Primer on Florida’s Assignment for Benefit of Creditors: What are they?
An assignment for the benefit of creditors is one of the vehicles utilized to liquidate a failed or no longer viable business under state law. This method of liquidating or transferring assets has long been popular in Florida. The assignment case is filed in a Florida Circuit Court where the assets of the business, assignor, are located. The proceeding is analogous to a bankruptcy liquidation of a business entity under Chapter 7 of the Bankruptcy Code.
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 equitably to creditors. The assignee is typically a professional liquidator.
An assignment proceeding is commenced with the execution of an irrevocable assignment in writing, in compliance with the statutory form which is provided. Once the assignment is executed, the next step is to record the original in the public records in the county where the assignor had its principal place of business and a certified copy in each county where assets of the estate are situated. In addition, the assignee for the benefit of creditors must file a petition with the clerk of the court commencing the assignment proceeding. The assignee must also file a motion asking the court to fix the appropriate amount of the assignee’s bond.
Duties of Assignee
The assignee’s duties are congruent to those of a bankruptcy trustee. These duties include the following:
Collection of the assets of the estate and reducing them to money;
Conducting an initial examination of the assignor under oath within 30 days;
Giving notice to creditors;
Conducting the business of the assignor for limited periods, if appropriate;
Paying administrative expenses of the estate to the extent that they are reasonable and necessary;
Keeping regular accounts and furnishing information concerning the estate to parties-in-interest;\
Examining the validity and priority of all claims against the estate;
Abandoning assets to perfected lien creditors where the estate has no equity;
Accounting;
Hiring professionals as may be necessary;
Paying dividends as appropriate; and
Submitting a final report.
Under the assignment statute, the term “asset” is defined as the “legal or equitable interest of the assignor in property, which includes anything that may be the subject of ownership, whether real or personal, tangible or intangible, including claims and causes of action, whether arising by contract or in tort, wherever located, and by whomever held at the date of the assignment, except property exempt by law from forced sale.” The assignee can pursue all these types of assets to liquidate them for the benefit of creditors, including commencing legal causes of action against third parties – e.g., pursuing fraudulent transfers and other kind of claims.
Significantly, one of the powers of the court is to allow the assignee to operate the business of the assignor for limited periods, if it is in the best interest of the estate to do so. This enables the assignee the opportunity to sell the business as a going concern, in order to obtain more value for the creditors, as there is generally a substantial incremental “going concern value” component to an ongoing business, even if it is insolvent.
As noted above, the assignee must file reports with the court. However, the assignee is required to file an interim report after six months. At the close of the administration, when the assignee is ready to make a final distribution, the assignee must file a final report of all receipts and disbursements and request approval from the court. Upon approval of the assignee’s final report, the court then discharges the assignee and releases the assignee’s bond and the assignment case ends.
Notice, Proof of Claims, and Priority of Claims
The assignee is required to notice of the assignment by publication in a newspaper of general circulation published in the county where the petition is filed and in any other county or counties where the assignment is required to be recorded, once a week for 4 consecutive weeks, within 10 days after filing of the petition; and by mailing notice to all known creditors within 20 days after filing of the petition.
The notice of the assignment must include the date of filing of the petition; the name of the court where the petition is filed and the case number assigned to the petition; the last day on which a proof of claim may be served upon the assignee. Proof of claims must be filed within 120 days from the date of the filing of the petition. Creditors must set out in the proof of claim the name and address of the creditor and the nature and amount of the claim. The proof of claim must be executed by the creditor or the creditor’s authorized agent or attorney.
Florida law sets out the scheme to prioritize claims in the following order by category of claim:
Secured Creditor Claims
Administrative Claims (fees and expenses incurred by the assignee and his professionals during the course of the assignment case)
Governmental Units Unsecured Claims
Wages/Compensation Claims
General Unsecured Creditor Claims
§ 727.114, Fla. Stat.
Section 507 of the Bankruptcy Code sets out a very similar priority scheme. However, wages, salaries, or commissions earned within 180 days before a bankruptcy case is filed or the debtor’s business ceased, whichever is earlier, are entitled to a priority unsecured claim status for up to $12,475. See 11 U.S.C. § 507(a)(4).
Stay of Certain Proceedings
Unlike bankruptcy cases, there is no general automatic stay in assignments.
Under Florida law, proceedings may not be commenced against the assignee. In Florida, all but consensual lien holders, meaning secured creditors and mortgagees, are prohibited from commencing proceedings against the assignee. Holders of nonconsensual liens, such as judgment, execution, or garnishment liens, must participate in the process.
Competing common claims against third parties are also stayed, and cannot be pursued. Only the assignee can prosecute such actions. See Moffatt & Nichol, Inc. v. B.E.A. International Corp., Inc., 2010 WL 4103149 (Fla. 3d DCA 2010) (competing fraudulent transfer claim against third party stayed because once an assignment proceeding is instituted in which all assets are assigned, only the assignee has standing to pursue fraudulent transfer claims on behalf of the estate, otherwise, it would allow one creditor to improperly 'cut in line', in contravention of the spirit of the assignment statute). Unless assignee abandons property subject to such common claims, creditors holding the competing claim must wait to receive their due at the distribution stage in the proceedings. Failure to abide by this concept may lead to the imposition of sanctions.
What to do?
Always remember that decisions regarding bankruptcy, assignment for benefit of creditors, restructuring and insolvency, trust assignment, and other possible solutions to a company’s inability to pay its debts are dependent on the specific situation and circumstances of the company. There’s a reason why businesses are given various choices when it comes to their inability to pay back debt and remain liquid.
In making a decision concerning an assignment for the benefit of creditors, you should weigh how important these factors are in your situation:
- Timing: do you want to control when things happen?
- Cost: are you interested in going a less costly route?
- Simplification: would you like less red tape?
- Stigma of Bankruptcy: are you concerned about your reputation?
- Creditor Agreement: are you looking for the creditor to agree to terms easily and quickly?
If your answers to the above questions are “yes,” then assignment for benefit of creditors may be the best path for you.
If your company is experiencing financial distress and is unable to pay its debts, then you want to seek advice from a business lawyer. Your attorney should be able to assess your present situation and review what options are available to you and which ones will be most helpful in alleviating the pressures of mounting debt.
Creditors should also be aware of the mechanics of assignment cases, and the right to active participate in the process – including the right to conduct discovery. Creditors likewise should consult with an attorney to assist in navigating the process to protect their rights and interests.
SARDI LAW can assist clients with assignments for the benefit of creditors and other insolvency proceedings. Each case is different, and the information provided here is not intended to create an attorney-client relationship. The hiring of a lawyer is an important decision that should not be based solely upon any single source of information, including advertising. You may ask us to send you additional information about us, and we urge you to review other sources of information about Sardi Law, PLLC.
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Florida Bar Journal
- Journal & News
Florida Legislature Overhauls Assignment for the Benefit of Creditors – More Similar to Bankruptcy, But With a Twist
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 much like a state court version of a bankruptcy proceeding. On June 19, 2007, the governor approved Ch. 2007-185 of the laws of Florida. 1 The short title of the bill is “An Act Relating to Debts and Debtors.” 2 The long title indicates that it amends F.S. §222.25, concerning certain exemption of personal property from legal process; F.S. §702.035, concerning publication of foreclosure notices; and a number of different portions of F.S. Ch. 727 that concerns itself with assignments for the benefit of creditors.
