Assignment for the Benefit of Creditors: General Overview

If you are considering bankruptcy for your insolvent business, an Assignment for the Benefit of Creditors (“ABC”) might be your answer.  An ABC is a less expensive, quicker, quieter, and simpler alternative to traditional bankruptcy.  An ABC is a state law procedure utilized to liquidate a failed, insolvent, or no longer viable business.  Fla. Stat. § 727.101.   An ABC is normally much simpler and usually less expensive than a comparable bankruptcy proceeding.  This savings means larger payouts to both unsecured and secured creditors.  This blawg provides a general overview of the ABC process, and highlights a few benefits of ABC as compared to a Chapter 7 bankruptcy.

An ABC is a conveyance by an assignor of substantially all of the assignor’s property to an assignee for the purpose of applying the property or its proceeds to the payment of the assignor’s debts and returning any surplus to the assignor after administration.  ABCs share some similarities with federal bankruptcy: ABCs ensure full reporting to creditors, and require equal distribution of an assignor’s assets.  However, there are several clear differences between the two, and each has its own advantages and disadvantages.

One of the biggest advantages of an ABC in comparison to traditional bankruptcy is that the assignor chooses the assignee.  Fla. Stat. § 727.104; 11 U.S.C. § 702.  This is significant for a few reasons.  Two problems with Chapter 7 bankruptcies, as compared to ABCs, are (1) many bankruptcy trustees appointed by the court are lawyers or accountants who operate independently, they are assigned cases in large numbers, and do not maintain staffs of people experienced in operating a business; and (2) when the trustee takes over, the debtor will be foreclosed from participating in the liquidation process.  In an ABC, a professional assignee, chosen by the assignor, is not only an expert in liquidating assets, but is also best suited to operate a business as long as need be to maximize return by realizing some form of going-concern value.  Another major advantage of an ABC over Chapter 7 bankruptcy is that the assignor can decide largely what is going to happen before and during the ABC.

The ABC proceeding is commenced with the execution of an irrevocable assignment in writing.  Upon execution of this assignment, the legal estate in the assigned property passes to the assignee, and the assignor loses all power over the property.  Then, the assignee records the original assignment in the public records and files a petition with the clerk of the court commencing the assignment proceeding.

Most of the powers of the assignee parallel those of the bankruptcy trustee.  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 periods, if appropriate, hiring professionals as may be necessary, and submitting a final report.  The assignee is required to provide notice of the assignment by publication in a newspaper of general circulation published in the county where the petition is filed, once a week for four consecutive weeks, within ten days of filing of the petition, and by mailing notice to all known creditors within twenty days after filing of the petition.  Fla. Stat. § 727.107.  The assignee may reject leases of both real and personal property under which the assignor is the lessee.  If the rejection creates a claim for damages, the lessor may claim the back rent plus future rent not to exceed the greater of one year’s rent or fifteen percent of the rent remaining term, plus attorney’s fees and costs.  Fla. Stat. § 727.112.  The assignee may collect any asset by suit in any court of competent jurisdiction.  The assignee has the power to enforce tort claims regardless of any generally applicable law concerning the non-assignability of tort claims.  The assignee may assign causes of action to a second party pursuant to the assignee’s business judgment and subject to notice.  Fla. Stat. 727.111.

The ability to operate the business is one of the most important of the assignee’s powers.  Assets sold off piece by piece normally bring far lower return.  The assignee may conduct the assignor’s business, without court approval for a limited period not to exceed 45 days.  If no timely objection is filed with the court after seeking court approval, the assignee may continue to operate the assignor’s business for an additional 90 days.  The court may even extend the 90-day period if it finds an extension to be in the best interest of the estate.  Fla. Stat. § 727.108.

The assignee is empowered to maintain an action to avoid any conveyance or transfer void or voidable by law. Fla. Stat. § 727.110.  This clearly contemplates avoidance of transfers under Florida’s Uniform Fraudulent Transfer Act.  Fla. Stat. Ch. 726.  Importantly, it has been held that only an assignee has standing to pursue fraudulent transfers, preferential transfers, or other derivative claims.  Moffat & Nichol v. B.E.A., 48 So.3d 896 (Fla. 3d DCA 2010).

ABCs do not impose an automatic stay in favor of assignors, do not grant an assignee authority to avoid preferential transfers, and do not provide a discharge of any debt.  This last reason is why many individuals and partnerships do not elect ABCs.  However, this presents minimal disadvantage to a corporation or limited liability company, as Chapter 7 bankruptcy does not offer discharge to corporations or limited liability companies.  While there is no automatic stay in an ABC, for practical reasons the ABC filing has the effect of an automatic stay—actions to reach the assets are stopped while the assignee acts to liquidate the assets.  The assignor no longer has any assets to pursue.

In an ABC, unsecured creditors must file a proof of claim and are prohibited from commencing proceedings against the assignee.  However, consensual lienholders may pursue collection by levy, execution, attachment or foreclosure of its collateral.  Fla. Stat. § 727.105.  This means that if substantial assets are subject to a consensual lien, and if continued use is important to the estate, as where the assignee intends to continue operating the business for a limited time, the lack of an automatic stay could be a severe disadvantage to creditors.  Here, it is important that the assignee work with the secured creditor, persuading it to trust that continued operation of the business will result in a greater return to that creditor.  It is common for the assignor and assignee to arrive at an agreement with dominant secured creditors before or concurrently with executing the assignment, agreeing that secured creditors will be patient and comply with the ABC.

Last, but certainly not least, any Florida corporation considering “closing its doors” should examine ABC as a cost-effective, clean and simple part of the wind-down process.  Closing a business can lead to personal liability for the owner.  The ABC process can be used to take the weight off of the business owner and minimize an owner’s liability potential.  ABC gives your business a proper burial, tight and neat.

By: Austin B. Calhoun, Esq. & Kayla Haines