assignment of assets for the benefit of creditors

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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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 benefits creditors abcs basics california

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

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

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

Assignors - Rights and Duties

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

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

Assets to be Assigned

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

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

Assignees - Rights and Duties

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

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

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

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

Preferential Claims and Avoidance

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

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

Creditors - Rights and Duties

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

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

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

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

It normally takes about 12 months to conclude an ABC.

Effects of ABC

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

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

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

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

The Statutes: California Code of Civil Procedure

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

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

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

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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.

Assignment For The Benefit Of Creditors: An Overview

Contributor.

What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

• an ABC does not afford a debtor an automatic stay from creditor collection; and
• a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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• Assignment for Benefit of Creditors

Assignment for Benefit of Creditors vs. Chapter 7 Bankruptcy

Assignment for benefit of creditors is also called general assignment, or abbreviated to ABC. It is generally referred to as an alternative to bankruptcy. An ABC involves a company assigning all of its assets to a third party who takes title to the company’s assets in trust, then will sell those assets and distribute the proceeds of the sales to the company’s creditors in priority as determined by  Florida State law  under 727.114 – pack lunch, it’s a long read. While this might sound like a  Chapter 7 liquidation bankruptcy , there are some key differences in how the two processes are conducted and in their end results.

• And ABC does not discharge a company’s debts. Full stop. Only a bankruptcy fully discharges all debts at the end of the procedure.
• There is no automatic stay of collections actions or lawsuits which would be covered by the automatic stay in a bankruptcy. These actions may continue and new actions may be filed or initiated.
• Board and shareholder approval is generally required for corporations since it involves transferring the entirety of the company’s assets and property. LLCs, LLP’s, partnerships, and sole proprietorships may have an easier time entering into a general assignment.
• The assignee acts much the same way as the US trustee, however the assignee is selected by the company that is liquidating, and the US trustee is appointed by the court. Consequently the disposition of property and payment of creditors can be accomplished without court approval.

When a liquidation is in the company’s best interest, the initial impulse is to get it over with as fast as possible. However this may not be in your company’s best interest, though it may be in the best interests of your creditors. Assignees are generally picked for their knowledge of that specific area of business, and maybe trusted above the US trustee in disposing of assets with an eye to getting the highest dollar value for them. There are also no asset exemptions allowed under a general assignment. Filing for Chapter 7 may be more expensive, and take a little longer, but there are also protected asset classes that cannot be attached by creditors when undergoing a filing of bankruptcy.

As you can see, this ABC is not as easy as 123. Filing for bankruptcy is not easy either, and the process can take longer than a general assignment. Before considering an assignment for benefit of creditors in order to settle your company’s debts, I would urge you to take advantage of a  free consultation at Van Horn Law group . Bankruptcy is not a dirty word, and you may even end up the better for it in terms of obtaining credit in order to open a new business and start over. Being able to shed all of your company’s debts after emerging from bankruptcy, will leave you free and clear. Give us a call, and we can figure out what is best for you and for your business.

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Assignment for the Benefit of Creditors (ABC)

Rappaport Osborne & Rappaport has the expertise to represent the corporate debtor (“Assignor”), the third party receiver (“Assignee”), or creditor in an Assignment for the Benefit of Creditors Proceeding (“Assignment Proceeding”).

An Assignment Proceeding is an alternative to bankruptcy.

An Assignment Proceeding is a state statutory device that allows an Assignor (a corporate debtor) to convey all of its assets to a third party Assignee to be liquidated and distributed pro rata to the creditors of the debtor.

An Assignment Proceeding is usually simpler and less expensive than filing a corporate bankruptcy. It can offer great advantages to the Assignor, such as choosing the Assignee. However, there is no “automatic stay” in an Assignment Proceeding. Although the assignment statute prevents unsecured judgment creditors from executing against assets of the estate, the statute does not prevent creditors from commencing or continuing litigation against the Assignor based on pre-assignment claims. Nor does it prevent secured creditors from immediately exercising their rights in the debtor’s pledged collateral.

Finally, since the Assignment Proceeding is not bankruptcy, an assignment may avoid the stigma and, potentially, the resulting reduction in value of assets associated with bankruptcy filings.