Overview An assignment for the benefit of creditors, generally speaking, is analogous to a Ch. 7 bankruptcy liquidation of a business entity. 3 An assignment proceeding is commenced with the execution of an irrevocable assignment in writing, in compliance with the statutory form which is provided. 4 Once the assignment is executed, the next step is to record the original in the public records in the county where the assignor had its principal place of business and a certified copy in each county where assets of the estate are situated. 5 In addition, the assignee for the benefit of creditors must file a petition with the clerk of the court commencing an assignment proceeding. The assignee must also file a motion asking the court to fix the appropriate amount of the assignee’s bond. 6 The assignee’s duties are congruent to those of a bankruptcy trustee. They include collection of the assets of the estate and reducing them to money; conducting an initial examination of the assignor under oath within 30 days; giving notice to creditors; conducting the business of the assignor for limited periods, if appropriate; paying administrative expenses of the estate to the extent that they are reasonable and necessary; keeping regular accounts and furnishing information concerning the estate to parties-in-interest; examining the validity and priority of all claims against the estate; abandoning assets to perfected lien creditors where the estate has no equity; accounting; hiring professionals as necessary; paying dividends as appropriate; and submitting a final report. 7 Unlike bankruptcy cases, however, there is no general automatic stay, such as federal law provides in 11 U.S.C. §362(a). Instead, a holder of a consensual lien may foreclose upon its collateral without leave of court. Like the Bankruptcy Code, there is a specific provision that allows governmental entities to enforce police or regulatory powers. 8 Significantly, one of the powers of the court is to allow the assignee to operate the business of the assignor for limited periods, if it is in the best interest of the estate to do so. 9 This enables the assignee the opportunity to sell the business as a going concern, in order to obtain more value for the creditors, as there is generally a substantial incremental “going concern value” component to an ongoing business, even if it is insolvent. After six months, the assignee is required to file an interim report. 10 At the close of the administration, when the assignee is ready to make a final distribution, the assignee must file a final report of all receipts and disbursements and request approval from the court. 11 Upon approval of the assignee’s final report, the court shall discharge the assignee and release the assignee’s bond. 12
Changes Made by Laws of Florida, Ch. 2007-185 Prior to the revisions enacted in 2007, F.S. Ch. 727 had received little attention from the legislature since 1987, when it was enacted. 13 The legislature had addressed the commencement of proceedings and the form of the assignment in 1989, 14 1991, 15 1997, 16 and 1998. 17 Other than that particular section of the assignment chapter, the last time the legislature had addressed any portion of it was in 1997. 18 Some of the current changes are intended for efficiency; some are to clarify legal issues that have arisen as a result of case law or overrule specific case law; 19 and some are to create more conformity with the Bankruptcy Code. The definition of “asset” in F.S. §727.103(1) has been expanded now to include “claims and causes of action, whether arising by contract or in tort.” There had previously been a controversy over whether an assignee for the benefit of creditors is the direct successor of the assignor, with respect to a claim against assignor’s former counsel for legal malpractice. In Cowan Lebowitz & Latman, PC v. Kaplan , 902 So. 2d 755 (Fla. 2005), the Florida Supreme Court affirmed the reinstatement of a legal malpractice claim which had been dismissed by the trial court on the basis that it had been commenced by an assignee for the benefit of creditors. The trial court had concluded that legal malpractice choses in action are personal and, therefore, not assignable. The district court of appeal reversed the dismissal. The Supreme Court affirmed the DCA, concluding that, only in cases where the public was misled, a legal malpractice cause of action was appropriately assignable to an assignee for the benefit of creditors, as liquidator of the assignor. The new definition of “asset” provided under F.S. §727.103(1) clearly embraces the result in Cowan. It goes considerably further, however, by including all claims and causes of action, whether arising by contract or in tort, and whether the public is generally affected. The standard assignment form corresponds to the statute by specifically including “choses in action.” Under the terms of the assignment 20 the assignor conveys to the assignee all of its assets (as defined in §727.103(1)), except such assets as are exempt by law from levy and sale under an execution. Collectively, the assets create an “estate.” The assignee, in turn, is required to take possession of, protect and preserve, and liquidate the assets of the estate and to convert the estate into money. 21 Section 727.103 also adds two new terms to the definitions: The first is “claims bar date,” which means the date 120 days following the date upon which the petition for commencement of the assignment case is filed with the court. This gives a clear, “bright line” claims bar. The other new term is “consensual lien holder.” 22 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.” The importance of the new definition is found later in the new law at F.S. §727.105, which is entitled “Proceedings against Assignee.” Here, in a limited version of the bankruptcy “automatic stay,” 23 the statute now provides that
proceedings may not be commenced against the assignee except as provided in this Chapter, but nothing contained in this Chapter affects any action or proceeding by a governmental unit to enforce such governmental unit’s police or regulatory power. Except in the case of a consensual lien holder 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. 24
In short, this clarifies that a consensual lien holder maintains the right to foreclose on its collateral, even in the face of an assignment for the benefit of creditors, as a consensual lien holder is not subjected to any stay. As for other creditors, while there is no “automatic stay” that would prevent them from suing or proceeding to judgment, they are barred from enforcement of any judgment against assets of the estate. F.S. §727.108 is entitled “Duties of Assignee.” Subsection (1) now includes, along with the duty to collect the assets of the estate and reduce them to money, the duty of prosecuting any tort claims or causes of action which were previously held by the assignor, regardless of any generally applicable law concerning the non-assignability of tort claims or causes of action . This reinforces and clarifies the new definition of “assets” 25 and, as previously noted, expands the holding in Cowan . In another major departure, the legislature has added §§727.108(1)(a) and (b). These new sections amplify the new language in §727.108(1), which direct the assignee to prosecute any tort claims previously held by assignor, regardless of whether they would otherwise have been assignable.
a. With respect to the estate’s claims and causes of action, the assignee may prosecute such claims or causes of action as provided in this Section, or sell and assign, in whole or in part, such claims or causes of action to another person or entity on the terms that the assignee determines are in the best interest of the estate under s.727.111(4); and b. In an action in any court by the assignee or the first immediate transferee of the assignee, other than an affiliate or insider of the assignor, against a defendant to assert a claim or chose in action of the estate, the claim is not subject to, and any remedy may not be limited by, a defense based on the assignor’s acquiescence, cooperation or participation in the wrongful act by the defendant which forms the basis of the claim or chose in action. 26
In other words, the legislature has eliminated the potential for a defense against a claim brought by an assignee or by his or her initial assignee, based upon the concept of in pari delicto. 27 Conceptually, the in pari delictodefense will apply “where the fault of the parties is mutual, simultaneous and relatively equal, and where the plaintiff is an active, essential, and knowing participant in the unlawful activity.” 28 Because agency principles attribute the actions of an officer or employee of a corporation to the corporation itself, acts of the officers or directors alleged in a complaint are attributable to the company . 29 The net result of any successful in pari delictodefense is that“the law will leave [the parties] where it finds them.” 30 In pari delictodefenses are regularly raised against receivers, bankruptcy trustees, and assignees. Generally speaking, the defendant will assert that the corporate entity being liquidated was an active participant in the wrongdoing at issue. Since the bankruptcy trustee or assignee, as the case may be, took over title to the property of the insolvent estate in question, 31 subject to all defenses that would have been interposed against the assignor, the defense is more than merely colorable. It is a subject worthy of separate articles, of which there have been many. 32 The recent case of Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145 (11th Cir. 2006), arose from a Chapter 11 bankruptcy case where the trustee of a liquidating trust had filed suit, alleging that the defendants, including outside counsel and their law firm, aided and abetted Edwards, a controlling shareholder, in breaching his fiduciary duties to the bankrupt debtor; breached their own fiduciary duty to the debtor; received property from the debtor via fraudulent transfer or preference; and violated the RICO statutes. The defendants responded that a bankruptcy trustee stands in the shoes of the debtor and, thus, is subject to the in pari delictodefense, just as the debtor would have been in the absence of a bankruptcy. The 11th Circuit accepted that position, holding that the doctrine of in pari delictobarred the creditor trustee’s claims on behalf of the bankrupt debtor for violations of RICO. Absent the intervention of the Florida Legislature, one would expect the same principles to be applied to a like claim brought by an assignee. Here, the legislature has intervened, and F.S. §727.108(1)(b), which expressly authorizes an assignee for the benefit of creditors to pursue such a claim, appears to directly overrule the holding in the Edwards case, insofar as it would affect assignees. Section 727.108(4) had previously authorized the assignee to conduct the business of the assignor for limited periods. The updated version of the