assignment for benefit of creditors

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Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

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

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

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

Assignors - Rights and Duties

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

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

Assets to be Assigned

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

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

Assignees - Rights and Duties

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

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

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

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

Preferential Claims and Avoidance

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

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

Creditors - Rights and Duties

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

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

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

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

It normally takes about 12 months to conclude an ABC.

Effects of ABC

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

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

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

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

The Statutes: California Code of Civil Procedure

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

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

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

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

Fox Rothschild LLP

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.  

[ View source .]

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Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

  • A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
  • The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).    (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.    (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .

Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

  • Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
  • Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
  • Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
  • Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
  • Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
  • No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay  like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
  • Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
  • Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
  • Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
  • 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
  • Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
  • Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
  • Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

  • The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims  compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
  • In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
  • Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
  • If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
  • If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
  • If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
  • While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.

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Assignment For The Benefit Of Creditors: An Overview

Contributor

KI Legal weblink

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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Assignments for the Benefit of Creditors: Overview | Practical Law

assignment of assets for the benefit of creditors

Assignments for the Benefit of Creditors: Overview

Practical law practice note overview w-006-7771  (approx. 19 pages).

Jimerson Birr, P.A.

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Pursuing Assignments for the Benefit of Creditors

  • Pursuing Assignments for the Benefit of Creditors
  • Pursuing Assignments for the Benefit of Creditors Overview
  • Bankruptcy and Restructuring
  • Security Agreements and UCC Filings in Bankruptcy
  • Acquiring Assets from Bankruptcy Estates and Distressed Borrowers
  • Workout, Refinancing, and Restructuring Opportunities Outside of Bankruptcy
  • Representing Creditors in Bankruptcy Court and Pre-Petition Negotiations
  • Debtor-in-Possession Financing and Cash Collateral
  • Preventing Debtor Bankruptcy Through Liquidation, Restructuring, and Reorganization
  • Proofs of Claim
  • Estate Disputes Over the Treatment of Differing Creditor Claims, Transfer Avoidance, Breach of Fiduciary Duty, and Alter Ego Liability
  • Reconciling Creditors Committee Interests to Avoid Litigation and Expedite Recovery
  • Litigating Parasitic State Court Claims on Behalf of the Estate
  • Adversary Proceedings to Set Aside Preference Payments and Fraudulent Transfers
  • Creditors’ Committees and Trustees
  • Defending Against Involuntary Bankruptcy Petitions
  • Advising Insolvent Companies on Fiduciary Duties and Winding Down
  • Establishing a Restructuring Agenda
  • Recovering from Non-Debtor Entities
  • Filing Involuntary Bankruptcy Petitions
  • Foreclosure or Repossession During Bankruptcy
  • The Impact of Commercial Reorganization on Creditors
  • Assigning Bankruptcy Claims to Claims Traders
  • Trade Supplier Relations with Financially Distressed Customers
  • Creditor’s Committees and Trustees
  • Adversary Proceedings in Bankruptcy
  • Relief from the Automatic Stay
  • Bankruptcy Defense: Fraudulent Transfers and Preferential Payments

What are assignments for the benefit of creditors?

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

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

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

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

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

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

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

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

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

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

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

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

Consider the following:

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

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

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

Frequently Asked Questions

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

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

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

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

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

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

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

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

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

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

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

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Assignment for Benefit of Creditors Lawyers

(This may not be the same place you live)

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

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

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

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

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

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

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

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

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

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

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

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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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Assignments for the Benefit of Creditors in Minnesota

Understanding how an ABC works is essential to a creditor re-establishing control of the debt collection process.

In August 2012, Minnesota enacted a new, more user-friendly statute governing the once seldom-used tool of Assignments for the Benefit of Creditors (“ABC”). [Disclaimer: Jeffrey Ansel served on the committee that was tasked with re-writing Minnesota’s receivership laws]. Since then, ABC’s have become more common. Unlike receiverships, [1] ABC’s are typically initiated by debtors, giving the debtor control over when an ABC is commenced, the assets included in the ABC, and selection of the “administrator” or assignee. Creditors, including (and especially) lenders are rightly concerned about the debtor having control over these options. Understanding how an ABC works, however, is essential to a creditor re-establishing control of the debt collection process.

GENERAL PURPOSE OF AN ABC

An ABC is commenced by the filing of a written assignment agreement in a form substantially similar to the form included in the statute. Minn. Stat. §577.12 and .13. The Assignment must be filed with the court administrator of the district court in the county where the assignor, or any of them if there is more than one, resides or has its principal of business. Minn. Stat. §577.12.  An ABC provides a debtor with an opportunity to use neutral party and a court‑supervised process to liquidate some or all of its assets in an orderly fashion to satisfy creditor claims. This process can insulate the debtor from having to deal directly with creditors and avoid any claims that the debtor preferred one creditor over another. As a court-supervised process, an ABC can help to narrow disputes and give all parties closure.

CAST OF CHARACTERS IN AN ABC

The cast of characters in an ABC includes the assignor, the assignee, the creditors of the assignor, the Court, and potentially holders of equity interests in the assignor. [2] Unlike a receivership, where a party, typically a creditor or shareholder, recommends and the Court selects and appoints a receiver, in an ABC the assignor is authorized to select the assignee. However, the assignee must be eligible to serve as receiver and therefore must meet the same criteria required of a receiver. See Minn. Stat. §577.12 [3]   To determine whether a proposed assignee is eligible to serve, the Court will evaluate the proposed assignee’s qualifications and independence. See Minn. Stat. §576.26. [4] The assignor may assign assets to one or more assignees. Minn. Stat. §577.12.  For example, an assignor can assign real property to an assignee with particular experience in liquidating real estate while assigning other assets to a different assignee.

The assignee takes possession and control of the assigned assets (the “Assignment Property”); gives notice to those statutorily entitled to the same pursuant to Minn. Stat. § 576.34,   and liquidates the Assignment Property for purposes of paying the assignor’s creditors. The assignee serves the same purpose as a general receiver under Minnesota’s receivership laws, Minn. Stat. § 576. [5]

Creditors of the assignor, both secured and unsecured, may receive distributions from the liquidation process. Creditors may be required to file claims forms detailing what is owed to them and why. See Minn. Stat. §576.49 and .50. Certain creditors are stayed from pursuing certain claims against the assignor, the assignee, or the Assignment Property outside of the ABC process. See, Minn. Stat. §576.45.

The Court in which the ABC is filed has jurisdiction over the Assignment Property, the assignee, and the ABC proceedings.

THE ASSIGNMENT PROPERTY

The language of the assignment form as set forth in Minn. Stat. §577.13, [6] and the statute provides that the assignor can assign all or some of its assets to the assignee. [7] The assets so assigned are the Assignment Property pursuant to Minn. Stat. §577.11(c).  The Court then has jurisdiction over the Assignment Property, and the assignee is given control over the assets, but not the entity which owns the assets (i.e., the assignor).

INITIAL ORDER

The Assignment agreement does not contain all of the usual terms and provisions of a typical receivership order. Accordingly, best practice suggests that the assignee upon appointment, or as soon thereafter as practical, should seek a court order approving and validating the assignment and otherwise delineating the powers, duties, and process for the ABC.  This order could also include the provisions typical in a receivership appointment order (e.g., duties of and restrictions on the other parties involved in the ABC, a periodic reporting protocol for the assignee with an objection process and statement that failure to timely object is a waiver of the objection as to matters described in the report, as set forth in Minn. Stat. §576.36, lay out the claims process, including claim form exemplars, claim administration, objections to allowance of claims, extend the limited stay if appropriate, and other matters relevant to the case), as well as other provisions specific to the particular situation.

