances, which might result in a better price. However, the chapter 11 process through sale would take no less than 60 to 90 days. It would be a very public, court-supervised process that might involve a contentious creditors’ committee populated by those stretched and restive creditors. Each aspect of this process would increase expenses, and it was not clear that the bank would fund operations or expenses. It appeared that the buyer, having performed due diligence, would be willing to purchase the assets through a faster process, even with less protection for the title.
Chapter 7 Bankruptcy
Under a chapter 7 bankruptcy case, a chapter 7 trustee would be appointed by the U.S. Trustee and would immediately displace company management. It is unlikely that a trustee would operate in a chapter 7 or secure bank financing to make that possible. The resulting liquidation would destroy going-concern value. The customer base would dissipate. The realization on inventory and receivables would diminish in liquidation. Even if the trustee received an Asset Purchase Agreement at the outset of the case and was willing to operate the business, the public and court-supervised process would still take at least 60 to 90 days at considerable cost.
Foreclosure and Sale Under Article 9 of the UCC
The board was willing to conduct a foreclosure sale of the company’s personal property assets, subject to the bank’s senior lien. An Article 9 foreclosure sale does not require court involvement. It can be concluded in 10 to 20 days, radically lowering the cost compared to sales in bankruptcy. The bank’s attorney, however, believed that, if an involuntary bankruptcy were filed, the company had to shut down for 20 days prior to a sale to diminish the potential effect of section 503(b)(9) claims by creditors. Shutting down the business for 20 days would destroy the value of the customer base to the buyer.
Assignment for the Benefit of Creditors
An assignment for the benefit of creditors is a well-established out-of-court process under Illinois common law. Other states, such as Massachusetts and Missouri, also have non-judicial common law ABC processes. In some states, the ABC process may be statutory and court-supervised.
When an assignment is made, all company’s assets are transferred to a trust administered by the assignee. The company, or the assignor, is allowed to select its own assignee to administer the assets. The U.S. Trustee’s office does not randomly select an assignee as is the case in a Chapter 7. There is no automatic stay in an ABC. However, it creates a similar effect because the assignee is accorded lien creditor rights as of the date of the assignment and thus stands ahead of all unsecured creditors and later-perfected secured creditors. Most creditors stop pursuing collection lawsuits against an assignor after an ABC begins because
(1) the defendant assignor no longer has any assets, and
(2) even if the plaintiff creditor adds the assignee as defendant, the assignee’s rights are prior to the creditor’s judgment and to any judgment lien the creditor might then file.
The ABC process is typically faster and less expensive than a chapter 7 or chapter 11 bankruptcy case. A sale of assets can be done in as few as 10 business days and can be done in conjunction with an Article 9 foreclosure. A buyer purchasing from an assignee receives the right, title, and interest in the company’s assets that was transferred to the assignee when the assignment was made.
[Editors’ Note : ABC may not be available in receiverships. To learn more, please see 90 Second Lesson: Receivership vs Bankruptcy . ]
Proposing an Assignment for the Benefit of Creditors
The buyer was willing to take some title risk to get the deal done quickly and to preserve the customer base. The bank recognized that the assignment for the benefit of creditors was its best option to maximize value from inventory and receivables. The bank agreed to support the ABC, lend funds to the proposed assignee, and pay the administrative costs of the trust estate. The buyer agreed to lease the company’s real property during the transition period following the sale date and to reimburse the trust for payroll costs and certain operating expenses.
[Editors’ Note : For more information on what a secured lender can do when its borrower is in trouble, please see What Secured Lenders Should Know If Their Borrower Files for Bankruptcy . ]
Principal Issues and Arrangements
Prior to formal acceptance of the assignment, the assignee and their attorney needed to work through substantive issues, including:
- Negotiating the Asset Purchase Agreement — The completed Asset Purchase Agreement and Operating Agreement would trigger the ABC. Because of the assignee’s fiduciary duty to get the highest and best price possible, and because a public sale of the assets was feasible, the buyer had to agree to marketing and sale of the assets by public auction. The agreements provided that the auction would be 20 days into the assignment, giving the assignee time to reach out to other potential buyers. The sale would be advertised in the auction section of the Chicago Tribune for 2 consecutive weekends. The buyer’s deposit of 10% of the purchase price, and potential bidders had to post that amount before bidding. The agreements also afforded the buyer bid protection — new bids had to exceed the current bid by a set increment, and the prevailing bidder was obligated to close.
