assignment benefit creditors

assignment for benefit of creditors

Primary tabs.

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 ]

• commercial activities
• financial services
• business law
• landlord & tenant
• property & real estate law
• trusts, inheritances & estates
• wex definitions

• 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.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Read more about our firm

© 2024, Stimmel, Stimmel & Roeser, All rights reserved  | Terms of Use | Site by Bay Design

In The (Red)

The Business Bankruptcy Blog

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.

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).

In Solvency

Understandable Insights from Fox Rothschild's National Bankruptcy Practice

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

by Magdalena Schardt

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.  Fox Rothschild attorneys in the financial restructuring department have experience in representing all parties involved in an ABC, from assignee, assignor, acquiring entity/individual to creditors.  If you have questions or are looking for more information about the ABC process, contact Magdalena Schardt or one of our financial restructuring and bankruptcy professionals in one of the 29 offices.

United States: Assignment For The Benefit Of Creditors: An Overview

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

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

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

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

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

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

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

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

Originally published 03/07/2023

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

  © Mondaq® Ltd 1994 - 2024. All Rights Reserved .

Login to Mondaq.com

Password Passwords are Case Sensitive

Forgot your password?

Why Register with Mondaq

Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms

Articles tailored to your interests and optional alerts about important changes

Receive priority invitations to relevant webinars and events

You’ll only need to do it once, and readership information is just for authors and is never sold to third parties.

Your Organisation

We need this to enable us to match you with other users from the same organisation. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use.

• Download PDF

• Pursuing Assignments for the Benefit of Creditors
• Pursuing Assignments for the Benefit of Creditors Overview
• Bankruptcy and Restructuring
• Security Agreements and UCC Filings in Bankruptcy
• Acquiring Assets from Bankruptcy Estates and Distressed Borrowers
• Workout, Refinancing, and Restructuring Opportunities Outside of Bankruptcy
• Representing Creditors in Bankruptcy Court and Pre-Petition Negotiations
• Debtor-in-Possession Financing and Cash Collateral
• Preventing Debtor Bankruptcy Through Liquidation, Restructuring, and Reorganization
• Proofs of Claim
• Estate Disputes Over the Treatment of Differing Creditor Claims, Transfer Avoidance, Breach of Fiduciary Duty, and Alter Ego Liability
• Reconciling Creditors Committee Interests to Avoid Litigation and Expedite Recovery
• Litigating Parasitic State Court Claims on Behalf of the Estate
• Adversary Proceedings to Set Aside Preference Payments and Fraudulent Transfers
• Creditors’ Committees and Trustees
• Defending Against Involuntary Bankruptcy Petitions
• Advising Insolvent Companies on Fiduciary Duties and Winding Down
• Establishing a Restructuring Agenda
• Recovering from Non-Debtor Entities
• Filing Involuntary Bankruptcy Petitions
• Foreclosure or Repossession During Bankruptcy
• The Impact of Commercial Reorganization on Creditors
• Assigning Bankruptcy Claims to Claims Traders
• Trade Supplier Relations with Financially Distressed Customers
• Creditor’s Committees and Trustees
• Adversary Proceedings in Bankruptcy
• Relief from the Automatic Stay
• Bankruptcy Defense: Fraudulent Transfers and Preferential Payments

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 .

We live by our 7 Superior Service Commitments

• Conferring Client-Defined Value
• Efficient and Cost-Effective
• Accessibility
• Delivering an Experience While Delivering Results
• Meaningful and Enduring Partnership
• Exceptional Communication Based Upon Listening
• Accountability to Goals

Assumption, Assignment and Sale of SBA Loans

3 Main Considerations When Obtaining Assignments of Lawsuits or Judgments as a Judgment Collection Tool

Assignment for the Benefit of Creditors: Stay of Litigation

latest Blog Posts

Professional services industry legal blog.

Reasonable and Effective Non-Compete Clauses from the Employer’s Perspective Read More

Join our mailing list.

Call our experienced team., we’re here to help, connect with us., call our experienced team..

Parsippany: (973) 538-4700

Fein Such Kahn & Shepard

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 .