SALES OF ASSIGNMENT PROPERTY

Typically the assignee is required to sell real and personal property as part of the ABC process. If the sale of such property is in the ordinary course of the assignor’s business, the assignee can sell such property without Court authorization. Minn. Stat. § 576.29, Subd. 1(b)(4). If, however, the sale of such property is not in the ordinary course of business (such as an auction, for example), the assignee is required to obtain prior Court approval. Minn. Stat. § 576.29, Subd. 1(b)(5). Depending on the nature and value of the property, the assignee may want to seek such approval before having a buyer identified or may want to wait until it has received a purchase offer.

The assignee may sell Assignment Property [8] subject to liens or free and clear of liens, except liens for unpaid real estate taxes or assessments or liens airing under federal law. Minn. Stat. § 576.46, Subd. 1. Any owner of property or lien holder may object to a proposed sale. If the Court determines that the amount likely to be realized from the sale is less than the objecting party would realize in the absence of the sale, the Court will not permit the sale to go forward. Upon the sale of property free and clear of liens, all liens encumbering the property shall transfer and attach to the proceeds of the sale, less reasonable expenses incurred in the disposition of the property. Minn. Stat. § 576.46, Subd. 1(c). The Court may then authorize the assignee to pay secured creditors out of the sale proceeds.

The Court may not authorize the sale free and clear of a co‑owner’s interest in property. Minn. Stat. § 576.46, Subd. 2. Rather, the assignee shall have the assignor’s rights and powers afforded by state and federal law, including any rights of partition.

A secured creditor may credit bid at a sale provided that the creditor tenders cash sufficient to pay the reasonable expenses incurred in the disposition of the property and all senior liens. Minn. Stat. § 576.46, Subd. 3.

CLAIM PROCESS

Not surprisingly, the claims process is usually the most time-consuming portion of the ABC. Unlike the more formal claims process in federal bankruptcy proceedings, the ABC/receiver statute provides the assignee and the Court with a great deal of latitude with respect to the claims process. Minn. Stat. § 576.49. The assignee is to “submit to the Court a recommendation concerning a claims process appropriate to the particular” ABC proceeding. The Court is then required to establish a claims process addressing specific topics in the statute. [9]

In some ABC proceedings, it makes sense for the assignee to immediately submit a claims process recommendation to the Court. Sometimes, however, it makes more sense for the assignee to wait until the assignee has a better understanding of the value of the Assigned Property and the claims the assignee anticipates will be filed. For example, if the value of the Assigned Property is unlikely to result in a distribution to general unsecured creditors, it does not make sense to immediately recommend a claims process that requires unsecured creditors to file claims and requires the assignee to evaluate, and potentially object to, those claims. See Minn. Stat. § 576.51 (establishing a priority schedule for allowed claims to receive distributions). Rather in such a circumstance, it might make sense to require secured creditors to file claims immediately and wait to determine whether to require unsecured creditors to file claims until more is known about whether a distribution to unsecured creditors is likely.

Likewise, in some proceedings it may make sense to have creditors file claims with the Court, whereas in other proceedings it may make sense to have creditors file claims with the assignee or claims processing agent retained by the assignee, depending on: (1) the anticipated number of claims; (2) the sophistication of the creditor, will creditors have the ability to electronically file claims with the Court; and (3) whether sensitive or confidential information is likely to be included along with claim forms.

The assignee should also evaluate the information it received from the assignor to determine whether claims should be allowed without requiring the specific creditor to file a proof of claim. For example, the assignor may have kept detailed books and records that show the assignor owed specific creditors specific amounts. The assignee should determine whether it is necessary for those creditors to file a proof of claim.

Once claims have been filed, the assignee and “any party in interest” may object to specific claims. Minn. Stat. § 576.50. The objection must state the grounds for the objection and comply with any other Court imposed requirements. Generally, objections must be filed with the Court and served on certain identified parties at least 30 days before a hearing on the objection. The Court is allowed to estimate claims if fixing or liquidating such claims would unduly delay the administration of the ABC process. Minn. Stat. § 576.50, Subd. 3.

Finally, unlike the claims process in bankruptcy proceedings, the ABC claims process does not include a cap on landlord claims associated with commercial leases. In bankruptcy proceedings, a debtor can reject a lease and a landlord’s resulting bankruptcy claim is capped by 11 U.S.C. § 502(b)(6) up to the rent reserved by the lease for the greater of one year or 15%, not to exceed three years, of the remaining term. In certain circumstances, the difference between lease rejection claims under the bankruptcy code and the Minnesota ABC process may be of sufficient size that it impacts the decision of whether to file bankruptcy or an ABC proceeding.

DISTRIBUTION

The ABC/Receiver statute provides the assignee and the Court with a great deal of flexibility in  the distribution to creditors of Assignment Property. Minn. Stat. §576.53. The assignee is permitted to make interim and final distributions after filing a proposed distribution schedule. The assignee is required to give notice of filing the proposed distribution schedule on all persons on the master service list and all persons that filed proofs of claims. Provided that no objections to the proposed distribution schedule are filed within 21 days of notices, the Court may enter an order authorizing the proposed distribution. If there are objections to the proposed distribution schedule, the Court will rule on those objections and then a distribution can be made.

The assignee’s proposed distribution schedule must comport with the statutory order of priority: (1) secured claims, subject to reimbursing the assignee for the reasonable and necessary expenses of preserving, protecting or disposing of the collateral, including allowed fees and expenses of the assignee and its professionals; (2) other expenses incurred during the ABC process; (3) wages incurred within 90 days of the filing of the ABC, capped at $13,650 (see 11 U.S.C. § 507(a)(4)); (4) security deposits for the purchase, lease or rental of non‑commercial property, capped at $3,025 (see 11 U.S.C. § 507(a)(7)); (5) past due domestic support obligations; (6) unsecured claims of governmental units for taxes that accrued before the commencement of the ABC; (7) all other unsecured claims; and (8) interest on unsecured claims. Minn. Stat. § 576.51.

Notwithstanding this priority schedule, the United States government claims the right to be paid first. See 31 U.S.C. § 3713. This can include tax claims, contract claims, and even claims where the United States is recovering funds on behalf of others. Moreover, the United States claims the right to recover, personally, from any party that makes distributions to others, including paying ABC expenses (including the assignee’s fee) before paying the United States.

Since the ABC/receivership statute was re‑written in 2012, there have not been any reported decisions in Minnesota addressing the conflict between these two statutes. Assignees as well as recipients of distributions should be careful and proactive in evaluating United States government claims before making or taking any distributions. Under the correct circumstances, the United States government may chose not to demand payment first. The United States government may permit secured creditors and/or the assignee to be paid before the United States government. It may also permit certain other creditor classes to be paid.

EFFECT OF AN ABC PROCEEDING-STAYS, PREFERENCES, AND DISCHARGE

The filing of the ABC triggers two separate stays. The first stay acts as a stay against acts to obtain possession of or exercise control over Assignment Property or to create or perfect a lien against Assignment Property. Minn. Stat. § 576.42, Subd. 3. This first stay is permanent. The second stay acts as a stay of commencement or continuation of legal actions against the assignor or the receiver/assignee that were or could have been commenced before the ABC filing and commencement or continuation of a legal action to enforce a lien having priority over the assignee. Minn. Stat. §576.42, Subd. 4. This second stay expires 30 days after the filing unless extended by the Court. In order to extend the stay, the assignee or other party in interest must file a motion seeking extension of the stay within the initial 30 day period. The filing of such a motion extends the stay for an additional 30 days. In order to extend the stay, the Court must do so within 60 days of the filing of the ABC proceeding. [10]

Unlike bankruptcy proceedings, the commencement of an ABC proceeding does not give the assignee the right to recover “preference payments” ‑ payments made within 90 days of the filing to satisfy a pre‑existing debt. Depending on the circumstances, the assignor and other parties in interest will want to evaluate whether the pursuit of preference claims will benefit the process.

