la assignment for the benefit of creditors

• assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

• Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
• Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
• Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
• Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
• After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
• After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
• Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
• Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
• Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

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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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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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2022 California Code Code of Civil Procedure - CCP PART 2 - OF CIVIL ACTIONS TITLE 6.5 - ATTACHMENT CHAPTER 13 - Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors Section 493.010.

493.010. As used in this chapter, “general assignment for the benefit of creditors” means an assignment which satisfies all of the following requirements:

(a) The assignment is an assignment of all the defendant’s assets that are transferable and not exempt from enforcement of a money judgment.

(b) The assignment is for the benefit of all the defendant’s creditors.

(c) The assignment does not itself create a preference of one creditor or class of creditors over any other creditor or class of creditors, but the assignment may recognize the existence of preferences to which creditors are otherwise entitled.

(Amended by Stats. 1982, Ch. 1198, Sec. 61. Operative July 1, 1983, by Sec. 70 of Ch. 1198.)

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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).

Louisiana Assignment for the Benefit of Creditors Services

Wall street smarts … main street sense™, a symphony of wall street smarts … main street sense™ louisiana assignment for the benefit of creditors services (abc) | general assignment | creditor assignment.

A Louisiana Assignment for the Benefit of Creditors (ABC) or General Assignment/Creditor Assignment can be a prudent alternative to bankruptcy for maximizing value for troubled private and public companies and their creditors.

An Assignment for the Benefit of Creditors (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, that’s us, to liquidate the assets and pay off the creditors. This process is a bankruptcy alternative, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from creditors.

For over 40 years in assignments worldwide, Equity Development Systems, Ltd has brought A Symphony of Wall Street Smarts … Main Street Sense ™ in skillfully guiding and judiciously representing business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.

From National Priority List Superfund Sites—to a Decommissioned Nuclear-Powered Aircraft Carrier—to the Pencils-on-the-Desk—we handle it all, and we have successfully managed and generated Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

Award-Winning Services Our award-winning Receivership Services have earned us the distinction of being the only Court-Appointed Receiver in the country that the United States Environmental Protection Agency (USEPA) allows to conduct Asset Recovery and Divestiture Services on active Superfund Sites. We are pleased to serve as Court-Appointed Keepers (Asset Recovery) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

We handle it all commercial | industrial | residential real estate developments | hoa and golf communities/resorts | environmentally impaired real and moveable property | hospitality/gaming | shipyards/admiralty/maritime | aviation (fixed and rotor) | automotive (manufacturing and retail) | heavy industrial manufacturing | oil & gas/minerals | and more..., 24/7/365 onsite crisis / interim / turnaround management teams our turnaround management and restructuring teams marshal onsite 24/7/365 throughout the world to provide the complete spectrum of crisis/interim and turnaround management services., testimonials, the actions undertaken on behalf of signal capital have established a level of confidence that has resulted in epa allowing signal to dispose of movable property on the facility in a way that most secured creditors would ordinarily not enjoy. in fact, i know of no other analogous situation where the epa region 6 removal program has cooperated with a secured creditor to the extent it has due to your efforts., senior attorney.

USEPA, Region 6

Such a relationship generally does not develop whereby EPA would permit a secured creditor to liquidate uncontaminated movable property due to the realistic concern that such actions would aggravate existing environmental problems or would interfere with EPA’s removal action. It is not at all unusual that in EPA’s proper exercise of its CERCLA responsibilities such accommodations are flatly rejected.

Notwithstanding that general approach, you have demonstrated a level of responsibility and credibility that has warranted a different approach for epa in this matter., louisiana assignment for the benefit of creditors services — statewide, maximizing value for all stakeholders, general/creditor assignments louisiana statutes title 10 – commercial laws rs 10:9-309 – security interest perfected upon attachment.

A Louisiana Assignment for the Benefit of Creditors Louisiana (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, for the purpose of liquidating the assets and paying off the creditors. This process is an alternative to bankruptcy, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from its creditors.

The debtor will appoint an assignee, that’s us, who will take possession of all the assets of the debtor and will be responsible for liquidating them and distributing the proceeds to the creditors according to the priority of their claims. We will then be responsible for identifying, collecting, and liquidating all assets, and for making payments to the creditors.

The ABC process is usually faster than bankruptcy and it allows the debtor to have more control over the liquidation process. It also provides a way for the debtor to avoid the negative impact of a bankruptcy filing on its credit rating. However, there are also some limitations to the ABC process, such as a lack of protection from certain types of claims and a lack of automatic stay to halt litigation against the debtor.

The process of a Louisiana Assignment for the Benefit of Creditors is initiated by the distressed entity (assignor) entering into an agreement with the assignee responsible for conducting the wind-down and/or liquidation or going concern sale in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, interest in, and custody and control of its property to the assignee in trust. The assignee divests the property and distributes the proceeds to the assignor’s creditors.

