washington state assignment for benefit of creditors

The ABC’s Of An Assignment For The Benefit Of Creditors

A flexible approach to managing debt outside of court, assignment for the benefit of creditors in washington.

Simply stated – an Assignment for the Benefit of Creditors assigns the assets and liabilities of the party making the assignment (the “Assignor”) to that party’s chosen representative (the “Assignee”).  The Assignee then administers those assets for the benefit of creditors as the holder of a power of attorney from the Assignor.

The Regional Background of Assignments for the Benefit of Creditors

Prior to the enactment of the Bankruptcy Code in 1978, the National Association of Credit Management (“NACM”) frequently administered Assignments for the Benefit of Creditors in Spokane, Washington.  

The Spokane Merchants Association was often the sponsor of these assignments, and enlisted the support of the distressed company with pressure from local trade creditors.

The NACM would prepare a written assignment to the management of the target company, with strong provisions for the operation of the company during the assignment.

The NACM would also form a committee of creditors to manage a plan for the repayment of creditors, while frequently obtaining a blanket lien against the assets of the company to render it “judgment-proof” from the claims of non-participating creditors.

Such an assignment effectively wrested control of a company away from its owners and managers, who often had few reasonable alternatives for continuing their business.

The dynamics of creditor intervention changed dramatically with the enactment of the Bankruptcy Code, and the provisions for restructuring business debt under Chapter 11 .   With the protections of the automatic stay, and for the continuation of existing management of the Chapter 11 entity as a debtor in possession, an Assignment for the Benefit of Creditors through NACM became immediately less viable as a creditor remedy.

Although the statute was essentially dead letter law, the Washington statute governing Assignments for the Benefit of Creditors remained substantially unchanged until the enactment of the Washington Receivership Act in 2004.

The Enactment of the Washington Receivership Act

RCW 7.08, which is the statute governing Assignment for the Benefit of Creditors, was restated in 2004 to coordinate Assignment for the Benefit of Creditors with the Washington Receivership Act .

The revised statute provided for the appointment of the Assignee as a receiver following the execution of the assignment.

Under the revised statute , the Assignor may appoint an Assignee for the express purpose of having that party appointed as the receiver.  

The Assignee is best selected by the assignor based on knowledge, trust, and expertise.  The Assignee must consent to the assignment.

Individuals, acting in their personal capacity, may execute an Assignment for the Benefit of Creditors to provide for the administration of their personal assets.   For example, a divorcing couple may initiate an assignment to administer their assets and liabilities as part of a property settlement agreement.  

Individuals are entitled to exempt property in accordance with applicable law, and exclude that property from the assignment.   Otherwise, the Assignor must assign all property to the Assignee.

The assignment must be substantially in the form set forth by statute at RCW 7.08.030. The assignment must attach a schedule of all known creditors, including the creditors’ mailing addresses; the amount and nature of their claims; and whether their claims are in dispute.  

The schedule must also include a true list of all property, including the estimated liquidation value and location of that property, and legal descriptions for all real property.

These schedules of assets and liabilities, while detailed, are less comprehensive than the Official Bankruptcy Forms. It is often advisable to supplement the statutory form of schedules with a schedule of executory contracts and a schedule of co-debtors, so parties will receive a more complete presentation of financial information.

There is no disclosure of operating information or past transactions that is similar to the Statement of Financial Affairs that is required in a bankruptcy case.

What Are The Business Purposes Of An Assignment For The Benefit Of Creditors?

Most Assignors execute an Assignment for the Benefit of Creditors for one of two purposes.

First, an Assignment for the Benefit of Creditors can provide a “stand-alone” procedure for liquidating assets under the independent management of the Assignee .   Unlike a bankruptcy or a receivership case, there is no legal action required to commence an Assignment for the Benefit of Creditors, and no judge will oversee the actions taken by the assignee.

Accordingly, an Assignment for the Benefit of Creditors can be employed to test the willingness of creditors to participate in a voluntary settlement of the Assignor’s liabilities. If so, the Assignor and the creditors may avoid the time and expense of a receivership or bankruptcy proceedings.