Significantly, an ABC proceeding does not conclude with the assignor receiving a discharge from its obligations (as a debtor can obtain by filing for bankruptcy). Rather, creditors continue to have claims against the assignor to the extent such clams are not paid through the distribution process. This may not be a particularly relevant concern for an entity filing an ABC proceeding as part of a liquidation of all its assets, but is certainly relevant for an individual or an entity that hopes to continue operating.

TERMINATION AND REMOVAL OF THE ASSIGNEE

At the conclusion of the ABC, the assignee will file a final report and seek approval of the final report and a discharge. Minn. Stat. § 576.38. The final report shall include a description of the activities of the assignee, a schedule of all Assignment Property as of the commencement of the ABC proceeding, a list of expenditures, a list of unpaid expenses incurred during the ABC proceeding, a list of all dispositions of Assignment Property, a list of all distributions, and, if not done separately, a request for payment of fees and expenses of the assignee. Minn. Stat. § 576.38, Subd. 3. The final report may incorporate the prior interim reports by reference. A discharge of the assignee excuses the assignee from further performance of any duties and discharges any lis pendens recorded by the assignee.

An assignee can also be removed if: the assignee fails to execute and file the bond required by the Court; the assignee resigns, refuses or fails to serve for any reason; or for other good cause. Minn. Stat. § 576.37. Upon removing the assignee, the Court shall determine whether a successor assignee should be appointed. A removed assignee is required to file a final report within 14 days of removal for matters up to the date of the removal.

Since the ABC statute was amended in 2012, there has been a significant increase in the number of ABC proceedings in Minnesota. In the right circumstances, ABC proceedings can be more advantageous than a bankruptcy or a lender exercising its rights under its loan documents. There are, however, limitations and disadvantages that all parties should be aware of prior to proceeding with an ABC. As a relatively new method of handling the assets of an insolvent entity, there is much uncertainty about the advantages and disadvantages of these proceedings. The authors hope that this article has helped clarify those considerations.

[1] ABC’s are governed by Minnesota Statute § 577.11‑.18 and once commenced are conducted similar to general receiverships as described in Minnesota Statute §576.21‑.53.

[2] Some of these terms are defined in Minn. Stat. §577.11, which provides as follows: (a) The definitions in this section and in section 576.21 apply throughout this chapter unless the context requires otherwise. (b) “Assignee” means the person to whom the assignment property is assigned. (c) “Assignment property” means the property assigned pursuant to the provisions of this chapter. (d) “Assignor” means the person who assigns the assignment property. (e) “Time of assignment” means the date and time endorsed by the court administrator pursuant to section 577.14

[3] See Minn. Stat. §577.12 [3] (“Every assignment for the benefit of creditors subject to this chapter made by an assignor of the whole or any part of the assignor’s property, real or personal, for the benefit of creditors, shall be: (1) to a person eligible to be a receiver under section 576.26, . . .).

[4] The Court will consider, among other things, whether the proposed assignee has: sufficient knowledge and experience; the financial ability to post the necessary bond; been previously disqualified from serving as a receiver or assignee; been convicted of a felony or other crime involving moral turpitude; and been found liable in civil court for fraud, breach of fiduciary duty, civil theft or similar conduct. In evaluating the proposed assignee’s independence, the Court will consider, among other things: the relationship the proposed assignee has to the parties and the property proposed in the ABC; whether the proposed assignee has a material financial interest in the outcome of the underlying dispute; and whether the proposed assignee is a creditor or holder of any equity interest in any of the parties to the ABC.

[5] Minn. Stat. §577.18 provides: “Except as otherwise provided in this chapter, an assignee shall be treated as a general receiver, the assignment property shall be treated as receivership property, and all proceedings following the filing of the assignment shall be governed by sections 576.21 to 576.53 .”

[6] The statute says in pertinent part:: “. . . the assignor, . . . hereby assigns to the assignee, . . . the assignor’s property, . . . which property is set forth on Schedule A attached hereto

[7] Minn. Stat. §577.12 states that the assignor can assign “the whole or any part of the assignor’s property, real or personal, for the benefit of creditors,. . .”

[8] The receivership statute provides that a receiver cannot sell agricultural land or homesteaded property unless the owner of the property has consented to the sale following the time of appointment. Minn. Stat. § 576.46, Subd. 1. Because an ABC proceeding is commenced by the assignor transferring to the assignee title to the Assignment Property, this provision should not prevent the sale of such property. That said, some title companies have been reluctant to insure title to real property being sold out of an ABC proceeding without having the assignor consent to the specific sale at issue.

[9]  The statutory requirements to be included in the claims process are: (1) whether proofs of claims must be submitted; (2) the deadline or deadlines for submitting proofs of claims; (3) where the claims are filed ‑ with the Court or the assignee; (4) whether to permit claims based on the amounts established in the books and records of the assignor without requiring the filing of formal claims; and (5) other matters bearing on the claims process.

[10] The Court is empowered to modify both stays upon the motion of a party in interest. Minn. Stat. §576.42, Subd. 5. Moreover, the stay is inapplicable to certain types of proceedings, including, criminal proceedings against the assignor, actions by a governmental unit to enforce its police or regulatory power or to establish tax liability, actions related to establishing paternity, actions to establish or modify an order for alimony, maintenance or support, setoff, acts to maintain or continue the perfection of a lien, or commencement of bankruptcy case. Minn. Stat. § 576.42, Subd. 6.

September 25, 2020

assignment of assets for the benefit of creditors

Jeffrey R. Ansel

Assignments for the Benefit of Creditors in Minnesota

Creditors’ Remedies, Bankruptcy & Work-Out

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  • Navigating risks in the UK and German Asset Based Lending Markets
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14. Mai 2024

Lending Focus - May 2024 – 5 von 6 Insights

Navigating risks in the UK and German Asset Based Lending Markets: a Comparative Analysis

  • In-depth analysis

What is asset based lending, in a nutshell?

The asset based lending ( ABL ) market continues to grow at pace, both in this jurisdiction, in Germany and internationally. 

ABL is a form of lending in which a percentage of the realisable value of a portion of the borrower's assets will be used to determine the sums to be advanced by the lender. The percentage set will be determined by the sum the lender is willing to lend money against in order to ensure that value of the loan never exceeds the realisable value of those assets, with reserves being created against the loan sum to reflect third party claims to the assets (for example retention of title or liens) that may reduce their overall value, and in relation to UK borrowers, certain preferential claims in UK insolvency proceedings. The value, quality and, crucially, liquidity of the assets (which could include receivables, stock, land, machinery and equipment) are as such paramount, particularly given that enforcement is likely to involve the lender taking control of the assets and converting them into cash.  This type of financing suits companies who are rich in receivables and stock and is particularly useful where financing is required on a flexible basis for example for companies whose returns are seasonal or those that are making strategic investments and acquisitions.  Borrowing companies may benefit from fewer covenants and favourable pricing depending on the nature and quality of the underlying assets.