statute allows conduct of the business for a period of 14 calendar days, or for a longer period on notice and until such time as an objection, if any, is sustained by the court. An assignee may not operate the business of the assignor, however, for longer than 45 days without a specific court order to that effect. The purpose of this amendment is to standardize the current, fairly haphazard procedure, in which an assignor may elect to operate the business while he or she offers it for sale, sometimes for very extended periods. Frequently, the highest and best disposition of the assets is the sale as a going concern. The amendment will help to standardize the process, as well as give objectors an opportunity to be heard within a fixed time frame. New §727.108(5) authorizes the assignee to reject an unexpired lease of nonresidential real property or of personal property under which the assignor is the lessee. This is the functional equivalent of 11 U.S.C. §365(a), which authorizes the trustee, subject to court approval, to reject any executory contract or unexpired lease to which the debtor had been a party. Florida has no state court precedent upon which to base the interpretation of this new portion of the statute. The federal courts, in contrast, have developed a substantial body of precedent with respect to the issues surrounding rejection of unexpired leases. It is reasonable to assume, then, that state courts, faced with disputes between parties under this new section, will look to federal precedent under 11 U.S.C. §365(a) for guidance. To further the objective of new §727.108(5), which authorizes the rejection of leases, a new §727.112(6) has been added to the chapter that concerns itself with proofs of claim. In a similar, but not exact corollary to 11 U.S.C. §502(b)(6), a claim for damages resulting from the assignee’s rejection of a lease of real property is “capped” or limited to the rent reserved under the remainder of the lease, without acceleration, for the greater of either one year or 15 percent of the remaining term, plus any unpaid prerejection rent, plus attorneys’ fees and costs incurred by the lessor, and his or her reasonable costs incurred in reletting the premises. This roughly corresponds to the Bankruptcy Code, with the exception that it adds F.S. §727.112(6)(b)(2) and (3), which provide for attorneys’ fees and costs, as well as reletting expenses; these items are not allowed by the corresponding Bankruptcy Code provision. Section 727.112 also adds a new subpart (7) concerning proofs of claim for damages resulting from termination of employment contracts. Such claims are limited to the compensation provided by the contract, without acceleration, for one year following either the date of the assignment or the date upon which the employee was terminated, whichever came first, plus any unpaid compensation due to the date of assignment or termination as the case might be. Again, this is analogous to the equivalent Bankruptcy Code provision. In fact, it is virtually identical. 33 Section 727.109, which deals with “power of the court,” has been modified at subsection (4) in order to allow the court to set a bar date for filing all claims against the assignment estate which arose on or after the petition for assignment. The court must allow at least 30 days from the date of notice of the “postpetition” bar date, for claims to be filed. This is analogous to the Bankruptcy Code, which allows claims engendered by rejection of leases and executory contracts to be filed within 30 days after such rejection. 34 New §727.109(7) provides that the court may hear and determine a motion brought by the assignee for approval of a proposed sale of assets of the estate outside the ordinary course of business, or a compromise of a settlement of a controversy and enter an order notwithstanding the lack of objection thereto. This coordinates with new revised §727.111, regarding notice requirements. Generally speaking, §727.111(4) requires 20 days notice by mail to all creditors and the assignor of any proposed sale of assets other than in the ordinary course of business, assignee’s operation of the business for more than 14 calendar days, compromise or settlement of controversies, and payment of fees to professionals. 35 A specific deadline is provided for objections, not less than three days before the date of the proposed action. If no objections are timely filed and served, the assignee may proceed without necessity of a court order, or may obtain an order from the court granting the motion, even if there was no objection. This implements the “negative notice” process with which bankruptcy practitioners are familiar. 36 F.S. §727.113 is entitled “Objections to Claims.” Previously, it simply provided that at any time prior to an order approving the assignee’s final report, objections to claims could be filed on at least 20 days notice. Now, modified §727.113(1) makes it clear that one creditor may object to the claim of another creditor. In order to facilitate the claims objection process, new §727.113 provides that
2. Following expiration of the claims bar date, the assignee shall create a register of all creditors that have filed claims against the assignor’s estate, and shall make the register available upon request of any creditor or other party-in-interest. 3. The assignee, as well as any creditor or party-in-interest, has standing to challenge the validity, extent or priority of any claim filed by a creditor against the assignor’s estate. 4. A creditor whose claim is secured by a lien against property of the estate has sixty (60) days following the sale or disposition of the property securing his or her claim to file a claim for an unsecured deficiency, notwithstanding the passage of the last date in which a Proof of Claim may be served upon an assignee as set forth in s.727.112(2). If such a creditor fails to file with the assignee a deficiency claim within ten (10) days after the filing and service by mail of the assignee’s final report of all receipts and disbursements, the creditor’s deficiency claim shall be disallowed as untimely, and the creditor is not entitled to share in any distribution made to holders of unsecured claim under s.727.114(1)(f) on account of its deficiency claim. 37
Thus, the new portions of the statute reinforce the concept that any creditor has standing to object to the claim of any other creditor. Moreover, a secured creditor has a special time period within which to file a deficiency claim. That time period is closed, however, by the filing and service of the assignee’s proposed final report of receipts and disbursements. The assignee must give 20 days notice prior to a hearing for approval of its final report, and since the deadline for a secured creditor with a deficiency claim is 10 days after filing and service of the final report, it is clear that, in effect, such a deficiency claim would be a de facto objection to the assignee’s final report. It would, thus, be cause either for an amendment to the final report or, in some cases, would trigger an objection to the deficiency claim. Section 727.114 is entitled “Priority of Claims.” There are a number of amendments, most of which bring the practice under state law closer to current bankruptcy practice. They include the following: Section 727.114(1)(a) has been amended to provide for the possibility of a deficiency claim, the substance of which we have already discussed. A secured creditors’ claims are expressly subject to surcharge for reasonable and necessary expenses of preserving and disposing of their collateral, to the extent of any benefit to such creditor. Otherwise, administrative expenses are governed by §727.114(1)(b). An amendment specifically includes rent incurred by the assignee in occupying any premises in which the assets of the assignment estate are located or the business is conducted, until the lease is rejected or otherwise terminated. This clears up and clarifies a long-standing dispute over whether the assignee must pay the contractual rent, or simply the “reasonable value” of storing the assets pending disposition. Section 727.114(1)(c) now grants the next priority after administrative expense to unsecured claims of governmental units for taxes which accrued within three years before the filing date of the petition. Previously, there had been no limit on the unsecured tax priority — the claim could have been 10 years old or more. The modification brings the priority closer to the tax priority set forth in the Bankruptcy Code. 38 Section 727.114(1)(d) concerns itself with claims for wages, salaries, or commissions. It has been updated to provide a priority for those sums earned by employees of the assignor within 180 days before the filing date of cessation of business, whichever occurs first, up to a maximum of $10,000 per individual employee. 39 Section 727.114(1)(e) previously had granted a priority to the extent of $900 for consumer deposits held by the assignor. Following the Bankruptcy Code and inflation, that amount has been raised to $2,225. 40 Two new subsections have been added. F.S. §727.114(2) now provides that a subordination agreement is enforceable in an assignment case, to the same extent that it is enforceable under applicable law. 41 New subsection 727.114(3) explains that a claim arising from rescission of a purchase or sale of a security of the assignor or of an affiliate of the assignor for damages arising from the purchase or sale of the security or for reimbursement or contribution on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal to the claim or interest represented by such security, except for security that is common stock, the claim has the same priority as common stock. 42 Generally speaking, this subordinates creditors whose claims arise under the securities laws for their alleged damage by reason of having purchased securities of the debtor, to the same priority as the securities themselves would hold against other creditors. Thus, someone whose complaint concerns the purchase of common stock, has a claim at the level of “equity” and, thus, is subordinate of claims of trade creditors, who have general unsecured claims. 43
Conclusion This short survey demonstrates that the legislature has covered significant ground in its effort to modernize and clarify assignments for the benefit of creditors, as well as its effort to bring the statute into a form more closely analogous to the Bankruptcy Code. The major changes with respect to assignability of tort claims in insolvency cases, and the prohibition of in pari delicto defenses as against an assignee for the benefit of creditors and his or her initial assignee 44 will no doubt be the subject of future litigation and more scholarly articles. Generally speaking, the assignment for the benefit of creditors is an efficient, relatively economical, and faster means for the administration of insolvent estates within the State of Florida, and remains a viable alternative to liquidation under the Bankruptcy Code.
