assignment for the benefit of creditors ohio

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Assignment of Benefits, Part 13: Ohio

I’m currently on a flight to Cincinnati and felt that it would be a perfect time for a new post in my series on Assignment of Benefits (“AOB”) tackling this issue in Ohio.

In Pilkington North America, Inc. v. Travelers Casualty & Surety Company, et al. , 1 the Supreme Court of Ohio addresses the two questions that we are consistently looking at concerning AOBs and whether they are applicable in any particular state. They are: 1) whether contract rights are assignable; and 2) whether anti-assignment clauses in insurance policies are enforceable.

Concerning the first question, the court stated:

It is long-standing tradition in the common law that all contract rights may be assigned except under three conditions. [] First, if there is clear contractual language prohibiting assignment, an assignment will not be enforced. [] Second, an assignment must not materially change the duty of the obligor, materially increase the insurer’s burden or risk under the contract, materially impair the insurer’s chance of securing a return on performance, or materially reduce the contract’s value. [] Third, the assignment will not be valid if it is forbidden by statute or by public policy.

This leads us to the second question, whether the anti-assignment clauses contained in an insurance policy will void the AOB. The court reviewed case law and history across the country. The court noted that under the “plain language” rules of insurance policy examination, the anti-assignment clauses should be valid and enforceable, however, the court stated:

Insurance contracts receive unique treatment post-loss, however. Insurance policies are generally construed such that assignment of an interest is valid after the occurrence of the loss insured against, and the assignment is then regarded as a transfer of the chose in action, even in the face of an anti-assignment provision.

The court ultimately held, “that the chose in action [] is unaffected by the anti-assignment provision when the covered loss has already occurred.” This means that so long as the assignment takes place post-loss, it will be valid regardless of an anti-assignment clause in the policy.

If you have any specific questions on AOBs or would like to see your state come up sooner, please comment below, or send me an email at [email protected].

As always, I’ll leave you with a (mildly) related tune, here’s Ohio’s own, Nine Inch Nails with, Hurt :

https://www.youtube.com/watch?v=kPz21cDK7dg

____________ 1 Pilkington N. Am., Inc. v. Travelers Cas. & Sur. Co. , 112 Ohio St.3d 482, 488-89 (2006) (internal citations omitted).

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Assignments for the Benefit of Creditors Checklist | Practical Law

Assignments for the Benefit of Creditors Checklist

Practical law checklist w-007-7855  (approx. 18 pages).

Assignments for the Benefit of Creditors – an often-overlooked state law alternative to Chapter 7 bankruptcy

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.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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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.

Legal Lingo: Assignment for Benefit of Creditors

Understanding the language of the law is the first step to understanding the law, and in such a complex profession with such a wide array of terms, it’s easy to feel as if you’re visiting a foreign country just by walking into a courthouse or lawyers office. The term “Assignment for the Benefit of Creditors” or an ABC has been in the news quite a bit lately. From the collapse of  Butler and Hosch  in mid-May to discount luxury travel site site  Luxury Link , and retailer  Body Central  it seems as if this “bankruptcy alternative” is becoming a mainstream term. So let’s crack it open and have a look at what this term really means.

The ABCs of an ABC

An  Assignment for Benefit of Creditors  is an analog to the more widely understood Chapter 7 Bankruptcy liquidation. It is a voluntary transfer of the debtor’s property in trust to a third entity for liquidation and satisfaction of the creditors’ claims. The trustee will then liquidate all nonexempt property and satisfy the creditors as much as possible. This is not a one size fits all plan, and it may not be suitable for certain companies in financial straits that will require a bankruptcy. If the company is in dire financial straits, with no lender willing to finance, no liquidity, and no cash flow, or if filing a Chapter 7 would not generate the best payouts for creditors, or if the debtor wants to avoid a Chapter 7 bankruptcy altogether, an ABC might just be a speedier and more agreeable way out for all parties.

• Company A transfers all property including rights, deeds, titles, and control of all assets and independent third entity who we will call the Trustee. They then walk away and have no further say in the disposition of their former property.
• The trustee liquidate the assets and distributes the monies to Company A’s creditors.
• Secured creditors – those who have a right to repossess or foreclose on collateral – are paid from the proceeds and are relieved of the time and expense of selling their collateral interest.
• Unsecured creditors- those that lend money without collateral such as credit cards – must follow a formal claims process called “proof of claims” which allows the trustee to confirm and control unsecured liabilities.

Very often a trustee specializing in ABC’s will be more efficient in the disposition of property than a court appointed trustee, especially when one is selected who has experience in this area of law. Assignment for Benefit of Creditors is less costly, less public, and often much speedier to resolve than your average bankruptcy. It is never easy to lose a business that you may have spent a lifetime building, but by waiting and hoping you may actually be making your situation worse.

At Van Horn Law Group, we understand all of the complex processes of relieving financial distress and helping our clients resolve their debts.

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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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Assignment for the Benefit of Creditors Is an Alternative to Small Business Bankruptcy

The statistic that fewer than half of new businesses continue to operate five years after they were founded if your small business is part of the majority, where the business closes in less than five years without ever having become profitable.  The task remains of closing down your business and settling your debts.  You have the right to file for bankruptcy protection if you cannot pay your debts, as does every business and every individual, but sometimes you can get the same debt relief without going through the entire bankruptcy process in federal court.  Assignment for the Benefit of Creditors (ABC) is a process of closing your business and settling its debts that does not involve the court system.  ABC is one of the many instances where businesses should hire lawyers.  If you are struggling with debts because a company that you founded is going out of business, contact a Philadelphia debt relief lawyer .

Liquidate Your Business Assets and Settle Your Debts Without Going to Bankruptcy Court

Assignment for the Benefit of Creditors (ABC) occurs when a company that is going out of business, known as a distressed company, signs over its assets to another company, known as the assignee.  The process begins when the distressed company and the assignee sign an ABC agreement.  The assignee then communicates with creditors to which the distressed company owes outstanding debts.  The assignee liquidates the assets transferred to it pursuant to the ABC agreement and uses the proceeds to pay the creditors.  There is not enough money from the sale of the distressed company’s assets to pay every creditor the face value amount of the debt that the distressed company owed it; if there were, the company would not be distressed and would not be going out of business.  The assignee settles the debts with the creditors in the same order of priority that the bankruptcy court uses in chapter 7 bankruptcy cases, in other words, secured creditors get paid before unsecured creditors.  If there is any money left from the liquidation after all of the participating creditors have settled the debts, then the distressed company’s shareholders get the remaining money.

The biggest difference between ABC and a bankruptcy filing is that ABC does not involve the court.  Everything takes place in lawyers’ offices and according to the timetable set by the distressed company, the assignee, and the creditors.  Therefore, ABC accomplishes the same goals as chapter 7 bankruptcy for a business, but it does so faster and at a lower cost.  Another reason that some business owners choose ABC instead of bankruptcy is that the proceedings of the bankruptcy court are a matter of public record.  People who plan to open another business after closing the current one do not want the bad publicity associated with a business bankruptcy filing.

Contact CONSUMERLAWPA.com About Settling Business Debts

A Philadelphia consumer law attorney can help you with ABC and other debt settlement options.  Contact CONSUMERLAWPA.com to set up a free, confidential consultation.

americanbar.org/groups/business_law/resources/business-law-today/2015-november/assignment-for-the-benefit-of-creditors/

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