In this article, which is the first in a series considering and comparing jurisdictions in the ABL space, we take a close look at the jurisdictional issues and key risks for an ABL lender in the UK and in Germany and how such issues may affect their decision to lend to corporates in that jurisdiction.  Lenders considering making funds available by way of asset-based loans will need to consider various factors including: (1) the types of security that may be taken in the jurisdiction and the ability to enforce the security in a default scenario in the manner the lender wishes; (2) restrictions applicable to the asset (for example non assignment provisions) which prevent the lender from taking the security it seeks; (3) the perfection requirements which if not satisfied may impact the validity and effectiveness of the security; (4) other creditors having priority over its security interests on insolvency or there being competing claims to the assets; (5) vulnerabilities of the security on insolvency and (6) third party costs involved in taking security in that jurisdiction.  Lenders will also need to get under the skin of the complexities of lending in the specific jurisdictions such as: any legal restrictions on the granting of security and any applicable regulatory (for example licensing) requirements which may affect a lender's ability to lend in that jurisdiction plus any hidden costs involved in the taking and perfecting of security.  Consideration of applicable regulatory requirements is beyond the scope of this article.  

What types of security can be taken under English and German law and what do they allow the lender to do on enforcement? 

Under English law , various options are available: 

  • Plant and machinery: A fixed charge may be taken over plant and machinery, potentially in the form of a standalone mortgage over chattels or as part of a debenture. 
  • Receivables: Security is usually taken by the creation of a mortgage over the receivables, which is usually done by way of an assignment. This can be legal or equitable under English law. An assignment will be a legal assignment if it complies with the requirements of s.136 of the Law of Property Act 1925 (the LPA ) (ie must be in writing, absolute, not purport to be by way of charge only and be notified in writing to the third party against whom the assignor could enforce the assigned rights). If any of these requirements fails, there is an equitable assignment which can still be perfected at any point.  Future receivables are typically secured by way of an equitable assignment. Notice of the security should be given to the relevant third party (the security provider's debtor). If notice is not given the assignment will be equitable only.  Alternatively, charges are also commonly taken over receivables. With a charge, there is no transfer of title involved. The right over the receivable remains with the chargor, but the chargee has a right, if the charge becomes enforceable to appropriate the asset. It may be helpful to take a charge instead of an assignment where for example, the underlying document prohibits assignment (although the lender’s counsel should interrogate the assignment restriction and make sure it doesn’t also extend to charges).  There are two types of charge, fixed and floating. If a fixed charge is taken over receivables it can impair a company's ability to trade as the chargor will (amongst other things) be prevented from disposing of the asset without the lender's consent. 
  • Inventory: Security is usually taken by way of mortgage in the form of an assignment or a floating charge – these types of non-possessory security allow the company to operate in the usual course. 
  • Real Estate: Security is generally taken by way of charge by way of legal mortgage, which will need to be registered at the Land Registry (where the land is registered) or at the Land Charges Department (where the land is unregistered). However, security interests over unregistered land protected by the deposit of title deeds do not need to be registered.

On enforcement: A security package along the lines of the above will allow a lender to enforce its security over the assets on default, using the options available to it in the security document (and generally at law).  Enforcement options are likely to include the appointment of receivers, the exercise of the power of sale over the assets and taking possession of the secured assets where appropriate.  The proceeds from realisation of the assets will then be applied towards expenses incurred during enforcement and followed by repayment of the debt. A key point for lenders to note in relation to assignments is that with an equitable assignment, the assignee cannot sue the third party against whom the assignor has rights in its own name; an assignee under an equitable assignment is normally required to join the assignor in any action it brings against the relevant third party. With a legal assignment, the mortgagee is allowed to use the counterparty/account debtor and the mortgagee can enforce the chose in action against the counterparty in its own name, without having to join the mortgagor in the action.  It should be noted that to appoint an administrator out of court the security holder must have a qualifying floating charge, and lenders may be prevented from enforcing their security when an application for administration has been made or the company has gone into administration.

By contrast, under German law , the following options are available:

  • Plant and machinery: Security may be taken in the form of a security transfer (see below for inventory). If the borrower is unable to repay the loan, the lender has the right to realise the asset and thus obtain economic satisfaction. However, there is a risk for the lender if the machinery and equipment that was transferred as collateral is located on the borrower's property and a third party enforces execution (eg on the basis of a mortgage or land charge in favour of the third-party) on the property. In this scenario, the machinery and equipment may under certain circumstances fall within the scope of the mortgage or land charge as an accessory to the property pursuant to Sections 97 and 1120 of the German Civil Code, Bürgerliches Gesetzbuch ( BGB ), with the consequence that the lender can no longer obtain satisfaction from the items. 
  • Receivables: Security may be taken in the form of an assignment. Third party debtors should be notified according to German market practice (at the date of the assignment or upon occurrence of an event of default). If third party debtors have not been notified, they can still pay to the assignor with discharging effect.
  • Inventory: With regard to inventories, a security transfer is considered. In connection with the security transfer asset lists and/or site maps of security areas where the assets are located should be delivered to properly identify (it is not sufficient that the assets are identifiable) and describe these assets, otherwise the transfer may be invalid. Also, lenders need to note that third party’s (extended) retention of title agreements and statutory liens (eg the landlord’s statutory lien) might lead to a situation where a certain portion of the inventory is not available for security for the lenders and thus reduces the security value of the security transfer of inventory.
  • Real Estate: The relevant real property must be listed in the land register and the security taken, generally by way of a non-accessory land charge, must be notarised and registered with the competent land register. 

On enforcement: In Germany, the rights available to the lender in the security documents may be used following default as set out in the relevant security document and as provided under German law. In contrast to the UK, the German enforcement regime appears to be more borrower-friendly with certain mandatory provisions to be followed in an enforcement scenario. In general, enforcement of security instruments therefore requires prior written notice (Androhung) of the lender’s intention to enforce the collateral while there are circumstances where such notice may not be required under German law, eg if the company has ceased making payments generally or has filed for insolvency or if insolvency proceedings have already commenced. The questions if, when and how to enforce the security interest at hand of the lender(s) need to be thoroughly assessed in advance given that an enforcement which was not done in accordance with German law principles might lead to damage claims against the lender(s).

How effective is a contractual restriction on assignment?

Security in ABL is commonly taken by way of assignment. The governing law of the security will depend on the governing law of the underlying asset. Under English law, if the relevant formalities are followed and the assignment is valid as a legal assignment, this will have the effect of taking the asset outside of the borrower’s estate in an insolvency scenario. Non-assignment clauses applicable to the relevant assets can present a significant hurdle, but are they always effective? Both the UK and German legal systems have mechanisms which may assist a lender who wishes to take an assignment where the asset is subject to a non-assignment clause. 

  • Under English law: Such a clause may be used to prohibit the assignment of the benefit of the contract and any accrued rights, subject to the Business Contract Terms (Assignment of Receivables) Regulations 2018, SI 2018/1254 (the Regulations), to the extent they apply. The effect of the Regulations is that, in certain situations when they apply, any contract term that prohibits or restricts the assignment of receivables is rendered ineffective. In general terms, the Regulations negate any ban on assignment of receivables (i) in B2B contracts created on or after 31 December 2018 for the supply of goods, services or intangible assets; (ii) where at least one of the parties has entered into the contract in the ordinary course of carrying on business in the UK; and (iii) where the party entitled to the receivable is an SME which is not an SPV (test applied at the time of the assignment, not when the contract was entered into). Certain categories of contract are excluded, eg regulated and Consumer Credit Act regulated contracts. If a restriction on assignment is found to be applicable and is not rendered ineffective by the Regulations, this may result in the lender seeking security by way of charge rather than by way of assignment over the relevant asset. 
  • Under German law: According to the general rules of BGB, an assignment may be invalid. However, section 354a of the German Commercial Code (HGB) provides for an exemption to that principle. The assignment of monetary claims cannot be contractually excluded, if the parties to the agreement are commercial parties (Kaufleute) and the underlying agreement between the contracting parties constitutes for both of them a commercial transaction (beiderseitiges Handelsgeschäft). Even though the assignment of the relevant receivable is therefore valid, the prohibition of assignment continues to apply contractually between the parties and a violation thereof might lead to damage claims. However, the assignment is effective despite this prohibition. It should be noted that such third-party debtor will (even after notification of the assignment of the claim) be able to make payment to the assignor with discharging effect.