As a non-judicial procedure, an Assignment for the Benefit of Creditors is also more private and confidential than a bankruptcy or receivership case. The owners of the assets can then devote their time and energy to other endeavors, and place some distance between themselves and the financial issues of their former business.

Second, an Assignment for the Benefit of Creditors contains the consent of the Assignor to the appointment of the Assignee as a general receiver over the Assignee’s property in accordance with chapter 7.60 RCW. This provision allows the use of an Assignment for the Benefit of Creditors as a “stepping-stone” to a general receivership, without the other procedural hurdles that are set forth in the receivership statute.

Either the Assignor, the Assignee, or any creditor of the Assignor may file a petition to appoint the Assignee as receiver of the assets of the Assignor. That petition, filed with the clerk of the superior court, must include a copy of the assignment; the schedules of assets and liabilities; and a request for the court to fix the amount of the receiver’s bond.

The amount of the bond may be low, since the Assignor selected the Assignee based on faith in the trustworthiness and integrity of the Assignee.    If circumstances change, the Court can increase the amount of the bond as appropriate.

The superior court will then appoint the Assignee as general receiver of the Assignor’s property upon the filing of the petition.

The Washington Receivership Act would govern all further proceedings involving the administration of the Assignor’s property and the claims of the Assignor’s creditors.

There is no requirement to schedule a meeting of creditors.   The court would only schedule such a meeting upon the motion of two or more creditors, if filed within thirty days following the date upon which the receiver mailed notice of the receivership to all known creditors.

At the meeting of creditors, the Court will determine whether to appoint a person other than the Assignee as the general receiver.   A creditor may not vote at any meeting of creditors until the creditor has presented a proof of claim.

The filing of a motion to elect a new Assignee suspends the authority of the Assignee to sell or dispose of any property of the Assignor, except perishable property, whether or not the court has appointed the Assignee as the general receiver.

The failure of the creditors to select a new Assignee will reinstate that authority.   Otherwise, the authority vests in the replacement Assignee, who then serves as the receiver.

More often, a party files a petition to appoint the Assignee as receiver to obtain the protections of the automatic receivership stay, and access to the court for the resolution of creditor disputes.

An Assignment for the Benefit of Creditors must be for the benefit of all creditors in proportion to the amount of their respective claims.   All creditors are entitled to receive notice of the assignment.

The Assignment for the Benefit of Creditors irrevocably appoints the Assignee as the Assignor’s attorney in fact, with full power and authority to do all things that may be necessary to fulfill the assignment.  

The Assignee can perform the same acts that the Assignor could do , including but not limited to the power to sue; the power to execute all necessary deeds, instruments, and conveyances, and the power to convey any or all of the real or personal property of the estate.

The Assignee must take possession of the assets, liquidate the assets, and collect all claims.   The Assignee must pay and discharge all reasonable expenses, costs, and disbursements in connection with administration of the assignment.

To the extent that funds are available after payment of administrative expenses, the assignee must   pay all of the Assignor’s debts and liabilities, according to their priority as established by law, on a pro rata basis within each class.  

Unlike a bankruptcy or receivership, there is no provision for the assignee to exercise the rights of a hypothetical lien creditor to file suit for the recovery of fraudulent transfers, or for the recovery of preferential payments to creditors.

Although the Assignment for the Benefit of Creditors statute does not set forth the priority of creditors’ claims, the priorities established in the Washington Receivership Act should be applicable in an Assignment for the Benefit of Creditors .  

These priorities do not elevate the claims of the federal government above the claims of state tax agencies. Nevertheless, the Internal Revenue Service may assert a first priority claim for payment under 31 U.S.C. 3713(a)(1) , which provides that a claim of the United State Government shall be paid first when a person indebted to the government is insolvent, and that person makes a voluntary assignment of property.

The Assignee must return any assets that remain after the payment of all debts and liabilities to the Assignor.