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Assignment for the Benefit of Creditors

In lieu of filing for Chapter 7 liquidation bankruptcy, a business may wish to settle its debts by entering into an assignment for the benefit of creditors. An assignment is a streamlined liquidation procedure that allows a business to pay off its creditors while avoiding the costs, time, and stigma associated with bankruptcy.

How Does It Work?

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While almost anyone can assign assets to an assignee, most assignors are corporations or partnerships. The business transfers control and title of its assets, include its accounts receivable, to an assignee. The business cannot rescind an assignment once it has been made.

The law of trusts applies to assignments. The assignee has the same duties and responsibilities to creditors as a trustee would have to the beneficiaries of a trust. The assignee liquidates the debtor’s assets and distributes the proceeds to creditors. The creditors may require the debtor to satisfy any deficiencies, or accept the proceeds as full satisfaction of the debt, also known as a “composition with creditors.” The costs of administering the assignment are paid first from the money generated by liquidation of the estate. Any surplus funds are returned to the business. Secured and Unsecured Creditors, Consent, and Cooperation A creditor does not need to consent to assignment of the asset. However, cooperation with securred creditors is generally sought to maximize the amount recovered from the sale or disposition of the asset. Likewise, while a secured creditor may choose to take back collateral, creditors often cooperate with the assignee to maximize returns on the asset.

Advantages and Disadvantages of Assignments

While business owners may also simply walk away from a failing business, this does nothing to protect the business’s owners or investors. An assignment allows for the opportunity to pay off creditors and to obtain orderly estate administration. An assignee may often be able to sell an asset for a greater price or pursue litigation that a bankruptcy trustee is unable to pursue. Secured creditors consenting to assignment eliminate the costs and litigation associated with the foreclosure and sale of an asset. An assignment may generate less publicity than that of bankruptcy.

There is limited court oversight involved in an assignment, and the automatic stay that prevents creditors from collecting on debts during the pendency of a bankruptcy case does not apply to an assignment case. If the business is not satisfied with the assignment case, it can still file for voluntary bankruptcy. As well, creditors may seek to impose an involuntary bankruptcy under Chapter 11 if they are not satisfied with how the assignment case is proceeding.

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Corporate trust, what is assignment for the benefit of creditors, explaining an emerging alternative to bankruptcy to resolve distress.

What is an ABC?

Assignment for the benefit of creditors (ABC) is a state law winddown procedure that allows for the orderly winddown of a company. The ABC provides for the appointment of an independent fiduciary representative – known as an assignee. The assignee manages the orderly wind down of the business and monetizes the company’s assets for the benefit of the company’s creditors. The assignee will then distribute the proceeds generated from the sale of the company’s assets to the company’s creditors according to state law.

Important pre-approval considerations :

• The decision must be approved by both the board and shareholders.
• Jurisdiction matters – 35 states have some form of an ABC in its laws. Each state will have different considerations and procedures to follow.

What are the benefits of an ABC?

• Choice: Unlike a receivership or a Chapter 7 Case, the board has the ability to select the assignee.
• Time: A bankruptcy case is a lengthy process with many procedural requirements. Most ABCs are significantly less time-consuming than a bankruptcy case or a receivership.  
• Savings: The shortened engagement time for ABCs means billing is leaner – many times, ABCs can provide higher returns.
• Distributions to Creditors: Since the cost of an ABC is usually less than a bankruptcy case or a receivership, the actual return to creditors is usually greater in an ABC than in a bankruptcy case or a receivership. In addition, due to the expedited nature of an ABC, distributions to creditors will usually occur sooner in an ABC than in a bankruptcy case or a receivership.

What else should be considered in ABCs?

ABCs have some key differences from bankruptcies which should be carefully considered. For example, there are no automatic stays or statutory caps for landlord claims or employment claims in ABC. Leases and other executory contracts may be more difficult to assign in an ABC than in a bankruptcy case. In addition, ABCs can only be used for a winddown or sale of the business, not reorganization of the business

Interested in learning more?