Our award-winning services have earned us the distinction of being the only Court-Appointed Receiver/Keeper/Assignee in the country that the United States Environmental Protection Agency (USEPA) allows to conduct such services on active Superfund Sites.

We are pleased to serve as Court-Appointed Keepers (Assignees) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.

A Louisiana Assignment for the Benefit of Creditors requires highly-trained—highly skilled—highly credentialed—highly experienced special assets and special situations transitional management, valuation, and disposition experts with decades of proven experience and unimpeachable credibility.

For over 40 years in hundreds of assignments worldwide, New Orleans-based Equity Development Systems, Ltd has skillfully guided and judiciously represented business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.

From National Priority List Superfund Sites—a Decommissioned Nuclear-Powered Aircraft Carrier—to the Pencils-on-the-Desk, we handle it all and we have successfully managed and generated Billions of Dollars  for our global clientele in the conversion of their distressed assets to cash.

We specialize in handling the disposition of complex and highly contentious special assets and special situations: Environmentally Impaired Real and Moveable Property (Superfund and Brownfields Sites), Hospitality, Gaming, Resorts,  Shipyards /Admiralty/Maritime, Aviation (Fixed and Rotor), Automotive (Manufacturing and Retail), Heavy Industrial, Oil & Gas/Minerals, Commercial and High-Value Residential Real Estate.

No assignment is too small or too large for EDS.

The process of a Louisiana Assignment for the Benefit of Creditors

The basic process in a Louisiana Assignment for the Benefit of Creditors is that the business (Assignor) turns over its assets, both real and moveable, to an independent third-party neutral (Assignee [EDS]) who is the responsible fiduciary for divesting the assets and settling with creditors.

A LouisianaAssignment for the Benefit of Creditors is a voluntary and arms-length transaction that provides a speedy, orderly disposition and equitable liquidation of the firm’s assets and subsequent distribution to its creditors. It is similar to a Chapter 7 liquidation process but is far quicker and much less expensive and, therefore, generally derives a larger distribution to all creditors.

EDS experts marshal on-site 24/7/365 throughout the State of Louisiana to secure and operate troubled accounts facing operational or financial challenges. Our experts work diligently with all stakeholders to preserve, protect, maintain, and enhance the enterprise value of the business and business assets that might otherwise be lost during costly and often fruitless bankruptcies.

Assets Held in Trust:  By operation of law, all assets are held in trust upon acceptance of the Assignment. These assets and the funds realized therefrom are protected against creditor claims. The assets are then liquidated, and the proceeds, less administrative expenses, are distributed to all creditors according to their lawful priority class. The order of priority is very similar to that used by the Trustee in a bankruptcy proceeding.

Duties of the Assignee:  The Assignee has similar duties to a Trustee in Bankruptcy. The Assignee is charged with acting in a business-like manner in the disposition of the assets. The Assignee has considerable flexibility in the methods used and does not have to obtain consent or have a hearing to ratify his or her actions.

Fees:  Unlike Bankruptcy, no upfront fees are required. The fee amount is determined before signing the documents and becoming part of the General Assignment agreement. The fees for the Assignee are paid as an administrative expense from the proceeds recovered.

Advantages of an Assignment for the Benefit of Creditors or Creditor/General Assignment:  An Assignment does not require court adjudication or consent in most states, nor does it require the consent of creditors. It does not have the stigma of bankruptcy and frequently benefits the company’s principals, who nearly always guarantee the lender obligations of the company. Because an Assignment avoids the administrative procedures that govern bankruptcy, there is a considerable reduction in the cost of disposition and the time necessary to sell the assets. The consequence is greater flexibility in divestiture methods and options, resulting in greater returns for creditors. An Assignment for the Benefit of Creditors is an option that should always be considered as an option to bankruptcy.

EDS’s unparalleled level of Assignment for the Benefit of Creditors expertise is recognized and appreciated statewide.

How may we be of service to you?

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Insolvency Law Committee Updates Assignment for Benefit of Creditors Desk Guide

Six years after publishing the popular First Edition of the Assignment for the Benefit of Creditors Desk Guide, the Insolvency Law Committee of the Business Law Section has updated and enhanced the Guide for continued use by assignors, assignees, creditors, landlords, purchasers of assets, owners, accountants, real and personal property brokers and other related professionals.

The Second Edition captures in an indispensable single volume (electronic with a paper version on its way) updated relevant California and Federal statutes, case law precedents, a bibliography of source materials, an enhanced tax section and commentary on current legal developments regarding preference avoidance and federal preemption issues that sometimes occur during a California Assignment for the Benefit of Creditors.

The Assignment for the Benefit of Creditors Desk Guide, Second Edition is no longer available for purchase.

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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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DTC Briefing: Why more brands are pursuing an Assignment for the Benefit of Creditors

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

Amid an economically challenging time for retail startups, more brands are pursuing a little-discussed alternative to Chapter 11 bankruptcy: an ABC. 