1 The final form was a committee substitute for S.B. 2118. 2 Florida Laws, Ch. 2007-185. 3 Fla.Stat . §727.101 (2007) explains: “The intent of this Chapter is to provide a uniform procedure for the administration of insolvent estates, and to ensure full reporting to creditors and equal distribution of assets according to priorities as established under this Chapter.” 4 Fla.Stat . §727.104(1)(a) (2007) provides: “An irrevocable Assignment and Schedules shall be made in writing, containing the name and address of the Assignor and Assignee and providing for an equal distribution of the estate according to the priorities set forth S 727.114.” Fla.Stat . §727.104(1)(b) (2007) sets out the form of the assignment document. 5 Fla.Stat . §727.104(2)(a) (2007). 6 Fla.Stat . §727.104(2)(b) (2007). 7 Fla.Stat . §727.108 (2007). 8 Fla.Stat . §727.105 (2007); 11 U.S.C. §362(b)(1) (2006). 9 Fla.Stat . §727.109(3) (2007). 10 Fla.Stat . §727.108(8) (2007). 11 Fla.Stat . §727.108(12) (2007); Fla.Stat . §727.116 (2007). 12 Fla.Stat . §726.116(3)(4) (2007). 13 1987 Fla. Laws., Ch. 87. 14 1989 Fla. Laws., Ch. 54. 15 1991 Fla. Laws., Ch. 110. 16 1997 Fla. Laws., Ch. 102. 17 1998 Fla. Laws., Ch. 246. 18 1997 Fla. Laws., Ch. 102. 19 See 2007 Regular Session Summary of Legislation Passed at 216-219, available at www.flsenate.gov. 20 Fla.Stat . §727.104(1)(b) (2007). 21 Id. 22 Fla.Stat . §727.103(6) (2007). 23 See 11 U.S.C. §362(a) (2006). 24 Fla.Stat . §727.105 (2007). 25 Fla.Stat . §727.103(1) (2007). 26 Fla.Stat . §727.108(1)(a) and (b). Subsection (b) appears to reverse Champaign National Bank v. SOS Industries, Inc. , 815 So. 2d 725 (Fla. 5th D.C.A. 2002), which held that an assignee may not make a secondary assignment of claims. 27 In Official Committee of Unsecured Creditors of PSA, Inc. v. Edwards , 437 F.3d 1145, 1152 (11th Cir. 2006), cert. den. sub nom Laddin v. Reliance Trust Co., 2006 U.S. Lexis 5711 (2006), the court provided an excellent summation of the concept: “The doctrine of in pari delicto is an equitable doctrine that states ‘a plaintiff who has participated in wrongdoing may not recover damages resulting from the wrongdoing.’ Black’s Law Dictionary 794 (7th ed. 1999). This common law defense ‘derives from the Latin in pari delicto potior est conditio defendentis : “In a case of equal or mutual fault. . . the position of the [defending] party. . . is the better one.’” Bateman Eichler Hill Richards, Inc. v. Berner , 472 U.S. 299, 306, 105 S.Ct. 2622, 2626, 86 L.Ed.2d, 215 (1985). The doctrine of in pari delicto is based on the policy: ‘courts should not lend their good offices to mediating disputes among wrongdoers’ and ‘denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality.’ Id .” 28 Silverberg v. Paine Webber Jackson & Curtis, Inc. , 710 F.2d 678, 691 (11th Cir. 1983). 29 United States v. Hadley , 678 F.2d 961 (11th Cir. 1982), overruled on other grounds, United States v. Goldin Indus., 219 F.3d 1268 (11th Cir. 2000). 30 Baker v. Nason , 236 F.2d 483, 489 (5th Cir. 1956); See also Whitelock v. Geiger , 368 So. 2d 372 (Fla. 3d D.C.A. 1979) (“when both parties are in pari delicto the court will leave them to settle their disputes without the aid of the court”). 31 See 11 U.S.C. §541 (a) (1) (2007) (providing that the debtor’s estate includes “all legal or equitable interest of the debtor in property as of the commencement of the case.” This includes any causes of action the debtor may have possessed.); See also Official Committee of Unsecured Creditors v. R.F. Lafferty & Co. , 267 F.3d 340, 356 (3d Cir. 2001). A trustee, as the representative of the estate, succeeds to the rights of the debtor in bankruptcy, and has standing to bring any suit that the debtor corporation could have brought had there been no bankruptcy. See 11 U.S.C. §323; O’Halloran v. First Union National Bank , 350 F.3d 1197, 1202 (11th Cir. 2003). With the new amendments to Fla.Stat. ‘ 727.108(1), it is clear that an assignee for the benefit of creditors in Florida likewise is the direct successor to the debtor and may (and must) prosecute its choses in action, if valid. 32 See generally DrewMoratzka, Eighth Circuit Refuses to Conflate Constitutional Standing Doctrine With In Pari Delecto Defense , 26-5 A.B.I.J. 18 (June 2007); Jeffrey Davis, Ending the Nonsense — The In Pari Delecto Defense Has Nothing To Do With What Is Section 541 Property of the Bankruptcy Estate , 21 Bankr. Dev. J . 519 (2005); Karl Rubinstein, The Legal Standing of an Insurance Insolvency Receiver: When The Shoe Doesn’t Fit, 10 Conn. Ins. L.J. 309 (Winter 2003/2004). 33 See 11 U.S.C. §502(b)(7). 34 Fed. R. Bankr. P . 3002(c)(4) provides that a claim arising from rejection of an unexpired lease or other executory contract shall be filed “within such time as the court may direct.” Local Rule 3003-1(C) of the U.S. Bankruptcy Court for the Southern District of Florida prescribes 30 days. 35 This corresponds to Fed. R. Bankr. P . 2002. 36 See, e.g .,Local Rule 9013-1(D) of the U.S. Bankruptcy Court for the Southern District of Florida, explains the “negative notice” practice. 37 Fla.Stat . §727.113(2)(3) and (4). 38 See 11 U.S.C. §507(a)(8)(A)(i) (2006). Which grants eighth priority for income or gross receipts taxes for which a return was last due within three years before the date of the petition. 39 This corresponds to 11 U.S.C. §507(a)(4) and (5) (2006), which deal with unsecured claims for wages, salaries, and commissions, and employee benefit contributions, respectively. 40 This corresponds to 11 U.S.C. §507(a)(7). 41 This corresponds to 11 U.S.C. §510(a) (2006), concerning subordination. 42 This is a direct paraphrase of 11 U.S.C. §510(b) (2006). 43 This provision was intended to reverse the holding in Moecker v. Antonine , 845 So. 2d 904 (Fla. 1st D.C.A. 2003), which allowed stockholders of an assignee to rescind their stock purchases and make claims as general unsecured creditors. See 2007 Reg.Sess. Summ. of Leg. Passed at 219. 44 Other than insiders.
Ronald G. Neiwirth is a partner with Fowler White Burnett, P.A., where he practices in the fields of bankruptcy, creditors’ rights, and international transactions. He is a regular lecturer on subjects pertaining to creditors’ rights and asset protection issues. He is a past chair of the National Association of Civil Law Notaries. Jason Bloom is a third-year law student at the University of Miami. He is a member of the Inter-American Law Review and the Moot Court Board. He spent last summer as an associate with Fowler White Burnett, P.A. He is a graduate of Northeastern University (valedictorian with a degree in criminal justice). He is currently pursuing a career in the public sector.
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ASSIGNMENT, made this day of , (year) , between , with a principal place of business at , hereinafter “assignor,” and , whose address is , hereinafter “assignee.”
WHEREAS, the assignor has been engaged in the business of ;
WHEREAS, the assignor is indebted to creditors, as set forth in Schedule A annexed hereto, is unable to pay its debts as they become due, and is desirous of providing for the payment of its debts, so far as it is possible by an assignment of all of its assets for that purpose.
