Has your distributorship ever received a notice of an Assignment for the Benefit of Creditors (ABC)? If so, or if you do, it is because your company is a creditor of a business that is insolvent. The reasons for insolvency can be many, but from time to time, businesses face the end of their financial rope, and undertake insolvency proceedings, such as bankruptcies, receiverships, and an Assignment for the Benefit of Creditors (ABC), all of which (and more) are generally available when circumstances warrant. This article is directed at what distributors as creditors should know about ABCs.
What Is an Assignment for the Benefit of Creditors?
An ABC is a state-law insolvency mechanism through which a financially distressed company (the “assignor”) voluntarily transfers legal title to all its assets to a neutral third party, the “assignee.” The assignee, typically a professional fiduciary or restructuring specialist, then liquidates those assets and distributes the proceeds to creditors in accordance with established priority rules and proportionality.
Think of the assignee as a private bankruptcy, with much less structure. Unlike a bankruptcy trustee, however, the assignee is not appointed by a federal court and does not operate under the strict rules of the Bankruptcy Code. ABCs are often creatures of state statute or law, which vary significantly by jurisdiction. Each state has its own ABC framework, whether statutory and/or common law, which clarifies and illuminates the parameters of a state’s ABC framework. As such, each state’s creditor protections differ accordingly.
ABCs are popular alternatives to traditional bankruptcy or formal receiverships, because they are usually faster, cheaper, and more flexible. While there can be many complexities to an ABC based on applicable state law, timing is often measured in days and months, rather than years. As such, ABCs create some urgency and a good degree of uncertainty for secured and more likely unsecured creditors, making immediate, yet thoughtful and strategic action imperative.
ABCs and Secured Creditors
Often, distributors who receive notice of an ABC are uncertain if they will see even a dime as to debt owed, a potential, contingent claim, and/or even a secured claim.
If your company holds a perfected security interest in the debtor’s assets, such as an equipment or inventory lien, a first-priority interest in accounts receivable, or purchase money security interest, your position in an ABC is generally stronger than that of unsecured creditors, but it is not without risk.
Secured creditors retain such liens in ABCs, as the assignee takes the assets subject to any security interest, and the secured creditor is entitled to be paid from the proceeds of any collateral sale before general unsecured creditors. That said, you should take action to ensure survival of your secured lien.
Consider three primary steps:
- Verify that your security interest is properly perfected. All too frequently, and all too late, a creditor learns that a lien they thought would protect them was never filed, improperly filed, or lapsed due to a missed continuation statement.
- Unlike in bankruptcy, there is no automatic stay in most ABC proceedings, but assignees often request or agree with secured creditors to refrain from self-help remedies, such as lien foreclosure suits. Assignees owe fiduciary duties to their creditor base, so talking to your assignee is likely in a creditor’s (secured or not) best interest, especially if your company is being asked to hold off.
- Closely monitor the sale process. Assignees have significant discretion over how they sell assets. A bulk sale that bundles your collateral with other assets may yield a lower recovery than a targeted disposition. You have among other rights the right to object if the sale process appears commercially unreasonable.
ABCs and Unsecured Creditors
Just as they do in bankruptcy proceedings, unsecured creditors usually stand in the back of the payment line in an ABC. This means that they are paid, if at all, only after secured claims, administrative costs, and priority claims (such as wages and taxes) are satisfied.
In many ABCs, especially those involving companies with significant secured debt, general unsecured creditors recover little or nothing. That reality makes early action and informed engagement of utmost importance. Any business receiving a notice of claim in an ABC should understand the scope of the ABC. Is it a statutory proceeding, is it subject to court supervision, and what rights and/or claims might exist depending on the circumstances.
There may be other legal flaws in creditor claims associated with ABCs. For example, transfers of property by the debtor that relate to the creditor claim may be voided under laws such as the Uniform Fraudulent Transfer Act (UFTA).
Creditors do not have to accept the premise that their claim is likely worth nothing, and, regardless, each creditor of the “assignment estate” should file a claim with the assignee by the bar date set out in the ABC notice. Otherwise, your claim may not be considered. Claims is typically broadly defined, so even if your claim has not matured, you may have a contingent or otherwise valid claim, under the laws of a given ABC.
As noted, assignees are fiduciaries and invariably owe fiduciary duties to creditors. The circumstances of your claim may involve claims such as breach of fiduciary duty if the ABC is not administered properly or your standing as a creditor is somehow compromised.
Unlike bankruptcy proceedings that offer unsecured creditors a formal committee and other transparencies, such as public court filings and trustee’s offices, ABCs can leave unsecured creditors in the lurch under most states’ ABC frameworks. Information is power, so it is important to secure all relevant documents, and public filings (some states require filings with various governmental departments for ABCs) can illuminate a creditor to potential avenues to protect its rights.
What Creditors Can Do to Protect Themselves in an ABC
While distributor-creditors can’t control everything and are at the mercy of various factors in an ABC, they can take steps to maximize their recovery:
- Act immediately. Time is of the essence in an ABC, as the clock is already ticking by the time you receive notice of an ABC. That is, the assignee may well be deep into the liquidation process, has already executed necessary paperwork, and even reached agreements with secured creditors (if the ABC is not driven by a senior secured creditor). Again, getting a handle on the process and your rights as a creditor is vitally important; working with experienced counsel should also be considered.
- Scrutinize pre-assignment asset transfers. As in bankruptcy, pre-assignment transactions, such as payments to insiders, transfers of intellectual property, and/or sweetheart deals with affiliates, may be avoidable and set aside as fraudulent transfers or preferences under state law – like the UFTA. Even if these claims belong to the assignee, creditors can and should raise them if the assignee appears unwilling to pursue them (or take other action to ensure they do).
- Engage with the process. Have counsel attend any creditor meetings, request financial disclosures, and ask questions about the proposed sale process and anticipated distribution timeline. In many states, creditors have the right to petition a court to supervise the ABC if the assignee is not acting in their interests. That option should be preserved, not surrendered through inaction.
The foregoing applies regardless of whether you are a secured or unsecured creditor or whether the assignee owes you $50,000 or $5 million. In an ABC, a creditor who moves quickly, understands the “playing field,” and engages experienced, aggressive counsel to advocate for them, is more likely to recover more than one who is sidelined.
Should you have questions as to an ABC, the process, or seek assistance responding to an assignment for the benefit of creditors, please contact me at 312-840-7004 or fmendelsohn@burkelaw.com. The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.