Called an Assignment for the Benefit of Creditors, an ABC is a liquidation process in which all of the assets of a company are transferred to a third party (an “assignee”) that is responsible for selling them off. Outdoor Voices is reportedly pursuing an ABC after closing all of is retail stores last month. Other retail companies that have undergone an ABC in the past six months include Bandier and Zulilly.  

The benefits of an ABC, according to lawyers and financial experts, is that it is often speedier and less expensive than a bankruptcy proceeding. Unlike in a Chapter 11 or 7 proceeding, there is no automatic stay that is imposed, meaning creditors can still bring litigation against the company.

More DTC startups seem to be taking advantage of an ABC simply because more founders and board members are becoming aware that it is an option. And, during an economically challenging time, startups are going to take advantage of a greater array of liquidation and reorganization options. In 2023, there was a 30% year-over-year uptick in the number of companies that filed for bankruptcy.

Still, there’s no widely available data on how many startups pursue an ABC versus a Chapter 11 filing.

“It is an old-fashioned form of liquidation proceedings, and it is certainly cheaper than Chapter 11,” Jeffrey Chubak, associate at Amini LLC, said. 

“It is nowhere near as known or as understood as bankruptcy,” said Steven Victor, senior managing director at turnaround and financial advisory services firm Development Specialists, Inc.  

Victor said that, anecdotally, it feels like there has been an uptick in the number of companies pursuing ABCs over the past couple of decades. He chalked that up to the fact that companies today have more diversified ownership structures. In the 1980s, he said, many more businesses were family-owned. Now, just 27.1% of businesses are family-owned , according to U.S. Census Bureau data. 

Therefore, companies are more likely to have a board member or an investor who has gone through an ABC themselves and who may recommend the process to other companies. ABCs were frequently utilized when the dot-com bubble burst in the early 2000s.

Part of whether or not a company pursues an ABC depends on what its goals are and what creditors it has to pay off. If a distressed company has a lot of debt that makes a sale unpalatable, it has a few different options: It could pursue a Chapter 11 or Chapter 7 filing; it could pursue an ABC; or, it could wind down the company. “Different insolvency proceedings might get chosen to accomplish different goals,” Chubak said. 

In a Chapter 11 filing, the purpose is to reorganize to hopefully keep the business operating. In a Chapter 7 bankruptcy, the goal is to liquidate assets.

While Chapter 11 and Chapter 7 proceedings are governed by federal law, ABCs play out in the state courts. One of the reasons companies may pursue an ABC is to keep more of the proceedings out of the public eye. There are typically fewer filings with an ABC and don’t attract as much scrutiny since they aren’t in federal court. With a Chapter 11 or 7 proceeding, “there are pleadings filed every day, every week,” he said — all of which can be fodder for journalists like, well, this one.

That’s not to say that the company will always keep the process under wraps. In fact, oftentimes it may make sense to put out a press release when a company undergoes an ABC to make potential acquirers aware of the sale process, Victor said. 

Another key component of the ABC process is that the distressed company enters into an agreement with a third-party assignee and transfers all of its assets and properties to that assignee. At that point, “if you are the management or owner of a company, or on the board of a company that is doing an assignment — you are essentially done,” Victor said. 

That can be appealing for leadership who don’t want to be involved with liquidation proceedings. Additionally, with an ABC, a company gets to choose who the third-party assignee is. That allows them to choose someone who they believe has specialized knowledge of their industry, and can potentially maximize the value of assets. By contrast, during a Chapter 7 proceeding, a company doesn’t get to choose who sells off their assets.

Once an assignee is chosen, they are responsible for then selling off the assets and distributing the proceeds to creditors. 

How long that may take depends on the parameters of the sale and what the assets are. “I can probably sell stuff in a month or two,” Victor said. By contrast, a Chapter 11 or 7 proceeding can take months, or even more than a year. When a company pursues an ABC, they likely have already tried to pursue other options at that point like securing a new round of financing or selling off the business, so they likely have already identified potential acquirers.

The one big drawback of an ABC, however, is that no automatic stay is imposed. “[Bankruptcy] affords the best form of protection from distractions during a liquidation,” Chubak said.

Different states have different regulations and stipulations around ABCs. For example, some states have unique requirements about who can serve as a third-party assignee. 

So, ultimately whether or not a company pursues an ABC depends on what state it operates in, what its goals are and what the advice is of its legal counsel. Another benefit to an ABC is that it can potentially allow a brand to live on, if that’s what the acquirer wants. Bandier, for example, was acquired by holding company BC Brands after announcing at the end of last year that it was going through an ABC.

No matter what position a company is in, Victor advises the leadership of a company to familiarize themselves with the ABC process.

“I strongly urge these boards to start considering their options, whatever they are, sooner than later, even during financing or a sale process,” Victor said. “In case Plan A doesn’t work, Plan B needs to be developed so that you don’t find yourself looking at a bankruptcy or an [ABC] with no funds to deal with it.”

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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.

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.

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United States: ABC: Assignments For The Benefit Of Creditors

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

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

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

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

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

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

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

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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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