NOW, THEREFORE, the assignor, in consideration of the assignee’s acceptance of this assignment, and for other good and valuable consideration, hereby grants, assigns, conveys, transfers, and sets over, unto the assignee, her or his successors and assigns, all of its assets, except such assets as are exempt by law from levy and sale under an execution, including, but not limited to, all real property, fixtures, goods, stock, inventory, equipment, furniture, furnishings, accounts receivable, bank deposits, cash, promissory notes, cash value and proceeds of insurance policies, claims and demands belonging to the assignor, and all books, records, and electronic data pertaining to all such assets, wherever such assets may be located, hereinafter the “estate,” as which assets are, to the best knowledge and belief of the assignor, set forth on Schedule B annexed hereto.
The assignee shall take possession of, and protect and preserve, all such assets and administer the estate in accordance with the provisions of chapter 727, Florida Statutes, and shall liquidate the assets of the estate with reasonable dispatch and convert the estate into money, collect all claims and demands hereby assigned as may be collectible, and pay and discharge all reasonable expenses, costs, and disbursements in connection with the execution and administration of this assignment from the proceeds of such liquidations and collections.
The assignee shall then pay and discharge in full, to the extent that funds are available in the estate after payment of administrative expenses, costs, and disbursements, all of the debts and liabilities now due from the assignor, including interest on such debts and liabilities. If funds of the estate shall not be sufficient to pay such debts and liabilities in full, then the assignee shall pay from funds of the estate such debts and liabilities, on a pro rata basis and in proportion to their priority as set forth in s. 727.114, Florida Statutes.
If all debts and liabilities are paid in full, any funds of the estate remaining shall be returned to the assignor.
To accomplish the purposes of this assignment, the assignor hereby appoints the assignee its true and lawful attorney, irrevocable, with full power and authority to do all acts and things which may be necessary to execute the assignment hereby created; to demand and recover from all persons all assets of the estate; to sue for the recovery of such assets; to execute, acknowledge, and deliver all necessary deeds, instruments, and conveyances; and to appoint one or more attorneys under her or him to assist the assignee in carrying out her or his duties hereunder.
The assignor hereby authorizes the assignee to sign the name of the assignor to any check, draft, promissory note, or other instrument in writing which is payable to the order of the assignor, or to sign the name of the assignor to any instrument in writing, whenever it shall be necessary to do so, to carry out the purpose of this assignment.
The assignee hereby accepts the trust created by the assignment, and agrees with the assignor that the assignee will faithfully and without delay carry out her or his duties under the assignment.
STATE OF FLORIDA
COUNTY OF
The foregoing assignment was acknowledged before me this day of , (year) , by , as assignor, and by , as assignee, for the purposes therein expressed.
(Signature of Notary Public - State of Florida)
(Print, Type, or Stamp Commissioned Name of Notary Public)
Personally Known OR Produced Identification
Type of Identification Produced
SCHEDULE A — CREDITOR LIST
SCHEDULE B — LIST OF ASSETS
List each category of assets and for each give approximate value obtainable for the asset on the date of assignment, and address where asset is located.
I. Nonexempt Property
1. Legal description and street address of real estate, including leasehold interests:
2. Fixtures:
3. Cash and bank accounts:
4. Inventory:
5. Accounts receivable:
6. Equipment:
7. Prepaid expenses, including deposits, insurance, rents, and utilities:
8. Other, including loans to third parties, claims, and choses in action:
II. Exempt Property
VERIFICATION OF ASSIGNMENT AND SCHEDULES BY ASSIGNOR
The undersigned, (name) , (position with assignor) of (assignor) , hereby verifies the Assignment of all of its rights, title, and interest in and to all of its assets, as indicated on the attached Schedules to that Assignment as filed with this Court on (date) , and further verifies each of the facts set forth in the Schedules annexed to the Assignment to the best of my knowledge and belief.
Name, Position with Assignor
COUNTY OF
Sworn to and subscribed before me this day of , (year) .
ACCEPTANCE BY ASSIGNEE
The undersigned, (assignee) , the Assignee herein, duly acknowledges that the Assignee accepts delivery of the assignment and that he or she will duly perform the duties imposed upon the Assignee pursuant to chapter 727, Florida Statutes.
NOTICE OF ASSIGNMENT
IN THE CIRCUIT COURT OF THE CIRCUIT, IN AND FOR COUNTY, FLORIDA
IN RE: ,
Assignor,
to: ,
Assignee.
TO CREDITORS AND OTHER INTERESTED PARTIES:
PLEASE TAKE NOTICE that on , a petition commencing an assignment for the benefit of creditors pursuant to chapter 727, Florida Statutes, made by , assignor, with principal place of business at , to , assignee, whose address is , was filed on , (year) .
YOU ARE HEREBY further notified that in order to receive any dividend in this proceeding you must file a proof of claim with the assignee or the assignee’s attorney on or before (120 days from the date of the filing of the petition).
Attorney for assignee (if any):
Address:
NOTICE OF OPPORTUNITY TO OBJECT AND REQUEST A HEARING
IN RE:
TO:
PLEASE TAKE NOTICE that, pursuant to s. 727.111(4), Florida Statutes, the assignee may (List applicable action(s) described in s. 727.111(4)) , and the Court may consider these actions without further notice or hearing unless a party in interest files an objection within 21 days from the date this paper is served. If you object to the relief requested in this paper, you must file your objection with the Clerk of the Court at (Clerk’s address) , and serve a copy on the assignee’s attorney, (attorney’s name and address) , and any other appropriate person.
If you file and serve an objection within the time permitted, the Court shall schedule a hearing and notify you of the scheduled hearing. If a hearing is already scheduled, list the date, time, and location of the hearing: (date, time, and location)
If you do not file an objection within the time permitted, the assignee and the Court will presume that you do not oppose the granting of the relief requested in the paper.
Address:
If no objections are timely filed and served, the assignee may take such action as described in the notice without further order of the court or may obtain an order approving the action without further notice or hearing. If an objection is filed, the court shall hold a hearing on the objection.
ASSIGNEE’S DEED
This Assignee’s Deed is made and executed this day of , (year) , by , as Assignee for the Estate of , Case No. in the Circuit Court of County, Florida, whose post office address is (hereinafter “Grantor”), to , whose post office address is (hereinafter “Grantee”).
Wherever used herein, the terms “Grantor” and “Grantee” include all the parties to this instrument, singular and plural, and the heirs, legal representatives, and assigns of these individuals, and the successors and assigns of corporations, wherever the context so admits or requires.
WITNESSETH:
That Grantor, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration in hand paid to said Grantor by Grantee, the receipt of which is hereby acknowledged, hereby grants, bargains, sells, aliens, remises, releases, conveys, and confirms unto Grantee, all of that certain real property lying and being in the County of , State of Florida, more particularly described as follows:
SEE ATTACHED “EXHIBIT A,” which is incorporated herein by the term “Property.”
This conveyance is subject to taxes accruing for the year of conveyance and subsequent years, and all encumbrances, covenants, conditions, and restrictions of record, except nothing herein operates to reimpose same.
TOGETHER with all the tenements, hereditaments, and appurtenances thereto belonging or in anywise appertaining.
TO HAVE AND TO HOLD the same in fee simple forever.
AND the Grantor hereby covenants with said Grantee that Grantor has good right and lawful authority to sell and convey said Property.
Grantor executed this instrument only in Grantor’s capacity as Assignee of the above referenced Assignment estate and no personal judgment shall ever be sought or obtained against Grantor individually by reason of this instrument.
IN WITNESS WHEREOF, said Grantor has caused these presents to be executed the day and year first written above.
(Grantor’s Signature)
Print Name:
As Assignee for the Estate of (Assignor’s Name)
Case No.
Circuit Court of County, Florida
Signed, sealed and delivered in the presence of:
(Witness’s Signature)
(Witness’s Name Printed)
Witness’s Signature
STATE OF FLORIDA COUNTY OF
Sworn to and subscribed before me this day of , (year) , by (Assignee’s Name) , as Assignee for the Estate of (Assignor’s Name) , Case No. , Circuit Court of County, Florida, on behalf of said estate.
(Signature of Notary Public – State of Florida)
Type of Identification Produced:
November 15, 2015
Assignment for the benefit of creditors: effective tool for acquiring and winding up distressed businesses, david s. kupetz.
