Bankruptcy & Insolvency: What is an assignment for the benefit of creditors?

An assignment for the benefit of creditors (ABC) is a legal proceeding under state law by which a business entity can have its assets liquidated by a third-party, called an assignee, for the benefit of its creditors. In some respects, it is a state law-based alternative to a Chapter 7 bankruptcy.

The debtor, known as the assignor, executes an assignment by which the assets of the entity, including all causes of action available to the assignor, are conveyed to the assignee. Shortly thereafter, the assignee, generally represented by counsel, will file a petition in state court to formally commence the ABC proceeding.

ABCs exist in every state. In all but 11 states, ABCs are governed by statute. In those other 11 states, they are a function of common law. Each state’s ABC statutes and practices differ in their breadth and formalities. Moreover, ABCs are not commonly utilized in all states. For example, ABCs are not a popular vehicle for business liquidations in New York, whereas their use in Florida is growing. In fact, Florida has adopted comprehensive legislation concerning such proceedings.

At least in Florida, ABCs are distinguishable from Chapter 7 bankruptcy cases in three primary respects.

NO AUTOMATIC STAY

First, unlike a bankruptcy proceeding, the filing of which operates to stay any proceedings against a debtor or enjoins further proceedings or collection efforts absent permission of the bankruptcy court, the filing of an ABC does not generally stay proceedings pending against a business or prohibit the commencement of new proceedings. As a practical matter, at that juncture a creditor would be suing any empty shell as the assets will have been conveyed to the assignee and the creditor’s simplest remedy is to file a claim in the ABC for the debt that is or would be the subject of the lawsuit.

OVERSIGHT LIMITED TO THE COURT

Second, while most bankruptcy proceedings are monitored by the Office of the United States Trustee, a division of the U.S. Department of Justice, and subject to the jurisdiction of the U.S. Bankruptcy Courts, ABCs are only subject to supervision by the state court judge presiding over the ABC.

ASSIGNOR SELECTION OF ASSIGNEE

Third, in a Chapter 7 proceeding, the Chapter 7 trustee is generally appointed from a panel of qualified trustees in that District. On occasion, creditors elect to vote out the initial Chapter 7 trustee at the meeting of creditors and vote to appoint a different fiduciary as the Chapter 7 trustee. In contrast, the assignor generally selects the assignee that will administer its assets in the ABC.

Florida’s rules governing ABCs have been codified in Section 727.101, et seq., of the Florida Statutes, which can be found here: Statutes & Constitution :View Statutes : Online Sunshine (state.fl.us).

In my next post on ABCs I will explore common features of Florida ABCs and Chapter 7 bankruptcy proceedings.

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