Resolute’s team of experts include Steve O’Neill , who has more than 35 years of legal experience in ABCs, complex bankruptcy cases, and sale/winddown of companies; and Jeremiah Foster , who has served bankruptcy trustee and liquidating trustee in a variety of ventures.

Please contact us if you would if you’d like to learn more about ABCs or explore your company’s options.

  (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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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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Assignments For The Benefit Of Creditors

What Is Assignment For The Benefit Of Creditors

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

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

History of Assignment for the Benefit of Creditors.

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

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

Some General Observations

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

Assignee’s Powers and Duties & Administration of the Estate

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

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

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

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

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

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

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

Assignee’s Final Account and Procedure

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

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More From Forbes

Creditor successfully levies on debtor’s funds held in attorney trust account in dickson.

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Retainer Agreement

In the post-judgment world, a creditor may levy execution upon the debtor's non-exempt assets wherever they are found within the court's jurisdiction. This includes the debtor's cash, whether in physical form or in a bank account. If a creditor finds the debtor's bank account, the creditor can have the sheriff serve a notice of levy on the bank and thereby levy upon (read: collect against) any and all accounts that are owned by the debtor. The bank must freeze the account funds immediately and then respond to the levy within a few days by turning over all the debtor's cash to the sheriff. Usually a couple of weeks later, the sheriff then turns the funds over to the creditor.

But what if the debtor's funds are held in the name of somebody else who has an account at the bank? In that event, the creditor has the sheriff serve the notice of levy upon the person holding the funds for the benefit of the debtor, and that person must then freeze the debtor's funds and turn them over to the sheriff. If that person claims that they are the real owners of the funds, they can request that the court have a hearing wherein they can make a third-party claim against the funds by asserting that their right to the funds is superior to that of the creditor.

What happens with the debtor's deposit for legal fees that are held in an attorney's client trust fund? You see, creditors absolutely love to levy upon the debtor's attorneys for any money they are holding for the benefit of the debtor. Not only can hitting this money provide the creditor with immediate cash to be applied against the judgment, but also taking those fees can deprive the debtor of legal representation thus making the creditor's job that much easier.

Can the creditor really do this? The answer was given by the California Court of Appeals in its opinion in Dickson v. Mann , 2024 WL 3421751 (Cal.App.Distr. 4, July 16, 2024), which we shall now consider.

Nicholas Dickson sued Jack Mann for alleged misconduct relating to Dickson's living trust. Mann ultimately stipulated to a $12 million judgment in favor of Dickson which was entered on August 8, 2022. To enforce the judgment, two weeks later, on August 22, 2022, Dickson had the sheriff levy upon Mann's law firm, being Higgs, Fletcher & Mack LLP ("HFM"), for any funds which HFM was holding for Mann. In response, HFM gave the sheriff a notice of third-party claim. In this third-party claim, HFM held an ownership or at least security interest to protect its fees in $585,000 that it had received from Mann. This resulted in a hearing before the Superior Court of San Diego County on the third-party claim.

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Now we have to dive into the nitty-gritty of HFM's agreement with Mann as it related to the $585,000. The HFM engagement agreement with Mann provided that HFM would provide him with a legal defense, including defending against Dickson's efforts to enforce the judgment, and that Mann agreed "to pay a flat fee in the amount of $585,000, inclusive of costs." In other words, were one to look at that clause in isolation, Mann paid HFM $585,000 to handle the matter from start to finish and Mann would not be getting any money back at the end.

But that clause would not be looked at in isolation. HFM's engagement agreement then went on to state:

"Both [HFM] and [Mann] understand and acknowledge that (1) [Mann] has the right to have [HFM] deposit the Flat Fee in a trust account until the fee is earned; and that in such case, (2) [Mann] is entitled to a refund of any amount of the Flat Fee that is unearned because the services were not completed. Despite being fully informed of the rights described in the preceding sentence, [Mann] consents to [HFM] depositing the Flat Fee into [HFM]'s operating account upon payment and consents to such fee being deemed earned by [HFM] when received."

HFM claimed that Mann already owed HFM $948,260 and that ― had the levy not occurred first on August 22 ― by the end of August HFM would have applied the entire $585,000 against Mann's outstanding bill of $948,260 thus leaving nothing of Mann's money remaining. However, " HFM presented no evidence during the litigation of its third party claim that it had begun providing any of the legal services covered by the $585,000 flat fee at the time the notice of levy was served on August 22, 2022."

