assignment for the benefit of creditors

assignment for benefit of creditors

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Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

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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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Assignment For The Benefit Of Creditors: An Overview

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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.

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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.

What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.

Please see full publication below for more information.

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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 .

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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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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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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.

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Assignments for the Benefit of Creditors in New York | Practical Law

Assignments for the Benefit of Creditors in New York

Practical law practice note w-018-2928  (approx. 19 pages).

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Assignments For The Benefit Of Creditors

What Is Assignment For The Benefit Of Creditors

An assignment for the benefit of creditors is a state court-administered proceeding somewhat similar to a Chapter 7 bankruptcy proceeding whereby an individual, a partnership, or a corporation in financial difficulty is able to liquidate its assets in an orderly manner and pay its creditors a pro-rata share of their individual claims. However there are significant differences between an assignment for the benefit of creditors, a state court receivership or a bankruptcy proceeding, that must be taken into account when an attorney is advising a client in financial distress. These differences will be highlighted in this presentation.

An Assignment is voluntary and is commenced by the “assignor” executing a formal “Deed of Assignment” in favor of an “assignee”. In substance it is similar to a deed of real estate and must be recorded in the county clerk’s office of the county of the assignor or the clerk of the Superior Court. The contents of the Deed of Assignment should confirm to N.J.S.A. 2A:19-4, and contain an inventory of assets. (See 44 New Jersey Practice Series Form 3.111) The deed effectively transfers all the assets of the assignor to the assignee who is empowered to liquidate the assets after receiving court approval, for the best prices available, at auction, or otherwise, in the assignee’s discretion, all, however for the benefit of the creditors of the assignor who will receive their pro-rata dividend depending on the amount of their claim, after payment of administration expenses.

History of Assignment for the Benefit of Creditors.

Assignments have an interesting history. They originated in the Middle Ages and were utilized by merchants who belonged to Guilds. When a merchant found himself in financial trouble he would voluntarily turn over all his assets to a member of the Guild who would make arrangements for sale and disposition of the property and pay the debtor’s creditors a fair share of the proceeds. The concept then was that members of Guild were the most knowledgeable people in the industry and could produce the most at a sale. For example, if the debtor was a jeweler, a furrier, or a cabinet maker, the Guild members who knew the market for the products would be able to get the best prices. The assignee would be a member of the Guild and the members would have confidence in that person to fairly and effectively liquidate the debtor’s assets.

The concept of a voluntary assignment was retained through the ages and ultimately was codified by statute. In New Jersey assignments are governed by N.J.S.A. 2A:19-1 et seq. The interesting thing about the codification of the common law is that the law retained the provision that the assignor can select his own assignee. In a state court receivership or a bankruptcy preceding the person designed to liquidate the assets is a “Receiver” or “Trustee”, and in each of these cases the debtor has no say in who is to be designated to liquidate the assets. The court makes the decision. This is an important concept to take into account when an attorney is considering what avenue to recommend when advising his/her client who is in financial difficulty.

Some General Observations

An assignment is rarely appropriate for an individual because, unlike a bankruptcy proceeding, the assignor does not receive a discharge. Accordingly, unless the attorney for the debtor was able to negotiate a release of the creditor’s claims in advance, and an agreement to the assignment, this avenue would not be appropriate. However, it should be mentioned that since Assignments generally proceed much quicker, more efficiently, and often produce better results and a higher dividend for creditors, in a given case, especially where the debtor has had a good relationship with his creditors the attorney should consider seeking the approval of the creditor body for the assignment and obtain agreement in writing from each of the creditors to accept the dividend in full satisfaction of their claim. When the attorney for the debtor decides to take the assignment route he should select an attorney as assignee who is familiar with liquidation proceedings, knows how to protect the assets pending their disposition by sale or otherwise, and knows experienced appraisers and  auctioneers who are familiar with the markets, who will properly appraise the assets and advertise the assets in a manner designed to command the best prices.