What perfection requirements are there and what happens if the security is not registered at an appropriate registry?

Under English law; All security granted by an English incorporated company, LLP or limited partnership (where the security is granted by its general partner and that general partner is a company or an LLP) must be registered at Companies House within 21 days of the security being granted (section 859A of the Companies Act 2006). A failure to register renders the security void against any administrator, liquidator or creditor of the company. When a charge becomes void, the money secured by it immediately becomes payable. The permission of the court (and an order providing the same) would be required to register security past the statutory cut off. It is worth noting that even if the governing law is not English, if the chargor is an English incorporated company or partnership, the registration requirement still applies.

Under German law: There is no central security registry under German law but asset specific registrations may be required. Perfection requirements under German law depend on the relevant security, the underlying assets and include, among others: 

  • with respect to land charges: notarisation or at least notarial certification (Beglaubigung) and registration with the competent land register.
  • with respect to the security transfer of inventory: transfer by delivering asset lists and/or site maps of security areas where the assets are located. The assets have to be properly identified (it is not sufficient that the assets are identifiable) and described, otherwise the transfer may be invalid. The Security Transfer Agreement is German market standard because it has the advantage that the debtor remains in direct possession of the secured assets and can continue to work with them, while the lender is allowed to have indirect possession via the debtor (Besitzkonstitut).
  • with respect to the assignment of receivables: certain third party debtors should be notified according to German market practice (at the date of the assignment or upon occurrence of an event of default). If third party debtors have not been notified (which is common for third party debtors of trade receivables), they can still pay to the assignor with discharging effect. To protect the lenders, the notification of third party debtors of trade receivables is often triggered by an event of default or other triggers.

Do other creditors have priority on insolvency and can there be competing claims to the assets themselves? 

Under English law: The order of priority is broadly as follows: Fixed charge holders, administrator/liquidator fees, preferential creditors (HMRC/tax authority rates and taxes owing plus employee wages and salaries and accrued holiday remuneration), prescribed part (up to £800,000), floating charge holders, unsecured creditors and shareholders. To the extent that a lender takes part of its security package by floating charge there will therefore be claims that take priority over its claim and a portion of the floating charge realisations will be applied towards the prescribed part. 

In Germany: There are also claims that will take priority over a secured creditor in an insolvency of the relevant company: the order is broadly: persons entitled to segregation due to security interests, persons entitled to separation due to valid security interests, mass creditors, ordinary insolvency creditors and lastly subordinated creditors. Certain tax authorities are preferential. There is no equivalent of the UK prescribed part. German insolvency law generally provides for the subordination of shareholder loans and “claims arising from legal acts economically equivalent to such a loan” in the insolvency of the company. Lenders therefore, in general, have a statutory priority over holders of an equity interest in the insolvent company.

Retention of title/reservation of title clauses are recognised under both English and German law and may impact the pot of assets available to the asset based lender. As such reserves to address potential retention of title claims may be built into the facility in both jurisdictions.

The application of rights of set off may also deplete the assets available to the lender. In the UK, the laws of set off are however favourable to a lender provided in an insolvency scenario there is mutuality of obligations. German law is also protective to debtors and security providers, applying principles of good faith. Furthermore, a prohibition to set-off cannot be upheld by the German courts if the counterclaim in question is undisputed or has been recognised by declaratory judgment. 

What are the key vulnerabilities of security on insolvency? 

Under English law: Assuming that the lender is not "connected" to the company, security may be set aside (1) within 2 years of the onset of insolvency if the administrator/liquidator declares it was a transaction at an undervalue; (2) where granted within 6 months of the onset of insolvency, the transaction may be void for being a preference or (3) within 1 year of insolvency a floating charge may be set aside if not granted for appropriate consideration. 

In Germany: Security may be subject to challenging rights by the security grantor's insolvency administrator in case of insolvency. There are several cases in which the collateral may be contested in insolvency within certain specific time limits, in particular – of course – where the granting of security is wilfully to the disadvantage of other creditors. Also, security can be contested if the total value of the aggregate security granted by the company on day 1 is initially more than 150% of the value of the secured obligations or there is deemed to be a lack of consideration (initial overcollateralisation). 

What are the standard third party costs involved in taking security or a guarantee in the jurisdiction? 

Under English law: Any security documents written in a foreign language need to be fully translated before being filed at Companies House. The filing fee at Companies House is nominal. 

Under German law: Typically, certain security interests, such as the pledge over shares in a German limited liability company (GmbH) or the creation of a land charge require the involvement of a German civil law notary. The fees of such notary are not negotiable but are mandatorily fixed and depend on the value of the security.

Are there any local law restrictions on a resident company granting security or a guarantee in favour of a lender? 

Under English law: There aren't any such restrictions, subject to the constitutional documents of the company and the terms of any investor/shareholder agreement permitting such transactions, and subject to the company being able to demonstrate the required corporate benefit for entering into the transactions.

Under German law: There are outright restrictions:

  • If the total value of the aggregate security granted by the company on day one is initially more than 150% of the value of the secured obligations (initial overcollateralisation), the security will be invalid.
  • If overcollateralisation occurs whilst the security is outstanding, the company can demand a partial release of the security (subsequent overcollateralisation).
  • Depending on the type of company, there may be corporate law restrictions such as a prohibition on the disbursement of assets necessary to maintain the share capital of a GmbH. In case of violation, the managing director(s) can be held liable for damages.

A loan agreement and the guarantees and/or security interests securing such loan may be void pursuant to section 138 para. 1 BGB (usury-like transaction – wucherähnliches Geschäft) or section 138 para. 2 BGB (usury – Wucher) if (i) there is a conspicuous disproportion between performance and consideration and (ii) subjectively, there is a reprehensible attitude on the lender’s side. The German Federal Court of Justice (Bundesgerichtshof) has consistently held that there is a conspicuous disproportion if the effective contractual interest rate exceeds the normal market effective interest rate by around 100% in relative terms or by 12% in absolute terms, although in individual cases the requirements of section 138 para. 1 BGB may also be met if the relative interest rate difference is only between 90% and 100%, based on an overall assessment of all other business circumstances. 

What about financial assistance issues?

Under English law: Whilst guarantees can be set aside for unlawful financial assistance, this only applies to a public company (or its subsidiary) giving financial assistance of the purpose of the acquisition of shares of a public parent company. This is therefore unlikely in the context of a typical ABL financing. 

Under German law: The regulations are similar – an Aktiengesellschaft (AG), a German form of public company similar to a plc in the UK, is prohibited from providing financial assistance by way of granting of security to a potential buyer of its shares. Any such financial assistance will be void. The return of contributions to shareholders is also prohibited. 