Dickson opposed HFM's third-party claim by pointing out that HFM held the $585,000 in its client trust account. This is an account that is meant to only and exclusively hold client funds in trust for the client's benefit. The $585,000 was held in HFM client trust account this, Dickson argued, meant that the entirety of the $585,000 still belonged to Mann and was dispositive of the whole matter.

After the third-party hearing, the Superior Court ruled in favor of Dickson, denied HFM's third-party claim, and awarded Dickson the $585,000. The Superior Court had two grounds for its ruling:

First, under the California Rules of Professional Conduct (the state bar ethical rules), where a law firm such as HFM has charged a flat fee, that flat fee is not considered to be earned until the matter has been concluded. In the meantime, until the fee is earned the funds remain the property of the client, being Mann. Since HFM was still obligated to represent Mann on the enforcement of the judgment (and some other matters), the Superior Court held that HFM had not yet earned its fee and so the funds in the account remained Mann's funds.

Second, and although neither Dickson nor HFM raised this matter, the Superior Court concluded that Mann had transferred the $585,000 to HFM for purposes of defrauding Dickson, and thus the California Uniform Voidable Transactions Act ("CUVTA") would apply to void Mann's attempted transfer of the funds to HFM.

On the basis of all this, the Superior Court ordered HFM to turn over $585,000 by December 13, 2022. HFM filed a motion for reconsideration asking that the Superior Court allow HFM to keep $53,458 for certain services that it had provided previously to Mann, but the Superior Court denied this request as well because, essentially, HFM did not timely raise the issue prior to or at the third-party hearing. HFM then appealed, which resulted in the opinion next to be discussed.

After a lengthy explanation of the third-party hearing process, the California Court of Appeals agreed with HFM that the location of the funds in HFM's trust account was not dispositive. Instead, the Court noted that there may be exceptional circumstances where a law firm's own funds may be held in a client trust account, such as where the law firm has billed against the funds but has not yet removed them from the account to pay the law firm's invoice.

If the location of the fund is not dispositive, then what is dispositive? The answer is that the law firm's engagement agreement with the client that describes how the law firm's fee is earned and how the client's funds are to be held is dispositive.

The Court of Appeals turned its attention to HFM's agreement with Mann that HFM would charge a flat fee for its services. Under the California Rules of Professional Conduct, a flat fee cannot be earned on receipt or be nonrefundable. Instead, the fees deposited by the client can only be paid to the attorney either as certain tasks are completed (as the law firm and the client have agreed) or upon the conclusion of the matter.

Here, the Court of Appeals distinguished a flat fee where the client has paid in advance against something known as a true retainer . A true retainer is an amount of money which a client pays to an attorney to make sure that the attorney will be available to handle the client's matter if it arises, but does not compensate the attorney for the attorney's work. One could think of a pure retainer as basically an availability deposit. Unlike a flat fee, a true retainer can be earned upon receipt or made nonrefundable to the client.

Returning to the concept of a flat fee, the Court of Appeals reiterated that a flat fee cannot be deemed to have been earned until certain specified tasks have been completed or the matter is finally concluded. With a flat fee, until the attorney completes the tasks or concludes the matter fully, the client has a right to a refund of the fee, but only if the client chooses to have the fee held in the attorney's client trust account instead of in the attorney's operating account (which is permissible with flat fees only).

Applying all this to the facts of the case before it, the Court of Appeals noted that HFM had utterly failed to present any evidence that it had performed any legal services at all to earn the $585,000 flat fee. Thus, HFM failed to prove that it was the owner of the $585,000 at the time of the levy, which meant that Mann was still the owner of those funds at that time. The Superior Court's finding that HFM had not established its ownership of the $585,000 was thus affirmed.

Having decided that Dickson was entitled to the $585,000 on his levy, the Court of Appeals felt that it did not need to address the Superior Court's second grounds for ruling in Dickson's favor, which was the CUVTA theory, i.e., that Mann had fraudulent transferred the $585,000 to HFM. The Court of Appeals also denied HFM's claim for the $53,458 that it claimed had been earned by its representation of Mann because, as the Superior Court had found, HFM's claim was untimely.