Assignee’s Powers and Duties & Administration of the Estate

Execution of the deed vests in the assignee legal title to all the assignor’s real and personal property, including property located outside of New Jersey. In effect, the assignee stands in the shoes of the assignor and has the right to commence actions on behalf of the estate, settle claims and take any other action relative to the handling of the assets that the assignor could have done had he/she not make the assignment. The assignee will immediately inspect the premises of the debtor, obtain insurance if necessary to protected the assets, change locks at the debtor’s place of business, deal with the utilities, the landlord, arrange with the postmaster for forwarding mail to the assignee, and in general do all that is necessary to protect the assets, just as the assignor would have done. All these steps are taken on an emergent basis, another reason why the debtor’s attorney should select an experienced attorney knowledgeable about the process of dealing with insolvent estates, someone who deals with locksmiths, landlords, impatient creditors, taxing authorities, lien holders, all clamoring for payment of their overdue bills. When necessary the assignee will seek court approval for retention of experts, such as accountants, appraisers, and auctioneers, and any other experts the assignee deems necessary for the proper administration of the estate.

The assignee will give proper notice to the creditors of the estate and advise them that their claims must be filed by a certain date or be barred from participation in any dividend.

The assignee with meet with the assignor for the purpose of familiarizing himself with the nature of the business, determining what causes of action should be investigated, as well as the validity of claims filed by creditors .

In unusual circumstances it might be advisable to continue the assignee’s business for a limited period of time either to wind down certain operations, collect receivables , or some other valid reason. The assignee must receive formal approval from the court in order to take this step.

After taking possession of the debtor’s property and making a determination of the extent of the assets of the debtor’s estate, the assignee, before disposing of the debtor’s property by private or public sale, must immediately conduct proper searches to learn whether there are any valid liens on the property. This search includes a title search if real estate is involved, a Uniform Commercial Code search to see if there are any encumbrances on inventory or accounts receivable. Tax searches and a judgment search must be made to see if there are any private or governmental  liens on the debtor’s property. Having conducted all the proper searches the assignee should promptly proceed to liquidate the assignor’s property and convert it to cash, terminate any leases and surrender the property to the landlord.

It is common to liquidate the assets of the estate at a public auction, and the assignee will take steps to select an appraiser, and auctioneer that he is familiar with, and advertise the date of the public sale of assets and give notice to the creditors. On occasion a private sale might be appropriate, but in this instance court approval should be obtained and notice should be given to creditors. These are all steps which are, subject to court sanction, within the powers of the assignee.

Other powers of the assignee are recovery of fraudulent transfers and preferential transfers. There are significant differences in the time periods involved here that are different from the bankruptcy statutes and must be taken into account by the assignor’s attorney when deciding if an assignment is appropriate for the client. For example, the preference period under the assignment statute is 120 days, one month longer than that provided for in the Bankruptcy Code. Another important difference between an Assignment and a Bankruptcy proceeding is the limit of the recovery of former employees for unpaid wage, benefit, or vacation time. Under the Bankruptcy Code an employee may recover up to $11,725.00 for any unpaid wage claim; the limit under the Assignment Act is $400.00 These two factors alone might be important consideration in deciding which proceeding to employ.

Assignee’s Final Account and Procedure

Once all assets have been liquidated, all claims examined and approved, the assignee makes a final accounting with the court, on notice to creditors and the procedure is not essentially different from that in a state court receivership or a bankrupcty court, except the forms and the time periods are different. If the court approves the accounts, formal papers are filed to complete the case and creditors are given their dividends. The Surrogate of the county examines and approves the final accounting of the assignee. The judge assigned to the case awards fees to the assignee from the proceeds of the sale of assets. After payment of dividends to the creditors this concludes the case.

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Assignment for the Benefit of Creditors

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• 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.

Manufacturing

• 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.

Consumer Products

• 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.