- Environmental Issues with the Real Estate — The Buyer did not want the real estate since it had potential environmental issues. The company agreed to place the real property into an LLC owned by the company. The company’s LLC member interest would be transferred to the assignee as part of the assignment. The assignee would sell the real estate in a separate transaction.
- Employee Layoffs and Terminations – The company had more than 100 employees and the buyer would not retain most of them. The company was subject to the federal WARN Act and its state law counterpart, so it made sense to complete the appropriate notice to state and local officials and employees before the assignment was accepted. Therefore, the WARN liability would be a pre-assignment liability, not an administrative cost of the estate. The WARN liability would be paid from proceeds left over after the bank was paid in full, rather than being paid ahead of the bank. Key employees agreed to stay with the business for a certain time with some stay-bonus arrangements.
- Funding Agreement with the Bank — The assignee prepared a liquidation expense budget for the bank. The bank agreed to fund the budget and provide cash advances to the assignee.
Once these issues were resolved, the assignee accepted the ABC, and all company’s assets were moved into the agreed upon trust per the trust agreement. Immediately following the acceptance of the ABC, the assigne e sent a notice to creditors
- informing them that the assignment had taken place,
- informing them of the sale and auction,
- providing a schedule of assets and liabilities,
- providing a claim form for the creditor to complete and return to the assignee, and
- disclosing the buyer’s plan to retain the shareholder/CEO after the sale
Such a notice initiates clear and reliable communication with creditors, which is critical to the success of an ABC. It reassures creditors that the assignee will honor its duties rather than balking and stretching as a company does when it’s in distress. Some creditors who received extra payments prior to the ABC inquired as to preference issues. However, in Illinois, an assignee has no power to avoid and recover preferential payments made by a company. Such creditors may be relieved that no bankruptcy case was filed, whereupon they would be exposed to such potential liability.
The assignee received responses to the auction marketing. Several parties performed due diligence on the assets, and one showed up to the auction and bid. The buyer prevailed at the auction, and the closing occurred 2 days later.
Following the closing:
- The assignee and the buyer operated the facility for a short period of time while the buyer transitioned customers, inventory, and equipment to its other facility.
- The buyer helped collect accounts receivable for approximately four months.
- WARN claimants with pre-assignment unsecured claims, were entitled to no more than the dividend other unsecured claimants were entitled to.
- The shareholder/CEO retained liability for federal tax liabilities.
- The real estate was listed with a broker for later sale by the assignee.
- The assignee sent 2 additional notices to creditors reporting the progress of the liquidation and their prospects for a dividend.
- The bank and shareholder/CEO negotiated the latter’s liability related to his guarantee of the company’s obligations.
This tale illustrates how an assignment for the benefit of creditors might mitigate loss and preserve going-concern value. There are certain practical considerations when navigating an ABC:
- Before deciding on an ABC, a distressed company, and its secured lender, must weigh the pros and cons of each bankruptcy option and sale options to determine the best fit.
- Before an assignee formally accepts an ABC, he should consider situational factors and potential complications. These might include personnel issues like WARN Act rules and liability, financial and tax responsibilities, real estate issues like repair costs and environmental concerns, and packaging assets for maximum realization. Package them with the real estate or separate from the real estate? Exclude certain asset classes?
- The assignee must work closely with the secured lender to ensure funding for the administration of the ABC.
- The assignee should ensure good communication with employees, creditors, and other stakeholders.
[ Editors’ Note : To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):
- Bankruptcy Intersections
- Chapter 11 Potpourri
- The Nuts & Bolts of a Chapter 11 Plan
This is an updated version of an article originally published in December 2013; it was previously updated on April 25, 2019 and was most recently edited by Nora Willi ]
© 2022. DailyDAC TM , LLC d/b/a/ Financial Poise TM . This article is subject to the disclaimers found here .