Related Posts

Real Estate Practice Alert: New Flood Risk Disclosure Requirements in New Jersey Take Effect on March 20, 2024

Navigating the Corporate Transparency Act: Key Considerations & Compliance Guidelines

Introducing Suneeta Thadani Dewan, Esq., Of Counsel Immigration Law Services

Jennifer L. Holowach, Esq. Promoted to Principal and Managing Attorney at FSKS

  (858) 481-1300   [email protected]

• Health & Safety Receiverships
• Partition Referee Matters
• Business Dispute Receiverships
• Cannabis Receiverships
• Rents & Profits Receiverships
• Post-Judgment Receiverships
• Legal Representation of Receivers & Referees
• Property Examples
• Meet the Team
• In the News
• Career Opportunities

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

May 24, 2021

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

How Do ABCs Work?

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

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

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

Benefits of Using an ABC

There are several benefits to using an ABC. 

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

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

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

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

Responsibilities of an Assignee

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

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

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

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

How to Choose an Assignee

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

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

Do You Need an Assignee? 

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

• There are no suggestions because the search field is empty.
• Court-Appointed Receivership (65)
• Real Estate (55)
• Partition Referee (30)
• Real Estate Finance (29)
• Real Estate Transaction (29)
• Partition Action (27)
• Commercial Properties (24)
• Enforcing Judgments (21)
• Commercial Leases (20)
• Hoarding (20)
• Business Litigation (19)
• Foreclosure Law (18)
• Tenants' Rights (18)
• Contract Disputes (17)
• receivership (17)
• Business Owners (16)
• Uncategorized (16)
• Construction Law (15)
• Collections Law (14)
• Business Formation: Asset Protection (11)
• California (10)
• Loan Modification (9)
• abandoned property (9)
• health & safety (9)
• receiver (9)
• Consumer Class Action (8)
• receiverships (8)
• Consumer Fraud (7)
• Receivership Remedy (7)
• health and safety code (6)
• healthy & safety receiver (6)
• Fraud against Senior Citizens (5)
• Health & Safety Code (5)
• code enforcement (5)
• Employment Law (4)
• Landlord (4)
• Marijuana Dispensaries (4)
• San Diego (4)
• Trade Secrets (4)
• abandoned (4)
• creditor (4)
• fire hazard (4)
• money judgment (4)
• Cannabis (3)
• Employment Class Action (3)
• Employment Discrimination (3)
• Health & Safety Code Receiver (3)
• Health and Safety receivership (3)
• Trademark Law (3)
• abandoned building (3)
• code enforcement officers (3)
• collection (3)
• court-appointed receiver (3)
• health and safety (3)
• hoarder (3)
• nuisance property (3)
• real estate. california (3)
• real property (3)
• rents and profits (3)
• substandard conditions (3)
• Attorneys' Fees Clauses (2)
• City of San Diego (2)
• Health and Safety Receivership Process (2)
• Post-Judgment Receiver (2)
• Unlawful Detainer (2)
• bankruptcy (2)
• business (2)
• business disputes (2)
• complaint (2)
• debt collection (2)
• dispute (2)
• distressed properties (2)
• foreclosure (2)
• habitability (2)
• health and saftey code (2)
• hoarders (2)
• hoarding support (2)
• judgment (2)
• judgment creditor (2)
• judgment debtor (2)
• partnership agreement (2)
• property (2)
• property value (2)
• san diego county (2)
• slumlord (2)
• tenant rights (2)
• Animal Hoarding (1)
• City of Chula Vista (1)
• Distressed Business (1)
• Historic Properties (1)
• Liquor License Receiverships (1)
• Mills Act (1)
• Neighborgood Blight (1)
• Partition Remedy (1)
• Post-Judgment Receivership(s) (1)
• Reimbursement of Employee Business Expenses (Labor (1)
• The Health and Safety Receivership Process (1)
• absentee landlord (1)
• abstract of judgment (1)
• account levy (1)
• assignment for the benefit of creditors (1)
• bank garnish (1)
• bank levy (1)
• bitcoin (1)
• board of directors (1)
• business formation (1)
• business owner (1)
• california receivership laws (1)
• city attorney (1)
• collecting judgment (1)
• commercial project (1)
• company (1)
• confidential information (1)
• confidentiality agreement (1)
• court award (1)
• court order (1)
• covid-19 (1)
• cryptocurrency (1)
• deceased owner (1)
• demolition (1)
• diliberti (1)
• disposable earnings (1)
• family law (1)
• general partnership (1)
• habitability requirements (1)
• hospitality assets (1)
• human smuggling (1)
• illegal business (1)
• illegal cannabis dispensary (1)
• illegal gambling parlor (1)
• initial inspection (1)
• joseph diliberti (1)
• judgment collection (1)
• judgment lien (1)
• lease term (1)
• liquidation (1)
• litigation (1)
• lodging properties (1)
• massage parlors (1)
• misappropriation (1)
• negligent landlord (1)
• new business (1)
• occupant relocation (1)
• partnership (1)
• partnership disputes (1)
• post-judgment collection (1)
• provisional director (1)
• public safety (1)
• real property lien (1)
• real property receiver (1)
• relocation (1)
• residential zoning laws (1)
• retail center (1)
• right of possession (1)
• san diego real estate (1)
• sex trafficking (1)
• short-term rental (1)
• sober living house (1)
• squatters (1)
• struggling hotels (1)
• substandard hotel (1)
• tenancy (1)
• unlicensed in-home business (1)
• wage garnishment (1)
• warranty of habitability (1)
• weed abatement (1)
• writ of execution (1)