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

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

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

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Receivership Under RCW 7.60: An Alternative to Bankruptcy

A receivership is the appointment of a disinterested person or organization (a receiver), by a court or by a corporation or a person, for the protection or collection of property that is the subject of creditors’ claims. Receiverships exist at both the state level, through RCW 7.60 , and the federal level, through Rule 66 of the Federal Rules of Civil Procedure . Receiverships serve to usher a business through difficult times with the hope of restoring profitability. While debtors can voluntarily choose to enter a receivership through an assignment for the benefit of creditors (commonly referred to as “ ABC ”), receivership is primarily another tool available for creditors to recoup value when a business is in financial distress.

In essence, a receiver is appointed by the court as the court’s agent, and subject to the court’s direction, to take possession of, manage, or dispose of property of a business for the benefit of creditors. A receiver has the ability to take possession of a failing business liquidate, and distribute the proceeds of the business in accordance with the priorities set forth by law.

If a receivership sounds like a bankruptcy, it should. They are comparable. In fact, the Washington State Legislature enacted RCW 7.60 to “create more comprehensive, streamlined, and cost-effective procedures applicable to proceedings in which property of a person is administered by the courts of this state for the benefit of creditors”; similar to the purpose of bankruptcy.  Statistics show that receiverships are an increasingly popular alternative to bankruptcy. And once you peel back the layers, it is not hard to imagine why. For both creditors and debtors, receiverships cost less and give more control over the outcome.

Costs & Control

Receiverships are generally cheaper than a bankruptcy. Receiverships are not held to the strict deadlines observed in a bankruptcy case and do not involve the burdensome filing requirements from interested parties. Both of these features help reduce the combativeness of bankruptcy litigation and shorten the time frame. Even still, receiverships maintain some of the primary benefits as bankruptcy proceedings such as an automatic stay of many types of actions and the sale of assets free and clear of liens.

Additionally, creditors typically collect more from a receivership than a bankruptcy. In a typical chapter 11 bankruptcy, company management typically remains in control of the debtor company (the classic “ debtor in possession ” bankruptcy), or the bankruptcy estate is overseen by a trustee selected from a standing panel of bankruptcy trustees. However, in a receivership, creditors can propose a potential receiver who meets the qualifications of RCW 7.60.035 . This means creditors can maximize their returns by choosing individuals that will protect creditor interest and choosing individuals who have specialized knowledge in the subject matter of the business going through the receivership.

Key Points to Consider

There are key issues to be aware while considering a receivership. First, while there are federal receiverships ( 28 U.S. Code § 3103 ), most receiverships are operated and controlled by state courts, and therefore subject to state court judges and their rules. While receivership law can look like bankruptcy law, a state court judge may not always agree with such comparison and bankruptcy case law is not necessarily binding on the state court. Some businesses, particularly those who own assets in multiple jurisdictions, will find a federal receivership more appropriate as it gives more power to receivers to manage assets across state lines, but the majority of businesses will find themselves in state court.

Second, receiverships are not always an independent process. While a receivership can be invoked to assist a business in winding up affairs, it can also be “combined with, or [] ancillary to, an action seeking a money judgment or other relief.” RCW 7.60.025 lists 38 reasons to appoint a receiver, the majority of those reasons are a receiver being appointed as part of other legal proceedings. In 2004 the Washington legislature codified receivership law into a single chapter. While that may seem recent, it was the legislatures attempt to clean up over 150 years of separate and distinct uses for receivers in all manner of roles, from caretaking to liquidation of assets.

The multi-faceted application of a receivership is apparent when you consider purpose of a receivership. Unlike bankruptcy, which is designed to protect the debtor, a receivership is designed to protect assets (particularly a lender’s assets), income, real estate, cash, business assets, etc.

Overall, federal and state receiverships are underutilized . They provide a flexible and efficient method of overseeing business transitions while protecting the assets of creditors and lenders alike. While bankruptcies are down in 2021 , following the same downward trend in 2020, some have expressed concern about the continued strength of economic conditions that allow for low bankruptcy filings. The fear now is the conditions and programs supporting businesses through the Covid-19 pandemic will dry up, and a wave of bankruptcy will follow. If this is the case, the receivership may find itself being used more often in the coming years.

The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Coleman Scroggins at [email protected].

  (858) 481-1300   [email protected]

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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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