Concluding comments

Understanding the risks and vulnerabilities of lending by way of ABL and taking associated security in an unfamiliar jurisdiction will be of crucial importance to a lender, when making the decision to lend. The factors considered above are not exhaustive, but aim to provide a detailed starting point for lenders, to assist them in this process. This is, as mentioned above, the first in a series of articles in which we compare ABL in the UK with various other jurisdictions, so please watch this space for the next in this series!

To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance  team.

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How Do Creditors Find Your Assets?

Avatar for Gideon Alper

Florida law provides judgment creditors numerous means to find information about a debtor’s income and assets.  Discovery in aid of execution  in Florida refers to the legal process by which a judgment creditor finds (discovers) debtor assets that may be subject to collection of a money judgment.

The principal discovery tools include requests to produce documents, written answers to interrogatories, and depositions under oath. A judgment creditor can use the same  discovery tools  available to parties in general litigation to discover financial information about a judgment debtor. After a creditor locates a debtor’s assets, the creditor applies collection tools to seize and liquidate the assets. Discovery of assets previously owned by the debtor provides clues about fraudulent transfers or conversions of assets to avoid collection. After a court issues a money judgment, the judgment creditor is permitted to ask the judgment debtor detailed and extensive questions about the debtor’s financial affairs. The creditor can demand that the debtor disclose all assets in which the debtor has any legal or equitable interest, including assets owned jointly with a spouse, family members, or business associates. The creditor can ask broad questions about the debtor’s past sales or transfers of assets. The debtor must answer questions under oath and under penalty of perjury. The creditor can also seek information from third parties, such as an examination under oath of the debtor’s spouse and other family members.

A creditor can find out about a debtor’s financial assets by using:

  • Depositions
  • Document requests
  • Financial statements
  • Real estate records
  • Public business records
  • Other creditors
  • Private investigators
  • Social media

Tip: Asset protection planning is rarely about trying to hide assets from judgment creditors. Instead, it is more about using legal methods to protect those assets from creditors even after the creditor discovers them.

Deposition in Aid of Execution

An effective discovery tool used for discovery in aid of execution is an oral deposition of the debtor under oath. A creditor can require a debtor to sit before a court reporter while the creditor asks questions about the debtor’s financial affairs and assets. The creditor can inquire about almost any aspect of the debtor’s finances, including the debtor’s tax returns and all other personal matters.

Almost any question that could lead to the creditor’s discovery of assets subject to execution is permitted. In most cases, the debtor’s deposition must take place in the county where the debtor resides. A creditor may not force the debtor to travel outside their residential county to the creditor’s place of business or to the creditor’s attorney’s law firm in another county. A creditor may take several depositions during the life of a judgment so long as the frequency of inquiry does not amount to unreasonable harassment.

Request for Production of Documents

The debtor must furnish documents the creditor reasonably requests related to the debtor’s financial affairs. Florida’s laws for discovery in aid of execution allow creditors to request copies of a debtor’s bank statements, check registers, canceled checks, credit card statements, insurance policies, and tax returns. A creditor can request documents up to at least four years old. The debtor is required, upon request, to produce all documents that possibly could lead the creditor to the discovery of the debtor’s assets available to satisfy the judgment.

The debtor is required to supply documents requested which are in the debtor’s custody or control. The debtor does not have to provide documents that the debtor does not have in their possession or cannot easily obtain.

Debtor’s Financial Statements

When an individual borrows money to start a business or personally guarantees a commercial loan to an existing business, the bank typically requires the individual business owner to submit personal financial information and personal tax returns. In addition, lenders typically require individual borrowers or guarantors to periodically update their financial statements during the life of the loan and submit copies of annual tax returns.

A judgment creditor will often request copies of a debtor’s loan applications and updated financial statements previously submitted to the debtor’s lenders. Some borrowers exaggerate their assets when they apply for a loan. A judgment creditor may use a debtor’s inflated valuations and asset descriptions on lending documents to contradict the debtor’s attempt to minimize the value of their assets during a deposition.

Real Estate Ownership

Real estate, or real property, deeds are filed in the county where the real estate is situated. Each Florida county maintains an index of real estate ownership. Florida counties have digitized their legal records so that property ownership information is available by online search. Online property records are centrally linked to state and national databases.

Instead of guessing where a debtor might own real property, for a small fee a creditor can search real estate records throughout Florida. Computer searches quickly provide the debtor’s property ownership and other information such as date of purchase, mortgages, and property value. The same property search can identify whether the debtor holds any mortgages on someone else’s real estate to secure a promissory note payable to the debtor. The judgment creditor can garnish the underlying note and payment stream if it finds that a debtor is a mortgagee from seller financing.

Business Interests

Florida debt collection laws also allow creditors to use public records to discover a debtor’s business interests. Florida public records do not include or reveal a debtor’s ownership interest in any particular entity. Still, they do disclose if the debtor is an officer or director of a corporation, manager of an LLC or limited liability company, or a registered agent.

Most owners list themselves in at least one of those capacities when filing annual reports with the Florida Division of Corporations. Once a creditor discovers a debtor is involved in a business in some capacity, the creditor will focus on the debtor’s ownership interests. The extent and nature of a debtor’s ownership of a business entity is usually revealed through the debtor’s tax returns or the use of other discovery tools.

Cooperation Among Creditors

Collection agents who work for institutional lenders and large collection agencies develop personal contacts working in banks and other financial institutions.

The creditor’s personal contacts are an excellent source of financial information about judgment debtors. Any contact person with access to a company’s computer records can quickly tell a collection agent whether the debtor has a financial account at its institution. The judgment creditor can then serve a  writ of garnishment  on any institution which reports an account of significant balance.

Professional Investigators

Private investigators may perform asset searches as a service to judgment creditors. Some private investigation firms specialize in searching for bank accounts, while other firms provide broader searches. Access to information over the internet and social media has made investigator’s asset searches easier and more accurate.

Private investigators have at their disposal several sophisticated methods of asset discovery. For example, a private investigator can access your phone records. The investigator can use reverse lookup tools to see whether the debtor has received toll-free calls from financial institutions where the debtor may have assets. Some creditors employ private investigators to verify if a debtor actually resides at the property the debtor claims as their exempt homestead.

Technology and Social Media

Social media has made it easier than ever for creditors to discover the nature and location of assets. People often refer to their assets and income in social media discussions. Social media is a revealing source of information about a debtor’s finances and things the debtor may have done to evade judgment collection.

Hiding Assets from Creditors

Asset protection does not involve hiding assets from judgment collection. People facing the collection of a judgment should resist the urge to hide or misrepresent their assets during the creditor’s asset discovery procedures. Most of the information a debtor provides a judgment creditor during discovery in aid of execution must be certified as true under oath.

Hiding assets, misrepresenting asset values, and lying about prior transfers of assets amounts to perjury. Perjury is not only a crime, but once discovered, it severely diminishes the debtor’s credibility before the judge. Judges tend to rule against any party who has previously lied to the court or the adverse party.

The better option is to engage in asset protection planning to make any assets you are concerned about more difficult to collect.

Gideon Alper

About the Author

I’m an attorney who specializes in asset protection planning. I graduated with honors from Emory University Law School and have been practicing law for almost 15 years.

I have helped thousands of clients protect their assets from creditors. Before private practice, I represented the federal government while working for the IRS Office of Chief Counsel.

Looking for help?

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The Wall Street Journal interviewed Jon Alper in an article about Florida homestead law.

Asset Purchase Agreement Checklist: Due Diligence for Mergers & Acquisition

Sep 19, 2021 | Miami Business Law Blog

Asset purchase agreement checklist Word & PDF

An asset purchase agreement can involve a wide range of property such as real estate, equipment, inventory, vehicles, businesses, intellectual property, art, collectibles, etc. Sometimes asset purchase agreements are in isolation and other times they are one part of a larger transaction. 