Recent Posts

For more information please contact Griswold Law

Phone: (858) 481-1300

Email: [email protected]

Address: 705 N. Vulcan Avenue, Encinitas, CA 92024

No communication via email or content posted on this website creates an attorney-client privilege. The information on this website is purely hypothetical. The information on this website should not be relied upon. If you have legal questions or are seeking legal assistance, you should contact an attorney immediately.

• California Department of Real Estate
• California Secretary of State
• State of California Courts
• U.S. Department of Housing and Urban Development
• United States District Court, Southern District of California
• United States Patent and Trademark Office

Assignment for the Benefit of Creditors: An Award-Winning Strategy

• November 22, 2021

Minnesota Lawyer and Finance & Commerce – Partner Content

Author: Arthur Boylan  and Pete McElligott

Next year will be the ten-year anniversary of Minnesota’s enactment of the statute for Assignments for the Benefit of Creditors (“ABC”).  When a turnaround is necessary, this simple yet versatile tool offers debtors more control than in a receivership or bankruptcy.  Done effectively, ABCs benefit both debtors and creditors.

How Does an ABC Work?

Unlike a bankruptcy trustee or court-appointed receiver, the debtor can select an “assignee” or administrator/receiver over the assets in an ABC.  An ABC starts by filing a simple statutory form (Minnesota Statute § 577.13) with the Court identifying the assignor (debtor) and assignee (administrator/receiver), assets subject to the assignment, and a list of creditors.  The assignment becomes effective upon filing of the ABC with the Court.

As outlined in the ABC, the primary purpose of the assignee is to use the ABC’s assets to pay off creditors and return any remaining property to the assignor.  The assignee can accomplish this purpose by liquidating ABC assets or working with legal counsel, professionals, and creditors to turn around a troubled business.  Once the ABC is filed, the assignee has powers of a general receiver with respect to the assignment property including the authority to manage, market, or sell the ABC’s assets, make and collect payments, pursue and defend litigation, and seek court intervention amongst many others.

An ABC Success Story

Anthony Ostlund was recently recognized for its representation of Lighthouse Management Group, Inc. (“Lighthouse”) when Lighthouse was named the winner of the 2021 Turnaround of the Year Award by the Minnesota Chapter of the Turnaround Management Association.  In 2015, Lighthouse was appointed assignee by the owner of two commercial office buildings commonly known as Apple Valley Commons.  After years of juggling multiple lawsuits involving the ABC and a difficult turnaround, Lighthouse was able to sell off the buildings at a significant profit, pay off all legitimate creditors, and expects to return assets to the property owner.

Before the assignment, the prior property manager had collected over three million dollars in rents from Apple Valley Commons while failing to pay real estate taxes, to invest in maintenance, and to retain and attract tenants.  Instead, they personally benefitted by withdrawing cash and spending thousands on personal expenses.  To no surprise, tenancy for both buildings was extremely low.

From the outset, Lighthouse developed a bold, decisive strategy.  Instead of attempting to market the buildings in a fire sale at depressed prices, Lighthouse set a goal to remove the property manager through litigation, fix up the properties, increase tenancy, and prepare the buildings for a sale.  At the same time, Lighthouse leveraged existing lending relationships to fund immediate expenses.  To increase rental income and revenue from new and existing tenants, Lighthouse set out to fix deferred maintenance.

