assignment for the benefit of creditors assets

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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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.

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  What is an Assignment for the Benefit of Creditors (ABC)?

An assignment for the benefit of creditors, or “ABC”, is a type of out of court settlement mechanism for dealing with debt. In most cases, when a company is going out of business, they will usually opt for either business bankruptcy or liquidation (selling off remaining assets). With an assignment for benefit of creditors, the company hires an “ABC” company to help them liquidate their assets for them in one consolidated procedure.

The benefits of the liquidation sales go to the creditors, while the ABC company takes a percentage of the sale profits as their fee. This basically makes the entire procedure faster than a regular, piece-by-piece liquidation of assets. It also takes much of the burden off of the company and business owners, who may already be pressed for time and resources.

Who Would Benefit Most From an Assignment For Benefit of the Creditors?

An assignment for the benefit of creditors works particularly well for smaller corporations and LLC’s. These smaller organizations might not be equipped for a full business liquidation procedure, which can take months or even years to fully complete. Instead, with an ABC, the company assigns (transfers) all of their assets, including the debt, to the ABC organization. At this point, the business owners can move forward while the ABC group takes care of the details of the liquidation process.

Are There Any Legal Issues Associated With An Assignment For Benefit of Creditors?

An assignment for benefit of creditors needs to be done with the consent of the creditors. Also, the ABC company will likely need to create a contract with the debtor regarding the process and procedure for the assignment. These steps can be fairly complex and may require the assistance of a lawyer. In some cases, disputes may arise. For instance, if the ABC company violates their own contractual duty to liquidate the assets, then litigation may be required.

Lastly, in some cases, the debtor might remain personally liable on some of the debt even after it has been assigned or transferred to the ABC company. This can have all kinds of effects on the business’ legal rights, as well as their credit and other factors. Thus, it’s important that the debtor fully understand their rights and responsibilities prior to entering into an assignment for benefit of creditors.

Overall, going the ABC route is generally faster and actually more profitable for the debtor in the long run than filing for bankruptcy or undergoing liquidation by themselves.

Do I Need a Lawyer For Help With An Assignment For Benefit of Creditors?

An assignment for the benefit of creditors can be a complex procedure and can involve a large amount of debt and assets. It may be in your best benefits to hire a business lawyer in your area if you need assistance with an ABC or other similar issues. Your attorney can provide you with legal research and advice in relation to the process, since business laws may differ by state. Also, if you need to attend any court meetings, your lawyer can provide you with legal representation during those times.

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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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What are assignments for the benefit of creditors?

Assignments for the benefit of creditors (ABCs) are an alternative to formal bankruptcy proceedings. Under Florida law, an ABC is a voluntary, out-of-court process where a debtor transfers their assets to an assignee, who then liquidates these assets and distributes the proceeds to the debtor’s creditors.

For example, a struggling business in Florida may pursue an ABC instead of filing for bankruptcy. This choice can be advantageous because it is often faster, less expensive, and less public than a formal bankruptcy filing. The business would transfer its assets to an assignee responsible for selling these assets and distributing the proceeds to the creditors following the priorities established by Florida law.

Need a bankruptcy law advocate? Schedule your consultation today with a top bankruptcy and restructuring attorney.

Which Florida laws and regulations apply to assignments for the benefit of creditors?

The primary source of law governing ABCs in Florida is Chapter 727 of the Florida Statutes . This chapter outlines the process for initiating an ABC, the assignee’s role, and the creditors’ rights. Additionally, the Florida Rules of Civil Procedure may apply to certain aspects of an ABC, such as serving notice to creditors and managing creditor claims.

Federal laws, such as the Bankruptcy Code , generally do not apply to ABCs because they are state law alternatives to bankruptcy. However, it is essential to note that federal laws may still impact an ABC in certain situations, such as when a debtor’s assets are subject to federal tax liens or other federal claims. In these cases, debtors must consult a knowledgeable attorney to navigate the interplay between state and federal laws.

How do assignments for the benefit of creditors connect to the bankruptcy process?

The connection between pursuing an ABC and bankruptcy legal services for debtors lies in their shared goal of providing relief to financially distressed individuals or businesses. Both processes involve the liquidation of assets and the distribution of proceeds to creditors. However, ABCs are generally less formal, less expensive, and more private than bankruptcy filings, making them an attractive option for debtors seeking to avoid the stigma and complexities associated with bankruptcy.