Both the Superior Court and the Court of Appeals found that HFM had failed to prove that it was owed any attorney fees. But let's assume hypothetically that HFM was owed fees by Mann: What would happen then?

The answer is that Dickson's successful levy on Mann's funds held by HFM would not somehow make those fees disappear. Instead, HFM would become an unsecured creditor for those fees, but would be in line to recover only after Dickson's judicial liens were satisfied. In other words, the law firm then goes to the back of the line behind other creditors. Good luck recovering anything when you are behind a $12 million judgment.

How could HFM have protected itself against not being paid for work performed? The answer to that question is easy. HFM should have billed Mann by the hour, and not flat fee, and taken a security interest in Mann's funds that were deposited in HFM's client trust account. This would not have protected the entire $585,000 but at the end of the day it would have assured that HFM would be compensated for the work that it did perform.

The underlying problem here is that the the $585,000 transfer by Mann reeked of the smell of Mann transferring those funds to HFM precisely so that Dickson could not recover against them, i.e., a fraudulent transfer under the CUVTA. Indeed, that was the finding which underpinned the Superior Court's second ground for ruling against HFM. To this end, HFM was probably lucky to have lost the $585,000 by the levy as opposed to a finding under the CUVTA. As I have related in numerous past articles, a transferee to a fraudulent transfer in California can not only lose and have the transfer avoided, but there can be tacked on conspiracy damages, attorneys fees, and even trebled damages under Civil RICO and similar theories.

If not obvious from this article, attorneys who represent debtors can be at extreme risk of not being paid for representing the debtor and, if they are not careful, they can also find themselves on the wrong end of a fraudulent transfer lawsuit. This is why attorneys who sometimes represent debtors (my own practice is about 60% creditor-side and 40% debtor-side) must give a lot of thought to how they are going to be paid. Most debtor attorneys will either require that the client come up with their deposit from exempt funds, such as exempt retirement accounts, or that they be paid from some third-party source such as family or friends. Taking non-exempt money from a debtor is quite hazardous, as illustrated by this case, unless you want to be working for the debtor for free.

The hard truth is that many attorneys do not regularly engage in post-judgment representation and thus are blissfully unaware of these pitfalls. It is a common creditor tactic to smother the debtor's attorney with a lot of work up-front, knowing that the debtor attorney will get a large deposit from the debtor to perform that work, and then hit the debtor's attorney with a levy exactly as Dickson did here. Easy money.

But what about the fact that taking this money may leave a debtor such as Mann without counsel, or at least quality counsel? The reality is that a debtor does not have a right to spend their non-exempt funds for their legal defense. Instead, the net effect of the law is that debtor should instead spend that money paying down the judgment instead of paying for somebody to defend him in post-judgment proceeding. Cruel, possibly, but the law offers very little protection for those who don't pay their judgments other than the statutory exemptions allowed to debtors, and the ability to pay legal defense fees is not one of those.

This is a flaw of many asset protection plans: They protect the assets, but do not provide a means for a debtor to properly fund a post-judgment defense. Too many asset protection plans are concocted with the idea that a creditor will see the plan and simply go away, which does not often happen in real life. To the contrary, defending a debtor's asset protection plan can be very expensive, last a long time, and that contingency must be considered well in advance.

Simply transferring a bunch of non-exempt money to one's attorney (even if the attorney is so foolish to accept it) is not a plan, but little more than a temporary stopover of those funds on the way to the creditor.

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Asset Protection in Trusts and Estates: Legal Approaches

Asset protection in trusts and estates involves implementing legal strategies to safeguard wealth from potential risks and liabilities, guaranteeing long-term financial security. Effective asset protection plans integrate estate planning strategies, such as trusts, gifting, and charitable donations, to minimize estate taxes and protect assets from creditor claims. Domestic and offshore asset protection trusts, as well as irrevocable trusts and LLCs, provide varying degrees of protection and tax efficiency. Business owners can further secure their assets through entity structuring, asset segregation, and adequate insurance coverage. A thorough understanding of these legal approaches is vital to develop an all-encompassing asset protection strategy that addresses unique needs and objectives, and exploring these concepts further reveals the nuances of shielding wealth.