About Howard Korenthal
Howard Korenthal is a Principal and Chief Operating Officer at MorrisAnderson and Associates, Ltd. He has over 30 years of experience assisting financially distressed and underperforming companies in senior management, interim management and financial advisory roles, and has been instrumental in over 200 turnaround and restructuring projects and complex chapter 11 proceeding. Howard has extensive…
Read Full Bio » • View all articles by Howard »
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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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Assignment for the Benefit of Creditors
- Distressed M&A >
Our Business Restructuring, Creditors’ Rights & Bankruptcy practice group regularly advises clients in a broad range of industries nationally on issues relating to financial distress, insolvency and the exercise of associated rights and remedies. Our extensive experience and substantial knowledge of the law enables us to develop innovative business strategies and solutions for our clients’ most difficult challenges.
In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.
Client feedback lauds our practice group as “five-star” for providing “a very high level of client service” and for going “above and beyond to assist the client.” We are also known for being “proactive and attentive. Always accessible. Creative and forward with advice.”
A representative sample of our completed ABC transactions include:
Health, Life Sciences & Wellness
- Representing the assignee in the ABC for a life sciences company specializing in cancer treatment options.
- Representing the assignee in the ABC for a provider of musculoskeletal wellness and soft tissue illness treatment and prevention solutions to employers.
- Representing the assignee in the ABC for a manufacturer of radiation protective products for the health care, dental, veterinary and nuclear industries.
Technology & Software
- Representing the assignee in the ABC for a developer of three-dimensional long-range facial recognition technology.
- Representing an assignee in a motion technologies company’s ABC in the Delaware Court of Chancery.
- Representing the assignee in the ABC for a developer of technology in the cable television industry.
- Representing the assignee in the ABC for a developer of marker-less motion capture software and systems.
- Representing the assignee in the ABC for a developer of energy conversion systems for wind energy and industrial markets, including advising our client on liquidation of assets and distribution to creditors.
- Representing three assignees in the ABC for the world’s largest privately held designer, manufacturer and marketer of winch systems.
Media, Entertainment & Leisure
- Representing the senior lender in the ABC for a nationwide religious bookstore.
- Representing the assignee in the ABC for a developer of interactive video games and digital content.
- Representing the assignee in the ABC for a vacation rental distributor.
- Representing the assignees in multiple ABCs involving a national trampoline park.
- Representing a special purpose entity in the ABC for an online grocery provider.
- Representing the assignees in the ABCs for an online estate auction house.
Real Estate & Other Services
- Representing the assignees in the ABCs for an office leasing company with 22 U.S. locations.
- Representing a secured lender’s interest in an ABC involving a government contract-related dispute.
- Representing the assignee in the ABC for a provider of advertising material.
- Representing three assignees in the ABC for an SAS company.
- Representing the assignee in the ABC for a provider of a mobile delivery network software development kit.
- Representing the assignees in multiple ABCs for a software company based in Denver, Colorado.
- Representing the assignee in the ABC for a software company based in Missoula, Montana.
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2014 New York Laws DCD - Debtor & Creditor Article 2 - (2 - 24) GENERAL ASSIGNMENTS FOR THE BENEFIT OF CREDITORS
- 2 - Jurisdiction of proceedings.
- 3 - Requisites of general assignment.
- 4 - Debtor's schedule.
- 5 - Notice to creditors to present claims.
- 6 - Bond of assignee.
- 7 - Further security.
- 8 - Discharge or removal of assignee; correction of inventory or schedule; supplemental inventories or schedules.
- 9 - Failure to file bond.
- 10 - Action on bond; application of recovery.
- 11 - Proceedings in case of death of assignee.
- 12 - Notices to parties interested in the estate as creditors or otherwise.
- 13 - Debts which may be proved against the estate.
- 14 - Duties of assignee.
- 15 - Power of court.
- 16 - Examination of witnesses.
- 17 - Invalid claims.
- 18 - Effect of orders; power of judge and duties of clerk.
- 19 - Sale and compromise of claims and property.
- 20 - General powers of court.
- 21 - Trial, costs and commissions.
- 21-A - Company pension plans; deductions from wages trust moneys; preference.
- 22 - Wages and commissions and preferred claims.
- 23 - Limitation of preferences.
- 24 - Appraisal of estate in the hands of assignee.
Disclaimer: These codes may not be the most recent version. New York may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
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