The A-B-C's of an Assignment for the Benefit of Creditors
7/ 14/ 2016
What exactly is an Assignment for the Benefit of Creditors (commonly referred to as an ABC)? In a nutshell, this is an effective, quick and cost-effective method of liquidating the assets of a financially distressed debtor without going through the US Bankruptcy Courts. One way to think of this is that an ABC is similar to a bankruptcy, but at the state level, whereas a bankruptcy is at the Federal level.
Since an ABC is governed at the state level, as you might expect, the rules and effectiveness of an assignment will vary from state to state. In some states, a contract between the assignor (debtor) and the assignee (party who handles the proceeding on behalf of the creditors) is all that is required to effectuate an ABC. In other states, the assignee or assignor may be required to register the ABC with a state court of appropriate jurisdiction, in order for it to be considered "legal" in that state.
When a debtor elects to liquidate through an ABC as opposed to filing bankruptcy, they can avoid the administrative costs and delays that arise during bankruptcy proceedings. This can be good for creditors. Since this method is cheaper and faster than bankruptcy, creditors can often receive a larger distribution on their claims.
The ABC is a consensual transaction where the debtor, as the assignor, transfers all of its assets to the assignee, which is an independent third party. There should be a binding contract between the two parties, known as the Trust Agreement and Assignment for the Benefit of Creditors Document. The assignee holds the debtor's property in trust and ultimately, distributes proceeds to creditors, if there are any, after all of the assets have been sold, in line with priorities established by applicable law.
As mentioned above, the administrative expenses of an ABC are far less than those involved with an actual bankruptcy proceeding. The assignee does require a fee, which is paid out of the debtor's assets. This fee is based upon the contractual agreement between the debtor and the assignee. Professionals such as attorneys or accountants who assist the assignee might also receive some form of compensation for their help. Even so, the costs of administration in an ABC are usually far less than those for bankruptcy, which means that creditors can often receive a bigger dividend once the assignment is concluded.
The assignee can be either an individual or an agent acting on behalf of a company. In a majority of states, there are statutes that govern the assignee's duties and obligations. In general, the assignee's main duty is to locate the debtor's assets and then assess their value. Then, sometimes with the help of the debtor, the assignee will analyze and implement the various options that will maximize the worth of the assets. They may allow the debtor to remain operational until the assets are sold during the usual course of business. Or, the assets could be sold at liquidation. If the debtor has accounts receivable, the assignee will try to determine which of those are collectible. Money collected from customers who owe money to the debtor will be placed into the trust account, along with the rest of the money raised from the sale of assets, to be distributed to creditors.
Just like a bankruptcy trustee, the assignee has the power in most states to recover on preferential transfers (preference payments) and payments made to insiders, provided they are made within a certain number of days preceding the assignment. Many states have statutes on this that parallel the time frames established under the Bankruptcy Code, while other states may give the assignee expanded powers in this area, allowing the assignee to reach back farther than a bankruptcy trustee.
Most states do not permit the assignee to examine the assignor without first obtaining a court order. Thus, creditors should monitor the assignment as best they can, to ensure that the assignment is not simply being used as a ploy to deepen the pockets of insiders outside the scrutiny of bankruptcy proceedings. The interests of creditors are best served when the assignee is experienced in handling turnarounds, liquidations and other financial distress situations. In our experience, the vast majority of assignees will be legitimate and reputable, working to quickly liquidate the debtor for the benefit of creditors.
The assignor (debtor) will provide the assignee with a list of creditors, contact information and the balance owed to each creditor. The assignee will then give notice of the assignment to the listed creditors, and give them an opportunity to file claims against the assignment estate, similar to a bankruptcy situation. There is usually a "bar date" for claims to be filed. A proof of claim should be filed prior to the bar date. We would recommend having the claim sent by registered or certified mail, so that it can be acknowledged by the assignee. If the claim is sent to the assignee by e-mail, an acknowledgment of some sort should be obtained, to prove that the claim was received. Claims that are received beyond the bar date or which do not meet other claim requirements set forth by the assignee, will be subject to objection and possibly disallowed.
In most cases, the assignee will collect all of the assignor's assets and liquidate them in a manner which provides the greatest return to the estate. Once the assets are liquidated, the assignee will prepare to distribute the funds to those creditors with allowed claims on file, on a pro rata basis. Many of the assignments we see provide nothing, or very little, to unsecured creditors. The debtor usually has too much secured debt, and not enough assets, to allow a distribution to unsecured creditors to take place.
One final thought: In some states, there could be some kind of court order which would act as a "stay" and prevent creditors from filing suit against a debtor that is the subject of an assignment. If there is no court order, creditors would be free to sue, but this would usually not be recommended. By virtue of the assignment, whatever assets the debtor had were transferred to the assignee. This means that even if you obtain a judgment against the debtor, you would be unable to collect it, because the debtor would no longer have any assets, as they were all transferred to the assignee.
For general questions, or if you need additional information, feel free to contact your local sales representative or the Louisville office (800-626-5873). This information is intended to be informational only, and does not constitute legal advice. We suggest you consult with your legal counsel if a specific opinion is desired.