Table of Contents

Key Takeaways

• Asset protection trusts shield assets from creditors and lawsuits, providing a robust shield against financial liabilities.
• Domestic Asset Protection Trusts (DAPTs) offer flexibility in trust designations and management, while providing a high level of protection for assets.
• Offshore trusts established in jurisdictions with strong asset protection laws and financial secrecy provide an additional layer of protection and tax efficiency.
• Irrevocable trusts and LLCs can be combined to create a multi-layered asset protection strategy that addresses both estate tax minimization and creditor protection.
• Effective trust drafting and enforcement are vital in verifying that trust provisions are upheld and assets remain secure.

Understanding Asset Protection Goals

To effectively implement an asset protection strategy, it is crucial to first identify and articulate the underlying goals that drive the need for protection, as these objectives will ultimately guide the selection and implementation of specific asset protection techniques. At its core, asset protection is about preserving wealth and mitigating potential risks that could compromise one's financial security. Wealth preservation is a critical goal, as it enables individuals to maintain their current standard of living and guarantee a secure financial future. A thorough risk assessment is imperative in identifying potential threats to one's assets, including creditor claims, lawsuits, and other financial liabilities. By understanding the specific risks and goals, individuals can develop a tailored asset protection strategy that addresses their unique needs and objectives. A well-crafted strategy will not only safeguard assets but also provide peace of mind, knowing that one's financial future is secure.

Types of Trusts for Asset Protection

When it comes to protecting assets, trusts are a vital component of a thorough strategy. Two key types of trusts that can be employed for asset protection are Asset Protection Trusts, which are designed to shield assets from creditors and lawsuits, and trusts with Spendthrift Trust Provisions, which restrict a beneficiary's ability to assign or encumber their interest in the trust. These trust types offer distinct advantages and can be used in various combinations to achieve ideal asset protection.

Asset Protection Trusts

Three primary types of trusts are commonly employed for asset protection: domestic asset protection trusts, foreign asset protection trusts, and hybrid trusts. Each type serves a distinct purpose and offers unique benefits for asset protection.

When selecting an asset protection trust, it is crucial to weigh factors such as tax implications, creditor protection, and asset segregation. Domestic asset protection trusts, for instance, offer tax efficiency through pass-through taxation, making them an attractive option for individuals seeking to minimize tax liabilities. On the other hand, foreign asset protection trusts provide an additional layer of protection, making them suitable for high-net-worth individuals seeking to shield their assets from creditors. Ultimately, the choice of trust depends on the individual's specific asset protection needs and goals.

Spendthrift Trust Provisions

Spendthrift trust provisions, which restrict a beneficiary's ability to assign or transfer their interest in the trust to creditors, are a pivotal component of asset protection trusts, as they shield trust assets from creditor claims. These provisions are designed to protect trust beneficiaries from creditor concerns, guaranteeing that trust assets remain intact and unaffected by creditor claims. By restricting the beneficiary's ability to assign or transfer their interest, spendthrift provisions prevent creditors from accessing trust assets to satisfy debts.

In asset protection trusts, spendthrift provisions are particularly essential, as they provide an additional layer of protection against creditor claims. By incorporating spendthrift provisions, trust creators can guarantee that trust assets remain protected, even in the event of a beneficiary's bankruptcy or creditors' claims. This is particularly important for high-net-worth individuals, who may be concerned about protecting their assets from creditor claims. By understanding the function of spendthrift trust provisions in asset protection trusts, trust creators can better protect their assets and guarantee the long-term financial security of their beneficiaries.

Estate Planning Strategies

Estate planning strategies serve as a vital component of a thorough asset protection plan, as they enable individuals to manage and distribute their assets in a manner that aligns with their personal and financial objectives. A well-crafted estate plan considers various factors, including estate taxes, family dynamics, and the individual's overall financial situation.