In an ABC, a debtor voluntarily transfers their assets to an assignee who liquidates them and distributes the proceeds to creditors. This process differs from a bankruptcy proceeding, where a court-appointed trustee oversees the operation. Furthermore, while strict federal rules and procedures bind bankruptcy cases, ABCs offer more flexibility, allowing parties to tailor the process to their needs.

When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.

What are the prerequisites for debtors to pursue assignments for the benefit of creditors?

Consider the following:

• Voluntary action: The debtor must willingly initiate an ABC, as this process is a voluntary alternative to bankruptcy.
• Valid assignment: The debtor must properly execute and deliver the assignment to a qualified assignee, who is often an attorney, accountant, or insolvency professional.
• Recording the assignment: The assignee must record the assignment in the county’s public records containing the debtor’s principal place of business.
• Filing notice: The assignee must file a notice of the assignment with the circuit court clerk in the county where the debtor recorded the assignment.
• Notifying creditors: The assignee must provide written notice to all known creditors of the debtor within 20 days of the assignment, informing them about the ABC process and their rights.

By satisfying these requirements, the debtor can effectively pursue an ABC in Florida, which allows for a more personal and flexible approach to resolving financial difficulties compared to bankruptcy.

Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.

Frequently Asked Questions

• Can a debtor choose any person as an assignee for an ABC?

No, not just anyone can be an assignee. The assignee must be a disinterested person who is not an insider of the debtor and is qualified to manage the debtor’s assets and affairs. Assignees are typically professionals, such as attorneys, accountants, or insolvency experts.

• Does an ABC in Florida prevent creditors from pursuing legal action against the debtor?

Unlike bankruptcy, an ABC does not automatically halt legal actions by creditors. However, creditors may agree to a standstill or moratorium on legal actions while the ABC process is ongoing. This outcome may depend on the specific circumstances and the willingness of the creditors to cooperate.

• How does an ABC affect the debtor’s credit rating?

Although an ABC may be less public and stigmatizing than bankruptcy, it can still harm the debtor’s credit rating. Credit reporting agencies may treat an ABC as a similar event to a default, which can lower the debtor’s credit score and make it more difficult for them to obtain future credit or loans. However, the impact on the credit rating may vary depending on the specific circumstances of the case and the debtor’s credit history before the ABC. Therefore, debtors must work closely with financial advisors and credit counselors to rebuild their credit after an ABC process.

Have more questions about how bankruptcy services could positively impact your business operations and relationships?

Crucially, this overview of assignments for the benefit of creditors does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation .

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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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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.”

What I’m reading 

• Allbirds is on the verge of a Nasdaq delisting , after receiving a notice that it has six months to raise its stock price. 
• Why we may see an uptick in DTC mergers . 
• Fly by Jing is launching in more than 2,000 Walmart stores. 

What we’ve covered 

• TikTok is encouraging brands to post more photos with its new Carousel function.  
• Lab-grown jewelry brand Dorsey has hit eight figures in revenue and seven figures in profitability. Here’s the brand’s playbook for growing profitably.  
• Figs is the latest startup to launch a trade-in program for the sake of customer acquisition . 

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Amid an economically challenging time for retail startups, more brands like Bandier and Zulilly are pursuing a little-discussed alternative to bankruptcy. 

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Bombas is venturing outside its core sock business with indoor/outdoor slide sandals. Bombas co-founder Randy Goldberg spoke with Modern Retail about how the brand thinks about product development.

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Assignment for the benefit of creditors.

If a debtor is a suitable candidate for an Assignment for the Benefit of Creditors (ABC), this efficient technique may be used to help them avoid the negative aspects of bankruptcy. For several decades AIQ and ARA has been a leader and an innovator in the implementation of this state court alternative for the administration of insolvent estates. AIQ and ARA have developed several innovative methods of operating a business in an assignment pending the partial or full sale of assets.

Our companies conduct a thorough analysis of the debtor’s financial situation in order to determine whether the debtor is eligible for an ABC. If so, then with the direction of the debtor’s attorney (assignor’s), AIQ or ARA serves as the assignee, responsible for liquidating the estate in full and ensuring the equitable distribution of funds received from the sale of assets to creditors.

As an assignee, we will develop a comprehensive liquidation plan in order to maximize value for assets while minimizing expenses and administrative costs. The liquidation plan includes the process of collecting accounts receivable, identifying potential revenue sources (such as filing for outstanding insurance claims) and working with our real estate affiliates and auction subsidiaries to receive the highest value for liquidating all tangible and intangible assets.

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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.

Get Information on Assignments For The Benefit Of Creditors;  call Michael McLaughlin, LLC, for  an initial consultation  at  (908) 373-8500 and get the legal answers you seek.

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