An assignment for the benefit of creditors (ABC) is a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings. In many instances, an ABC can be the most advantageous and graceful exit strategy. This is especially true where the goals are (1) to transfer the assets of the troubled business to an acquiring entity free of the unsecured debt incurred by the transferor and (2) to wind down the company in a manner designed to minimize negative publicity and potential liability for directors and management.
The option of making an ABC is available on a state-by-state basis. During the meltdown suffered in the dot-com and technology business sectors in the early 2000s, California became the capital of ABCs. In discussing assignments for the benefit of creditors, this article will focus primarily on California ABC law.
Assignment Process
The process of an ABC is initiated by the distressed entity (assignor) entering an agreement with the party which will be responsible for conducting the wind-down and/or liquidation or going concern sale (assignee) in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, interest in, and custody and control of its property to the third-party assignee in trust. The assignee liquidates the property and distributes the proceeds to the assignor’s creditors.
In order to commence the ABC process, a distressed corporation will generally need to obtain both board of director authorization and shareholder approval. While this requirement is dictated by applicable state law, the ABC constitutes a transfer of all of the assignor’s assets to the assignee, and the law of many states provides that the transfer of all of a corporation’s assets is subject to shareholder approval. In contrast, shareholder approval is not required in order for a corporation to file a petition commencing a federal bankruptcy case. In some instances, the shareholder approval requirement for an ABC can be an impediment to the quick action ordinarily available in the context of an ABC, especially when a public company is involved as the assignor.
The board of directors of an insolvent company (a company with debt exceeding the value of its assets) should be particularly attentive to avoiding harm to the value of the enterprise and the interests of creditors. Under Delaware law, for example, the obligation is to maximize the value of the enterprise, which should result in protecting the interests of creditors.
It is not unusual for the board of a troubled company to determine that a going concern sale of the company’s business is in the best interests of the company and its creditors. However, generally the purchaser will not acquire the business if the assumption of the company’s unsecured debt is involved. Further, often the situation is deteriorating rapidly. The company may be burning through its cash reserves and in danger of losing key employees who are aware of its financial difficulties, and creditors of the company are pressing for payment. Under these circumstances, the company’s board may conclude than an ABC is the most appropriate course of action.
The Alternative of Voluntary Federal Bankruptcy Cases
Chapter 7 bankruptcy provides a procedure for the orderly liquidation of the assets of the debtor and the ultimate payment of creditors in the order of priority set forth in the U.S. Bankruptcy Code. Upon the filing of a Chapter 7 petition, a trustee is appointed who is charged with marshaling all of the assets of the debtor, liquidating the assets, and eventually distributing the proceeds of the liquidation to the debtor’s creditors. The process can take many months or even years and is governed by detailed statutory requirements.
Chapter 11 of the Bankruptcy Code provides a framework for a formal, court-supervised business reorganization. While the primary goals of Chapter 11 are rehabilitation of the debtor, equality of treatment of creditors holding claims of the same priority, and maximization of the value of the bankruptcy estate, Chapter 11 can be used to implement a liquidation of the debtor. Unlike the traditional common law assignment for the benefit of creditors (assignments are governed by state law and may differ from state to state), Chapter 7 and Chapter 11 bankruptcy cases are presided over by a federal bankruptcy judge and are governed by a detailed federal statute.
Advantages of an ABC
The common law assignment by simple transfer in trust, in many cases, is a superior liquidation mechanism when compared to using the more cumbersome statutory procedures governing a formal Chapter 7 bankruptcy liquidation case or a liquidating Chapter 11 case. Compared to bankruptcy liquidation, assignments may involve less administrative expense and are a substantially faster and more flexible liquidation process. In addition, unlike a Chapter 7 liquidation, where generally an unknown trustee will be appointed to administer the liquidation process, in an ABC the assignor can select an assignee with appropriate experience and expertise to conduct the wind-down of its business and liquidation of its assets. In prepackaged ABCs, where an immediate going concern sale will be implemented, the assignee will be involved prior to the ABC going effective. Further, in states that have adopted the common law ABC process, court procedures, requirements, and oversight are not involved. In contrast, in bankruptcy cases, the judicial process is invoked and brings with it additional uncertainty and complications, including players whose identity is unknown at the time the bankruptcy petition is filed, expense, and likely delay.
In situations where a company is burdened with debt that makes a merger or acquisition infeasible, an ABC can be the most efficient, effective, and desirable means of effectuating a favorable transaction and addressing the debt. The assignment process enables the assignee to sell the assignor’s assets free of the unsecured debt that burdened the company. Unlike bankruptcy, where the publicity for the company and its officers and directors will be negative, in an assignment, the press generally reads “assets of Oldco acquired by Newco,” instead of “Oldco files bankruptcy” or “Oldco shuts its doors.” Moreover, the assignment process removes from the board of directors and management of the troubled company the responsibility for and burden of winding down the business and disposing of the assets.
From a buyer’s perspective, acquiring a going concern business or the specific assets of a distressed entity from an Assignee in an ABC sale transaction provides some important advantages. Most sophisticated buyers will not acquire an ongoing business or substantial assets from a financially distressed entity with outstanding unsecured debt, unless the assets are cleansed either through an ABC or bankruptcy process. Such buyers are generally unwilling to subject themselves to potential contentions that the assets were acquired as part of a fraudulent transfer and/or that they are a successor to or subject to successor liability for claims against the distressed entity. Buying a going concern or specified assets from an assignee allows the purchaser to avoid these types of contentions and issues and to obtain the assets free of the assignor’s unsecured debt. Creditors of the assignor simply must submit proofs of claim to the assignee and will ultimately receive payment by the assignee from the proceeds of the assignment estate. Moreover, compared to a bankruptcy case, where numerous unknown parties (e.g., the bankruptcy trustee, the bankruptcy judge, the U.S. trustee, an unsecured creditors’ committee, and possibly others) will become part of the process and where court procedures and legal requirements come into play, a common law ABC allows for flexibility and quick action.
From the perspective of a secured creditor, in certain circumstances, instead of being responsible for conducting a foreclosure proceeding, the secured creditor may prefer to have an independent, objective third party with expertise and experience liquidating businesses of the type of the distressed entity act as an assignee. There is nothing wrong with an assignee entering into appropriate subordination agreements with the secured creditor and liquidating the assignor’s assets and turning the proceeds over to the secured creditor to the extent that the secured creditor holds valid, perfected liens on the assets that are sold.
As a common law liquidation vehicle that has been around for a very long time, ABCs have been used over the years for all different types of businesses. In the early 2000s, in particular, ABCs became an especially popular method for liquidating troubled dot-com, technology, and health-care companies. In large part, this was simply a reflection of the distressed nature of those industries. At the same time, ABCs allow for quick and flexible action that frequently is necessary in order to maximize the value that might be obtained for a business that is largely dependent on the know-how and expertise of key personnel. An ABC may provide a vehicle for the implementation of a quick transaction which can be implemented before key employees jump from the sinking ship.
The liquidation process in an ABC can take many different forms. In some instances, negotiations between the buyer and the assignee commence before the assignment is made and a prepackaged transaction is agreed on and implemented contemporaneously with the execution of the assignment. This type of turnkey sale can effectively allow the purchaser of a business to acquire the business without assuming the former owner’s unsecured debt in a manner where the business operations continue uninterrupted.
In certain instances, the assignee may operate the assignor’s business post-ABC with the intent of selling the business as a going concern even if an agreement has not been reached with a purchaser. However, the assignee must weigh the risks and costs of continuing to operate the business against the anticipated benefits to be received from a going concern sale.
In many cases, the distressed enterprise has already ceased operations prior to making the assignment or will cease its business operations at the time the ABC is entered. In these cases, the assignee may be selling the assets in bulk or may sell or license certain key assets and liquidate the other assets through auctions or other private or public liquidation sale methods. At all times, the assignee is guided by its responsibility to act in a reasonable manner designed to maximize value obtained for the assets and ultimate creditor recovery under the circumstances.