Effective estate planning strategies can minimize estate taxes, safeguarding that a significant portion of the estate is preserved for beneficiaries. This can be achieved through strategies such as gifting, trusts, and charitable donations. Family dynamics also play a pivotal part in estate planning, as they can impact the distribution of assets. For instance, blended families or families with special needs individuals may require customized estate plans that address their unique circumstances. By integrating estate planning strategies into an asset protection plan, individuals can safeguard that their assets are protected and distributed according to their wishes, while minimizing potential conflicts and tax liabilities.

Protective Trust Provisions

By incorporating protective trust provisions into an estate plan, individuals can create an added layer of security for their assets, safeguarding that they remain protected from creditors, lawsuits, and other potential threats even after distribution to beneficiaries. These provisions can be carefully crafted through trust drafting to verify that the trust's assets are shielded from potential claims. One key aspect of protective trust provisions is the inclusion of spendthrift clauses, which restrict beneficiaries' ability to assign or transfer their interests in the trust. This prevents creditors from accessing the trust's assets to satisfy a beneficiary's debt. Additionally, trust enforcement mechanisms, such as the appointment of a trust protector or a distributions trustee, can be implemented to certify that the trust's terms are upheld and its assets are protected. By incorporating these provisions into an estate plan, individuals can rest assured that their assets will remain protected for generations to come. Effective trust drafting and enforcement are vital in verifying that these provisions are upheld and the trust's assets remain secure.

Domestic Asset Protection Trusts

Domestic Asset Protection Trusts (DAPTs) offer a strategic approach to safeguarding assets from creditors and lawsuits . When structuring a DAPT, it is vital to ponder the trust's design and composition, as this will impact the level of protection afforded. By examining the various trust structure options and their associated benefits, individuals can create an effective asset protection strategy tailored to their specific needs.

Trust Structure Options

Typically, asset protection strategies involving trust structures rely on the establishment of Domestic Asset Protection Trusts (DAPTs), which offer a range of options for shielding assets from creditors. These trusts are designed to provide a high level of protection for assets, while also offering flexibility with regard to trust designations and management.

When designing a DAPT, it is vital to weigh trust flexibility and designations to guarantee that the trust meets the specific needs of the settlor and beneficiaries. By carefully selecting the trust structure option, individuals can create a robust asset protection strategy that shields their assets from creditors while maintaining adaptability and control.

Asset Protection Benefits

A Domestic Asset Protection Trust (DAPT) offers a robust shield against creditors, providing a range of benefits that safeguard assets and certify their longevity. By establishing a DAPT, individuals can secure Wealth Preservation and Financial Security for themselves and their beneficiaries. One of the primary benefits of a DAPT is the protection of assets from future creditors, thereby preventing the depletion of wealth. Additionally, a DAPT provides a layer of separation between the trust assets and the grantor's personal assets, thereby shielding the latter from potential claims. This structure also enables the grantor to maintain a level of control over the trust assets while still benefiting from the protection offered. In addition, DAPTs can be designed to provide tax benefits, such as reducing estate and gift taxes, thereby preserving wealth for future generations. Overall, a DAPT is an effective tool for individuals seeking to protect their assets and secure long-term Financial Security, making it an attractive option for those engaged in Wealth Preservation strategies.

Offshore Asset Protection Trusts

Beyond the borders of the United States, offshore asset protection trusts offer an additional layer of protection for high-net-worth individuals seeking to safeguard their assets from potential creditors and lawsuits. These trusts are often established in jurisdictions known for their strong asset protection laws, financial secrecy, and tax havens. By placing assets in an offshore trust, individuals can guarantee that their wealth remains protected from legal claims and creditors.

Some key benefits of offshore asset protection trusts include:

• Strong asset protection laws : Jurisdictions like the Cook Islands and Nevis have enacted laws that make it difficult for creditors to access trust assets.
• Financial secrecy : Offshore trusts often provide a high level of confidentiality, making it challenging for creditors to discover the existence of the trust.
• Tax havens : Many offshore jurisdictions offer favorable tax environments, reducing the tax burden on trust assets.
• Increased flexibility : Offshore trusts can be structured to accommodate complex asset protection strategies.
• Enhanced protection : By combining offshore trusts with other asset protection strategies, individuals can create a robust shield against legal claims and creditors.