Most parties — through the help of their legal counsel — execute the terms of an asset purchase with some reliance on a due diligence checklist. A good checklist keeps the parties organized and on track to accomplish all tasks necessary to close the deal. This article offers some explanation of items you might see on an asset acquisition due diligence checklist, why they're important, and a sample checklist you can download.

Table of Contents

Why Is a Due Diligence Checklist for Asset Purchase Important? 

A standard part of every asset purchase agreement should be a due diligence checklist to properly identify all items needed to successfully close the deal. You can cross these items off the list once finished during the period leading up to the closing date (and post-closing). The main benefit of an acquisition checklist is the confidence that you haven't missed any critical steps. Other key benefits of a checklist include: 

  • increased organization 
  • helps you assess if you are on schedule to meet obligations and deadlines under the agreement
  • Identifies red flags or other issues that would otherwise delay or terminate the agreement

Your stock purchase agreement closing checklist should incorporate every agreement, contract, license, disclosure, compliance item, and any other document necessary to finish the deal. Attempting to close a deal without a solid checklist in place creates the risk for important items to slip through the cracks. An incomplete or substandard checklist can jeopardize any otherwise well-intentioned transaction. 

Asset Purchase Agreement Checklist 

The contents of your asset purchase agreement checklist will likely vary depending on the nature of the purchased asset. For example, the requirements for a real estate acquisition will differ from the needs of a contract involving the sale of intellectual property. Generally, your checklist could include the following:

A list of every agreement related to the deal

  • Letter of intent (the initial agreement between the parties – may be binding or nonbinding)
  • Asset purchase agreement (the main contract) 
  • Brokerage agreement (i.e., a contract with anyone who procured the deal)
  • Security agreement (for situations where the seller retains an interest in the asset or other property in the event of a buyer default)
  • Escrow agreement (terms for handling funds and property during the process of closing the asset purchase agreement)
  • Stock purchase agreement
  • Employment agreements (for when the asset is a company with key personnel)
  • Consulting agreements 
  • Noncompetition agreements 
  • Nondisclosure or confidentiality agreement

Agreements for assignments or assumptions of liabilities (to effect the transfer of rights and obligations related to an asset or liability)

You often see assignment and assumption contracts in the following contexts: 

  • leases for real property or personal property
  • loans 
  • intellectual property transfers 
  • prior agreements affecting the involved asset 

A list of related instruments or other legal documents

  • Promissory note (repayment terms for asset purchases that are financed or paid for through installments)
  • Bill of sale (a receipt for transfer of property often used for items like equipment, vehicles, inventory, etc.)
  • vehicle title certificates 
  • UCC financing statement (document filed with Secretary of State listing creditors and security interests in assets subject to the agreement)
  • Certificate of incorporation (a certification from an officer of the buyer and seller attesting to the valid organization of their entities that are party to an agreement)
  • Legal opinions (lawyer certified statements that attest to the legitimacy of parts of a deal based on an agreed-upon set of facts)
  • Third-party consents (usually in the context of property subject to a lease or loan agreement)

A list of exhibits to the asset purchase agreement

  • A list of assumed business names, trade names, and internet domains
  • A list of employees and independent contractors involved in a business acquisition
  • A list of customers, clients, referrals, and other trade secrets 
  • Disclosures of licenses and permits the seller holds
  • Disclosure of any encumbrance(s) on the asset
  • Other statements to verify applicable regulatory compliance
  • Insurance policies 
  • Warranty claims related to the asset

Financial statements (to verify the accuracy of any representations or warranties made in the asset purchase agreement)

  • Balance sheet 
  • Income statements
  • Profit and loss statements 
  • Accounts receivable
  • Tax returns or other documentation showing tax clearance with the IRS 

Organizational documents (for a business sale)

  • Operating agreement 
  • Bylaws 
  • Consent resolutions 
  • Annual reports 
  • Meeting minutes 

Important terms and dates for the transaction

  • Purchase price of the asset 
  • Due diligence period 
  • Escrow dates 
  • Closing date 
  • Post-closing items 

Asset Purchase Checklist Download

As mentioned above, every asset purchase agreement due diligence checklist will be different and require some customization to fit the unique elements of your deal.  You can download our sample checklist in word or pdf to get a better sense of how this document can add value to your next transaction. Of course, this checklist is only a sample and should not be used without consulting a lawyer.

Need Help with an M&A Closing Checklist

Due diligence checklists are essential to transactions in mergers & acquisitions. The attorneys at Cueto Law Group regularly assist clients in the negotiation and administration of asset purchase agreements and similar transactions. The firm values the organization and confidence a due diligence checklist can bring to every deal.

Cueto Law Group is a Miami-based, boutique law firm whose attorneys handle matters involving commercial transactions and litigation. The firm is led by international business attorney,  Santiago Cueto . 

If you need help during any stage of an asset purchase, do not hesitate to contact our office. We can schedule a consultation to learn more about your legal needs and how Cueto Law Group can help.

assignment of assets for the benefit of creditors

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assignment of assets for the benefit of creditors

Kris Roglieri Bankruptcy Converted to Chapter 7, The End of NACLB?

bankruptcy court

Among Roglieri’s wholly owned assets are Commercial Capital Training Group and the National Alliance of Commercial Loan Brokers (NACLB conference), according to documents he previously submitted to the court. He owns 100% of the membership interest in each LLC. During a prior hearing, the Chapter 11 trustee asked Roglieri if he understood that he could not transfer NACLB’s assets without trustee approval after rumors swirled that he was trying to sell it. At the time, Roglieri said that there had been no serious talks in that regard. It may have been a hard sell and could still continue to be. Despite the NACLB conference’s longevity, for example, Roglieri asserted during the proceedings that he did not maintain formal financial records for it and there are no balance sheets, P&Ls, or statement of cash flows related to it. It also apparently stiffed the venue of its last event since it lists an unpaid debt of $436,237 to Caesars Entertainment in Las Vegas.

The NACLB conference has also apparently changed its name in order to distance itself from its connection with Roglieri, according to emails reviewed by deBanked . On March 25, an official NACLB mass email communication asserted that the conference would go forward “despite uncertainties surrounding this year’s event due to unrelated legal issues” and that “we are thrilled to announce that the annual conference will proceed this November under a new rebranded name , maintaining the trusted team that has organized the event for the past 9 years.”

Following that, an official NACLB conference representative sent out emails affirming that it was rebranding to the “Commercial Loan Broker Association” and that the conference would actually take place in a new location with a different date.

The Receiver managing Prime Capital Ventures, LLC, the main entity at the heart of the Roglieri saga, filed Chapter 11 bankruptcy protection for it on Tuesday. As part of that, he stated that the entity owes more than $100 million to its creditors.

assignment of assets for the benefit of creditors

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  1. ABCs 101 (Assignment for the Benefit of Creditors)

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  2. Voluntary Assignments For The Benefit Of Creditors by James Avery Webb

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  3. Assignments-for-the-Benefit-of-Creditors-Overview-w-006-7771.pdf

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  4. Washington General Form of Assignment to Benefit Creditors

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  5. Assignment of Business Assets Form

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  6. Assignment for the Benefit of Creditors

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COMMENTS

  1. Assignment for the Benefit of Creditors: Effective Tool for Acquiring

    An assignment for the benefit of creditors is an effective tool for acquiring and winding down distressed businesses, while minimizing negative publicity and potential liability. ... of creditors serves in a capacity that is analogous to a bankruptcy trustee and is responsible for liquidating the assets of the assignment estate and distributing ...