Disadvantages of an ABC
As discussed above, an ABC can be an advantageous means for a buyer to acquire assets and/or a business in financial distress. However, unlike in a bankruptcy case, because the ABC process in California is nonjudicial, there is no court order approving the sale transaction. As a result, a buyer who requires the clarity of an actual court order approving the sale will not be able to satisfy that desire through an ABC transaction. That being said, the assignee is an independent, third-party fiduciary who must agree to the transaction and is responsible for the ABC process. The buyer in an ABC transaction will have an asset purchase agreement and other appropriate ancillary documents that have been executed by the assignee.
Unlike in a formal federal bankruptcy case, executory contracts and leases cannot be assigned in an ABC without the consent of the counter party to the contract. Accordingly, if the assignment of executory contracts and/or leases is a necessary part of the transaction and, if the consent of the counter parties to the contracts and leases cannot be obtained, an ABC transaction may not be the appropriate approach. Further, ipso facto default provisions (allowing for termination, forfeiture, or modification of contract rights) based on insolvency or the commencement of the ABC are not unenforceable as they are in a federal bankruptcy case.
Secured creditor consent is generally required in the context of an ABC. There is no ability to sell free and clear of liens, as there is in some circumstances in a federal bankruptcy case, without secured creditor consent (unless the secured creditor will be paid in full from sale proceeds). Moreover, there is no automatic stay to prevent secured creditors from foreclosing on their collateral if they are not in support of the ABC. The lack of an automatic stay is generally not significant with respect to unsecured creditors since assets have been transferred to the assignee and unsecured creditors claims are against the assignor.
While there is a risk of an involuntary bankruptcy petition being filed against the assignor, experience has shown that this risk should be relatively small. Further, when an involuntary bankruptcy petition is filed, it is generally dismissed by the bankruptcy court because an alternative insolvency process (the ABC) is already underway. In the context of an out-of-court workout or liquidation, there is always the risk that an involuntary bankruptcy petition may be filed against the debtor. Such a risk is substantially less, however, in connection with an assignment for the benefit of creditors because the bankruptcy court is likely to abstain when a process (the assignment) is already in place to facilitate liquidation of the debtor’s assets and distribution to creditors. A policy is in place that favors allowing general assignments for the benefit of creditors to stand.
Distribution Scheme in ABCs
ABCs in California are governed by common law and are subject to various specific statutory provisions. In states like California, where common law (with specific statutory supplements) governs the ABC process, the process is nonjudicial. An assignee in an assignment for the benefit 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 the net proceeds, if any, to the assignor’s creditors.
Under California law, an assignee for the benefit of creditors must set a deadline for the submission of claims. Notice of the deadline must be disseminated within 30 days of the commencement of the assignment and must provide not less than 150 and not more than 180 days’ notice of the bar date. Once the assignee has liquidated the assets, evaluated the claims submitted, resolved any pending litigation to the extent necessary prior to making distribution, and is otherwise ready to make distribution to creditors, pertinent statutory provisions must be followed in the distribution process. Generally, California law ensures that taxes (both state and municipal), certain unpaid wages and other employee benefits, and customer deposits are paid before general unsecured claims.
Particular care must be taken by assignees in dealing with claims of the federal government. These claims are entitled to priority by reason of a catchall-type statute which entitles any agency of the federal government to enjoy a priority status for its claims over the claims of general unsecured creditors. In fact, the federal statute provides that an assignee paying any part of a debt of the person or estate before paying a claim of the government is liable to the extent of the payment for unpaid claims of the government. As a practical result, these payments must be prioritized above those owed to all state and local taxing agencies.
In California, there is no comprehensive priority scheme for distributions from an assignment estate like the priority scheme in bankruptcy or priority schemes under assignment laws in certain other states. Instead, California has various statutes which provide that certain claims should receive priority status over general unsecured claims, such as taxes, priority labor wages, lease deposits, etc. However, the order of priority among the various priority claims is not clear. Of course, determining the order of priority among priority claims becomes merely an academic exercise if there are sufficient funds to pay all priority claims. Secured creditors retain their liens on the collateral and are entitled to receive the proceeds from the sale of their collateral up to the extent of the amount of their claim. Thereafter, distribution in California ABCs is made in priority claims, including administrative expenses, obligations owing to the federal government, priority wage and benefit claims, state tax claims, including interest and penalties for sales and use taxes, income taxes and bank and corporate taxes, security deposits up to $900 for the lease or rental of property, or purchase of services not provided, unpaid unemployment insurance contribution, including interest and penalties, and general unsecured claims. Interest is paid on general unsecured claims only after the principal is paid for all unsecured claims submitted and allowed and only to the extent that a particular creditor is entitled under contract or judgment to assert such claim for interest.
If there are insufficient funds to pay the unsecured claims in full, then these claims will be paid pro rata. If unsecured claims are paid in full, equity holders will receive distribution in accordance with their liquidation rights. No distribution to general unsecured creditors should take place until the assignee is satisfied that all priority claims have been paid in full.
Assignments for the benefit of creditors are an alternative to the formal burial process of a Chapter 7 bankruptcy. Moreover, ABCs can be particularly useful when fast action and distressed transaction and/or industry expertise is needed in order to capture value from the liquidation of the assets of a troubled enterprise. The ABC process may allow the parties to avoid the delay and uncertainty of formal federal bankruptcy court proceedings. In many instances involving deteriorating businesses, management engages in last-ditch efforts to sell the business in the face of mounting debt. However, frequently the value of the business is diminishing rapidly as, among other things, key employees leave. Moreover, the parties interested in acquiring the business and/or assets will move forward only under circumstances where they will not be taking on the unsecured debt of the distressed entity along with its assets. In such instances, especially when the expense of a Chapter 11 bankruptcy case may be unsustainable, an assignment for the benefit of creditors can be a viable solution.
Additional Resources
For other materials on this topic, please refer to the following.
Business Law Section Committees
Business bankruptcy committee.
David S. Kupetz , a partner in SulmeyerKupetz, is an expert in restructuring, business reorganization, bankruptcy, and other insolvency solutions.
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Assignment for the Benefit of Creditors Florida
Assignment for the benefit of creditors florida, statewide — nationwide, maximizing value for all stakeholders.
An Assignment for the Benefit of Creditors Florida (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, for the purpose of liquidating the assets and paying off the creditors. This process is an alternative to bankruptcy, and it allows a debtor to avoid the lengthy and costly bankruptcy process while still getting relief from its creditors.
The debtor will appoint an assignee, who will take possession of all the assets of the debtor and will be responsible for liquidating them and distributing the proceeds to the creditors according to the priority of their claims. The assignee will be responsible for identifying, collecting, and liquidating all assets, and for making payments to the creditors.
The ABC process is usually faster than bankruptcy and it allows the debtor to have more control over the liquidation process. It also provides a way for the debtor to avoid the negative impact of a bankruptcy filing on its credit rating. However, there are also some limitations to the ABC process, such as a lack of protection from certain types of claims and a lack of automatic stay to halt litigation against the debtor.
An Assignment for the Benefit of Creditors Florida (ABC) or General Assignment/Creditor Assignment can be a prudent alternative to bankruptcy for maximizing value for troubled private and public companies and their creditors.
The process of an Assignment for the Benefit of Creditors Florida is initiated by the distressed entity (assignor) entering into an agreement with the assignee responsible for conducting the wind-down and divestiture of the assets or sale of the business in a fiduciary capacity for the benefit of the assignor’s creditors. The assignment agreement is a contract under which the assignor transfers all of its right, title, and interest in, and custody and control of its property to the assignee in trust. The assignee divests the property and distributes the proceeds to the assignor’s creditors.
Our award-winning services have earned us the distinction of being the only Court-Appointed Receiver/Assignee in the country that the United States Environmental Protection Agency (USEPA) allows to conduct such services on active Superfund Sites.
We are pleased to serve as Court-Appointed Keepers (Assignee) for the U.S. Marshals Service for federal court seizures of assets under admiralty jurisdiction.
FLORIDA GENERAL ASSIGNMENT SERVICES
General Assignments Florida Statutes Title XLI, Chapter 727
An Assignment for the Benefit of Creditors Florida requires highly-trained—highly skilled—highly credentialed—highly-experienced special assets and special situations transitional management , valuation , and disposition experts with decades of proven experience and unimpeachable credibility.