Irrevocable Trusts and LLCs

In conjunction with offshore asset protection trusts, irrevocable trusts and limited liability companies (LLCs) can be employed to create a robust domestic asset protection strategy, providing an additional layer of protection for high-net-worth individuals. Irrevocable trusts, in particular, offer benefits such as shielding assets from creditors and minimizing estate taxes . By transferring assets to an irrevocable trust, individuals can remove them from their personal estate, thereby reducing their taxable estate and potential creditor claims.

LLCs, on the other hand, provide liability protection and flexibility with regard to ownership structure and management. By combining irrevocable trusts and LLCs, individuals can create a multi-layered asset protection strategy that addresses both estate tax minimization and creditor protection. From a taxation perspective, LLCs offer pass-through taxation, allowing income to flow directly to the owner's tax return, reducing the overall tax burden. By leveraging the irrevocable benefits of trusts and the flexibility of LLCs, high-net-worth individuals can create a thorough domestic asset protection strategy that complements their offshore asset protection trusts.

Asset Protection for Business Owners

Many business owners, particularly those with high-risk ventures or significant personal assets, require tailored asset protection strategies to safeguard their business and personal wealth from potential lawsuits, creditor claims, and other financial threats. Effective asset protection planning can provide a financial shield against business risks, guaranteeing that personal assets remain secure even in the face of unexpected events.

Some key considerations for business owners seeking to protect their assets include:

• Entity structuring : Choosing the right business entity, such as a corporation or limited liability company (LLC), to limit personal liability
• Asset segregation : Separating business and personal assets to prevent commingling and reduce risk
• Insurance coverage : Obtaining adequate insurance coverage, such as liability insurance, to protect against unforeseen events
• Contractual agreements : Drafting and negotiating contracts that limit personal liability and protect business interests
• Ongoing monitoring : Regularly reviewing and updating asset protection strategies to verify they remain effective and aligned with changing business needs

Common Asset Protection Mistakes

Vulnerability often lies in the nuances of asset protection planning, as even the most well-intentioned strategies can be undermined by common mistakes that leave business owners and their assets exposed to unnecessary peril. One such mistake is failing planning, where business owners neglect to ponder the potential risks and liabilities associated with their assets. This oversight can lead to hidden liabilities, which can remain undetected until it's too late.

Another common mistake is inadequate entity structuring, where business owners fail to properly separate their personal and business assets. This can culminate in the piercing of the corporate veil, leaving personal assets vulnerable to creditors. Additionally, inadequate insurance coverage and failure to regularly review and update asset protection plans can also lead to exposure.

It is vital for business owners to be aware of these common mistakes and take proactive steps to mitigate them. This includes working with experienced legal professionals to develop a thorough asset protection plan that takes into account potential risks and liabilities. By doing so, business owners can safeguard that their assets are adequately protected and their financial security is preserved.

Frequently Asked Questions

Can i change the terms of an irrevocable trust after establishment?.

While generally irrevocable, trusts can be modified through trust modification or judicial reformation, allowing for changes to the original terms, but only under specific circumstances, such as ambiguity or unforeseen consequences, and with court approval.

How Do I Determine Which Assets to Place in a Trust?

When determining which assets to place in a trust, consider the family's overall wealth distribution goals, identifying high-risk or high-value assets, such as real estate or business interests, that require protection and strategic allocation.

Are There Any Tax Implications for Asset Protection Trusts?

When establishing an asset protection trust, tax implications must be considered to guarantee tax efficiency and wealth preservation. Grantors should consult with tax professionals to minimize tax liabilities and amplify benefits, certifying ideal asset protection and financial security.

Can Creditors Access Assets in a Trust for a Beneficiary's Benefit?

Generally, trust beneficiaries' interests are protected from creditor claims, as they hold no direct ownership or control over the trust assets; however, creditors may potentially access trust assets if the beneficiary's interest is deemed a general assignment of property.

Do I Need an Attorney to Set up an Asset Protection Trust?

To guarantee a properly structured asset protection trust, it is highly recommended that a trust creator seeks the guidance of a seasoned attorney, possessing requisite legal proficiency, to navigate complex trust laws and regulations.

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