Assignment for the Benefit of Creditors: Stay of Litigation

This is the first of three follow-up blogs to our earlier publication Assignment for the Benefit of Creditors: General Overview. This blog explores ABC’s lack of statutory automatic stay and whether there is a functional and practical equivalent. The next blog will discuss whether a creditor may file a claim after the statutory 120-day deadline. The third blog will examine whether a creditor may file a claim of fraudulent transfer against the estate.

One of the key benefits of filing for bankruptcy is the imposition of an automatic stay, which halts all efforts to collect a claim against the debtor or the debtor’s property (11 U.S.C. § 362). Unlike bankruptcy cases, in an ABC, there is no automatic stay.  However, pursuant to Chapter 727 of the Florida Statutes, “[e]xcept in the case of a consensual lien holder[1] enforcing its right in personal property or real property collateral, there shall be no levy, execution, attachment or the like in respect of any judgment against assets of the estate in the possession, custody, or control of the assignee” (Fla. Stat. §727.105).

This means that a consensual lien holder maintains the right to foreclose on its collateral, even in the face of an ABC, because a consensual lien holder is not subject to any stay. However, as for other creditors, while there is no automatic stay that would prevent them from suing or proceeding to judgment, they are barred from the enforcement of any judgment against the assets of the estate (Id.). Unless assignees abandon property subject to their claims, creditors must wait to collect their due at the distribution stage (Smith v. Effective Teleservices, Inc., 133 So. 3d 1048 [Fla. 4th DCA 2014]). Presumably, the fact that the assignor would likely have no assets after the assignment, coupled with the inability to execute a judgment during litigation, would likely have the same effect as an automatic stay in bankruptcy, and cause all creditors, except consensual lien holders, to cease litigating once the assignee files the notice of assignment.

One concern in filing an ABC is that the debtor risks an involuntary bankruptcy petition, but involuntary bankruptcy petitions may be brought only by persons with undisputed claims against the estate and have to be filed in good faith (11 U.S.C. § 303[b]). Most bankruptcy courts will not allow involuntary bankruptcy to be used as a creditor collection tool employed by an aggressive creditor (In re Bailey’s Beauticians Supply Co., 671 F.2d 1063 (7th Cir. 1982]). The proper use of involuntary bankruptcy is preserving assets and enforcement of fairness among a group of creditors (Id.). The debtor’s right to costs and attorney’s fees in the event of dismissal, plus actual and punitive damages if the creditors filed the petition in bad faith, would likely act as a deterrent for creditors thinking about pursuing involuntary bankruptcy (In re Ed Jansen’s Patio, Inc., 183 B.R. 643, 644 [Bankr. M.D. Fla. 1995]). Before assigning its assets, the debtor should make sure to investigate the possible risks associated with an involuntary bankruptcy petition to ensure that an ABC is a viable plan. For more information on involuntary bankruptcy, see our blog titled Involuntary Bankruptcy: General Overview.

Chapter 727 of the Florida Statutes does not provide an automatic stay for an Assignment for the Benefit of Creditors that would prevent creditors from suing or proceeding to judgment.  However, creditors are barred from enforcement of any judgment against assets of the estate.  This is true for all creditors except for “consensual lien holders” who can foreclose their collateral even in the face of an Assignment for the Benefit of Creditors.  The inability to execute a judgment would likely have the same effect as an automatic stay in bankruptcy and cause all creditors, except consensual lien holders, to cease litigating once the assignee files the notice of assignment.

[1] A consensual lien holder is “a creditor that has been granted a security interest or lien in personal property or real property of the assignor prior to the date on which a petition is filed with the court and whose security interest or lien has been perfected in accordance with applicable law,” (Fla. Stat. §727.103[6]).