  2. Assignment for Benefit of Creditors: Alternative to Business ...

    The third alternative to liquidating your own business or filing for bankruptcy is to follow a procedure called an "assignment for the benefit of creditors," or ABC. An ABC, as the name would suggest, is an assignment with the purpose of liquidating assets to benefit creditors by getting them paid.

  3. assignment for benefit of creditors

    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 ...

  4. Assignments for the Benefits of Creditors

    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 ...

  5. Assignments for the Benefit of Creditors

    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 ...

  6. Assignments For The Benefit Of Creditors: Simple As ABC?

    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 ...

  7. ABC: Assignments for the Benefit of Creditors

    The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods. The assignee distributes the net proceeds of sale to the company's creditors in accordance with priorities under applicable law. The Buyer's Perspective.

  8. Assignment for the Benefit of Creditors: General Overview

    The assignee has many duties, including, but not limited to, collection of the assets and reducing them to money, giving notice to creditors, conducting the business of the assignor for limited ...

  9. Assignment For The Benefit Of Creditors: An Overview

    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 ...

  10. Making Assignments For The Benefit Of Creditors As Easy As A-B-C

    resolve distress under state law" in a process called an "assignment for the benefit of creditors" (ABC).11 ABCs provide a state-law alternative to the filing of a federal bankruptcy case. Aptly named, they involve the assignment of an insolvent company's assets to a third-party assignee, who is selected

  11. Assignments for the Benefit of Creditors: Overview

    A Practice Note providing an overview of assignments for the benefit of creditors. This Note addresses the basic process by which assignments are generally administered and considerations when determining whether an assignment for the benefit of creditors is the appropriate course for liquidating a business.

  12. PDF Assignments for the Benefit of Creditors: Delaware

    • Secure or pay any creditor a greater proportion of the creditor's debt or demand than must be secured or paid to other creditors. (10 Del. C. § 7387.) Therefore, assignment documents typically include express language making the assignment for the general benefit of all creditors, without preference, according to

  13. Pursuing Assignments for the Benefit of Creditors

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

  14. The ABCs of Assignments for the Benefit of Creditors (ABCs)

    Just as in bankruptcy, an ABC can also be used to facilitate a going-concern sale of the debtor's assets to a third-party. General assignments for the benefit of creditors (ABCs) have been and ...

  15. Assignment for Benefit of Creditors Lawyers

    An assignment for the benefit of creditors, or "ABC", is a type of out of court settlement mechanism for dealing with debt. In most cases, when a company is going out of business, they will usually opt for either business bankruptcy or liquidation (selling off remaining assets). With an assignment for benefit of creditors, the company hires ...

  16. Assignment for the Benefit of Creditors: An Overview

    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 ...

  17. PDF The ABCs of Assignments for the Benefit of Creditors (ABCs)

    1. Upon acceptance of the assignment, the assignee gives notice of the assignment to creditors; 2. Creditors are provided with a reasonable period of time to file proofs of claim with the assignee and therefore to be included in the pool of creditors who can share in the proceeds of the liquidation of the business' assets; 3.

  18. Assignment for the Benefit of Creditors: A Remedy to Avoid Bankruptcy

    Assignment for the Benefit of Creditors contracts are a well-established tool that can help individuals and entities avoid a formal bankruptcy filing. (858) 481-1300 [email protected]. ... Instead of trying to liquidate assets and transfer funds to creditors, struggling companies can pass those challenges on to the Assignee. ...

  19. Primer on Florida's Assignment for Benefit of Creditors ...

    The assignment is a contract, in which the assignor turns over all assets and liabilities to the assignee for liquidation for the benefit of creditors. The assignment is a transfer of the debtor's legal and equitable title to property to the assignee, a fiduciary with authority to liquidate the debtor's affairs and distribute proceeds ...

  20. Delaware ABCs: A Look at Creditors' Assignments

    Delaware ABCs (Assignments for the Benefit of Creditors): No Longer as Easy as 1-2-3. Companies forced to wind down operations and liquidate their assets often choose a liquidation process known as an ABC (Assignment for the Benefit of Creditors). An ABC is usually more streamlined, requires fewer public disclosures and less court involvement ...

  21. Assignment for Benefit of Creditors

    An "Assignment for Benefit of Creditors" is a unique process authorized under New Jersey law that allows a business to dissolve, sell all of its assets, use the proceeds to pay creditors, and avoid a bankruptcy proceeding. In an Assignment for Benefit of Creditors, the company chooses an "Assignee," (usually a local attorney) to whom ...

  22. PDF Assignments for the Benefit of Creditors: Florida

    2. Generally, in which court can an assignment for the benefit of creditors (ABC) be commenced in your jurisdiction? Please explain if an ABC can be conducted without a court filing in your jurisdiction. In Florida, ABCs begin with the contractual assignment of the assignor's assets to an assignee. The assignment is then recorded

  23. Assignments for the Benefit of Creditors in Minnesota

    The assignee takes possession and control of the assigned assets (the "Assignment Property"); gives notice to those statutorily entitled to the same pursuant to Minn. Stat. § 576.34, and liquidates the Assignment Property for purposes of paying the assignor's creditors. ... ("Every assignment for the benefit of creditors subject to ...

  24. Florida Legislature Overhauls Assignment for the Benefit of Creditors

    Ask any dozen attorneys if they know how an assignment for the benefit of creditor works. Most of them will probably understand that it provides a means to liquidate an insolvent business' assets. Someone might suggest that an assignment is very much like probating the estate of a company that has died. The most frequent response is that an assignment for the benefit of creditors is very ...

  25. Navigating risks in the UK and German Asset Based Lending Markets: a

    The asset based lending ( ABL) market continues to grow at pace, both in this jurisdiction, in Germany and internationally. ABL is a form of lending in which a percentage of the realisable value of a portion of the borrower's assets will be used to determine the sums to be advanced by the lender. The percentage set will be determined by the sum ...

  26. How Do Creditors Find Your Assets?

    The creditor can also seek information from third parties, such as an examination under oath of the debtor's spouse and other family members. A creditor can find out about a debtor's financial assets by using: Depositions. Document requests. Financial statements. Real estate records. Public business records.

  27. Asset Purchase Agreement Checklist: Due Diligence for Mergers & Acquisition

    A standard part of every asset purchase agreement should be a due diligence checklist to properly identify all items needed to successfully close the deal. You can cross these items off the list once finished during the period leading up to the closing date (and post-closing). The main benefit of an acquisition checklist is the confidence that ...

  28. Kris Roglieri Bankruptcy Converted to Chapter 7, The End of NACLB?

    A judge approved a motion to convert the Chapter 11 bankruptcy proceeding for the embattled Kris Roglieri to a Chapter 7. The intent behind this is to kickstart the process to sell off Roglieri's assets for the benefit of creditors whereas before Roglieri hoped that his various wholly owned businesses could somehow continue. The trustee, however, said that such an outcome was impossible ...

  29. In this module, we have learned about assets, liabilities, and

    An asset is an economic resource. A liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events. Equity is the difference between the value of the assets and the amount of the liabilities of something owned.

  30. Understanding Assignment of Credits and Rights in Sales

    An assignment of credits and other in- corporeal rights shall be perfected in accordance with the provisions of article 1475. (n) Assignment of credit defined. Assignment of credit is a contract by which the owner (assignor/ creditor) of a credit and other incorporeal rights transfers, either onerously or gratuitously, to another (assignee) his ...