Just days after being appointed, Lighthouse obtained an ex parte temporary restraining order removing the property manager and his business from the premises and enjoining them from transferring or disposing of any funds, records, or other property belonging to the buildings.  A year later, the Court granted Lighthouse’s affirmative motion for summary judgment against the bad actors finding them liable for breach of contract, civil theft, unjust enrichment, and fraud.  Before a trial on damages, two of the Defendants stipulated to entry of judgment against them in the amount of $1.45 million.

During discovery, Lighthouse discovered fraud with respect to the sale of cell tower leases on one of the buildings.  That discovery led to another lawsuit ending in a favorable settlement resulting in a payment back to the ABC.  Lighthouse was also able to successfully reach a settlement agreement concerning tax appeals.

As highlighted by this case study, the ABC statute enables debtors, assignees, and legal counsel the ability and authority to take the necessary action to right the ship.  Lighthouse acted quickly, removed the bad actors, resolved lawsuits favorably, worked with lenders to address pressing needs, and retained and attracted tenants to increase occupancy to record highs.  In the end, Apple Valley Commons was sold for over $10 million benefitting the debtor and creditors.  While every case is different, keep in mind this award-winning strategy and the versatility that ABCs provide.

related attorneys

Arthur G. Boylan

Peter J. McElligott

related practice areas

Complex Commercial Litigation

90 SOUTH 7TH STREET, SUITE 3600 MINNEAPOLIS, MN 55402 P 612.349.6969       F 612.349.6996

© 2024 ANTHONY OSTLUND LOUWAGIE DRESSEN BOYLAN P.A. ALL RIGHTS RESERVED.

• 651•312•6500
• 651•312•6618

© 2021 ANTHONY OSTLUND LOUWAGIE DRESSEN BOYLAN P.A. ALL RIGHTS RESERVED.

Privacy Overview

Assignment for the Benefit of Creditors: The Liquidation Tool Connecticut Should Adopt

By lucas b. rocklin.

Under Connecticut law, when a borrower defaults on a loan, a lender has one or more of the following options: the lender can negotiate a workout if feasible, liquidate any loan collateral if the borrower is cooperative, commence a lawsuit to recover any loan collateral and/or obtain a money judgment, or possibly force the borrower into an involuntary bankruptcy. Borrowers have the additional option of filing a voluntary bankruptcy, which happens frequently when borrowers are faced with aggressive lenders. Each option can be beneficial in the appropriate situation, but all too often a post-default “cat and mouse” game ensues between the lender and borrower that often leads to both parties being less than satisfied with the end result.

An Assignment for the Benefit of Creditors (ABC), provides another option that is often advantageous to both lender and borrower. ABC is a method of winding down a failed and no longer viable business. It is similar to a bankruptcy liquidation, but has the advantage of avoiding the delay, expense, unpredictability and stigma often associated with a bankruptcy proceeding. A liquidation of a failed business through the ABC process can result in greater recovery to the lender and less loss to the borrower. Authorized under state law, and done with or without court oversight depending on the law of the state, ABC laws have been adopted by a majority of U.S. states including California, Massachusetts, Illinois, and Florida. Connecticut has not adopted the ABC liquidation tool but should.

Here is how the ABC process works. The borrower is the assignor, who assigns and transfers title to all of its assets to a third-party assignee who liquidates the assets in a fiduciary capacity for distribution to the borrower’s creditors, similar to a bankruptcy trustee. Assignees are experienced liquidation companies and the assignment is done through a contract between the borrower and assignee and includes the assignee’s fee, which can be a flat payment, percentage of the assets sold or a blend of the two. Frequently with the input and consent of the secured lender, the borrower selects an assignee who has expertise in liquidations involving the borrower’s industry. The borrower and secured lender are largely able to predetermine how the sale of the borrower’s property will occur prior to the assignment. This is preferable to a Chapter 7 bankruptcy, where a trustee is appointed at random who may not be familiar with the borrower’s industry or the most effective way to sell the borrower’s assets.

At the beginning of the assignment, the borrower provides the assignee with a list of its creditors and the assets being assigned. The assignee also obtains UCC and title searches of the borrower’s property. With this information, the assignee sends notice of the assignment to all creditors and includes a claim form and sets a deadline for creditors to file a claim.

The assignee takes the borrower’s property subject to all creditor claims, secured and unsecured. The assignment does not cause an “automatic stay” to stop creditor collection efforts, as is true under bankruptcy law, although the assignee can settle and defend creditor litigation. In reality, most creditors welcome the assignment as a way to avoid having to complete a foreclosure for example, and because the borrower’s assets have been transferred to a third-party assignee who has expertise in liquidating businesses of the borrower’s type. The assignee can also dispute and negotiate claims that are filed with the assignee and can seek to recover preference payments and fraudulent transfers as allowed under state law, similar to bankruptcy trustee.

With title to the borrower’s assets, the assignee liquidates the property in a commercially reasonable manner. This may be done through an auction or other sale of the borrower’s property, and the assignee can hire outside professionals such as attorneys, accountants, and real estate brokers who are paid from the borrower’s estate. Property sold in the ABC process is not “free and clear” of security interests, as is true in a bankruptcy sale, and absent a full payoff of all secured creditors’ claims, consent of the secured creditors to release their liens is required. After the borrower’s property is sold, creditors are paid according to their claims and in the order of priority set forth under state law or the Bankruptcy Code (for example, secured creditors are paid before unsecured creditors).

The ABC process can be an efficient and cost-effective way to wind-down a failed business. It avoids the post-default “cat and mouse” game that frequently occurs between lender and borrower in Connecticut. The ABC process can also be completed without the delay, expense, unpredictability and stigma often associated with a bankruptcy proceeding. It is time for Connecticut to adopt the liquidation tool of ABC.

Disclaimer  This article is for educational purposes only and to give you a general understanding of the law, not to provide specific legal advice. No attorney-client relationship exists by reading this article. This article should not be used as a substitute for legal advice from a licensed professional attorney in your state.

Lucas B. Rocklin

Lucas B. Rocklin is a creditor rights attorney. He has extensive experience in representing financial institutions and creditors in workout and litigation matters (commercial and consumer) including collections, foreclosures, bankruptcy and landlord-tenant litigation. Attorney Rocklin also practices labor law including collective bargaining agreement negotiations and arbitrations.

New Haven | Hartford | Fairfield | White Plains

• Todd E. Duffy
• Douglas A. Amedeo
• Susan D. Bainnson
• Bankruptcy Litigation
• Individual Bankruptcy
• Chapter 11 Debtor Work
• Representation Of Directors & Officers
• Out-of-Court Restructuring
• Assignment for Benefit Of Creditors
• Creditors & Creditors Committees
• Commercial Litigation

Assignment For The Benefit Of Creditors

If you do not want to file a bankruptcy petition and cannot get creditors to agree to a workout, you might want to look to the state courts for some relief. In most states (including New York and New Jersey), companies look to a set of statutes governing the assignment for the benefit of creditors or an “ABC”.  However, this option is only used in the event the company has a lot of creditors and the company managers have decided to wind up the business.

In an ABC, the company’s board of directors makes the decision to liquidate through the ABC process and authorizes an officer to commence that proceeding.  That officer prepares and signs a written assignment of all of the company’s assets and debts to a third party.  The assignment contents must comply with very specific state requirements.

Once the assignment is complete, the assignee will look to see if the company can be sold as a going concern. The assignee will also send each creditor a claim form to assert their claim against the debtor.  If the assignee cannot sell the company as a going concern, the assignee will put each individual asset up for sale. The assignee will use his/her contacts to find buyers for assets and use publication notices specific to the industry to find buyers and generate cash to pay creditors.

This process almost always yields more for creditors than a chapter 7 bankruptcy because the administrative expenses of a chapter 7 bankruptcy are much higher than they are in state court, and the sale process is usually less cumbersome than it would be under a bankruptcy filing.  Once all of the assets are sold and there is nothing left to liquidate, the assignee will pay creditors in the order of their priority, which is set under the state’s statute.  The entire process usually takes about 6 months.

It should be noted that to the extent any of the company’s managers have personally guaranteed debt, unless the debt is paid in full through an ABC, the guarantor will not be relieved of his/her guaranty obligations.

CONTACT US TODAY