For over 40 years in hundreds of assignments worldwide, Palm Beach-based Equity Development Systems, Ltd. has skillfully guided and judiciously represented business owners, creditors, investors, attorneys and law firms, and myriad other stakeholders in the disposition of their troubled accounts.
From National Priority List Superfund Sites —to a decommissioned nuclear-powered aircraft carrier—to the pencils-on-the-desk—we handle it all, and we have successfully managed and generated Billions of Dollars for our global clientele in the conversion of their distressed assets to cash.
We specialize in handling the disposition of complex and highly-contentious special assets and special situations: Environmentally Impaired Real and Moveable Property (Superfund and Brownfields Sites), Hospitality, Gaming, Resorts, Shipyards /Admiralty/Maritime, Aviation (Fixed and Rotor), Automotive (Manufacturing and Retail), Heavy Industrial, Oil & Gas/Minerals, Commercial and High-Value Residential Real Estate. No business is too small or too large for EDS.
The process of an Assignment for the Benefit of Creditors
The basic process in an Assignment for the Benefit of Creditors Florida is that the business (Assignor) turns over its assets, both real and moveable, to an independent third-party neutral (Assignee [EDS]) who is the responsible fiduciary for divesting the assets and settling with creditors.
An Assignment for the Benefit of Creditors Florida is a voluntary and arms-length transaction that provides a speedy, orderly disposition and equitable liquidation of the firm’s assets and subsequent distribution to its creditors. It is similar to a Chapter 7 liquidation process but is far quicker and much less expensive and, therefore, generally derives a larger distribution to all creditors.
EDS experts marshal on-site 24/7/365 throughout the State of Florida to secure and operate troubled accounts facing operational or financial challenges. Our experts work diligently with all stakeholders to preserve, protect, maintain, and enhance the enterprise value of the business and business assets that might otherwise be lost during costly and fruitless bankruptcies.
Assets Held in Trust: By operation of law, all assets are held in trust upon acceptance of the Assignment. These assets and the funds realized therefrom are protected against creditor claims. The assets are then liquidated, and the proceeds, less administrative expenses, are distributed to all creditors according to their lawful priority class. The order of priority is very similar to that used by the Trustee in a bankruptcy proceeding.
Duties of the Assignee: The Assignee has similar duties to a Trustee in Bankruptcy. The Assignee is charged with acting in a business-like manner in the disposition of the assets. The Assignee has considerable flexibility in the methods used and does not have to obtain consent or have a hearing to ratify his or her actions.
Fees: Unlike Bankruptcy, no upfront fees are required. The fee amount is determined before signing the documents and becoming part of the General Assignment agreement. The fees for the Assignee are paid as an administrative expense from the proceeds recovered.
Advantages of an Assignment for the Benefit of Creditors or Creditor/General Assignment: An Assignment does not require court adjudication or consent in most states, nor does it require the consent of creditors. It does not have the stigma of bankruptcy and frequently benefits the company’s principals, who nearly always guarantee the lender obligations of the company. Because an Assignment avoids the administrative procedures that govern bankruptcy, there is a considerable reduction in the cost of disposition and the time necessary to sell the assets. The consequence is greater flexibility in divestiture methods and options, resulting in greater returns for creditors. An Assignment for the Benefit of Creditors is an option that should always be considered as an option to bankruptcy.
EDS’s unparalleled level of Assignment for the Benefit of Creditors Florida Assignee expertise is recognized and appreciated statewide. How may we be of service to you?
- Miami: (305) 741-5553
- Fort Myers: (239) 299-7833
- Vero Beach: (772) 758-9888
Assignment for the Benefit of Creditors (ABC)
When a business is facing financial difficulty the business owners/investors must decide whether or not to liquidate and close the company. The business owners have the option of filing for bankruptcy whether Chapter 11 (reorganization) or Chapter 7 (liquidation), both Federal law options, or they have a state court action called an Assignment for the Benefit of Creditors or ABC for short.
An assignment for the benefit of creditors is a formal, voluntary transfer of all or substantially all of business’ assets to an assignee, in trust, to apply the property or its proceeds to the payment of debt. The assignee for the benefit of creditors serves essentially as a non-judicial trustee has fiduciary obligations to creditors. No court intervention is typically involved in an assignment for the benefit of creditors. The assignment for benefit of creditors usually is faster and cheaper than a formal bankruptcy case, particularly when the assets involved might be liquidated quickly. A valid assignment for the benefit of creditors places the debtor’s property in the hands of the assignee and out of the reach of the debtor’s creditors.
Assignment for the Benefit of Creditors Process in Florida:
- The business (Assignor) enters into a contract whereby it transfers all rights, titles, interests, custody and control of all assets to an independent third-party trustee (Assignee);
- The Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors;
- Secured creditors are paid from proceeds derived from their security, relieving them of the legal costs and burden of foreclosing and selling their collateral;
- In this process, the unsecured creditors cannot follow the assets that are sold;
- A formal claims process is established for unsecured creditors, thus allowing the assignee to limit and control ongoing liabilities of the company
- Assignee is able to review, control, clean-up and work toward closure to the corporate situation before and during the sale of assets.
Benefits of an Assignment for the Benefit of Creditors:
- The Assignee is selected by the company
- In a bankruptcy a trustee is automatically appointed by the court.
- There is usually less notoriety than with a bankruptcy;
- The Assignment for the Benefit of Creditors (ABCs) is cost effective;
- The process is less formal, with few or no court hearings
- Typically the assignor needs to appear for a deposition and nothing more.
- Asset sales can occur quickly, allowing for a higher price under such circumstances;
- A third party can acquire title to the assets in a purchase transaction;
- Limited operations can be continued to maximize the remaining value in company;
- The assignee can arrange the allow the business to continue to operate for a short period of time to do a “cash only” sale in order to liquidate and get the maximum result of return.
The assignment for the benefit of creditors is an option that a business thinking of closing its doors should consider. The assignment offers both benefits and detriments when compared to a liquidation bankruptcy and the decision should only be made after consulting an assignment for the benefit of creditors attorney or a bankruptcy lawyer.
If you are thinking of closing your business operations and would like to discuss liquidation proceedings then please contact Shmucher Law, PL to schedule a free consultation. We can be reached by calling 305.741.5553 or 239.299.7833.
Shmucher Law, PL, a bankruptcy law firm, represents debtors, creditors, and trustees in bankruptcy matters throughout Broward and Miami-Dade counties.
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A Q&A guide to an assignment for the benefit of creditors (ABC) in Florida. This Q&A addresses the process by which assignments are generally administered in Florida, including the commencement and administration of the ABC, the duties and actions of assignees, creditor claims, and the jurisdiction of the court. COMMENCING AN ABC PROCEEDING 1.
Since assignees are statutorily charged with the duties to 1) determine whether prosecution of the estate’s claims and causes of actions is in the best interest of the estate 10 ; 2) examine the validity and priority of claims against the estate 11 ; and 3) conduct due investigation of the estate’s assets’ value and benefit to the estate, 12 …
An assignment for the benefit of creditors is one of the vehicles utilized to liquidate a failed or no longer viable business under state law. This method of liquidating or transferring assets has long been popular in Florida. The assignment case is filed in a Florida Circuit Court where the assets of the business, assignor, are located.
Generally speaking, the assignment for the benefit of creditors is an efficient, relatively economical, and faster means for the administration of insolvent estates within the State of Florida, and remains a viable alternative to liquidation under the Bankruptcy Code. 1 The final form was a committee substitute for S.B. 2118.
(2) “Assignee” means a natural person solely in such person’s capacity as an assignee for the benefit of creditors under the provisions of this chapter, which assignee shall not be a creditor or an equity security holder or have any interest adverse to the interest of the estate.
creditors had no claim to the assets to which the assignee now held title. The transfer was not a fraudulent conveyance because the debtor did not intend to hinder, delay, or defraud creditors, as required by the Statute of Elizabeth.' Rather, the intent was to benefit creditors, and this special practice came to be known as an assignment for ...
An assignment for the benefit of creditors (ABC) is a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings. In many instances, an ABC can be the most advantageous and graceful exit strategy.
An Assignment for the Benefit of Creditors Florida (ABC) is a legal process in which a debtor assigns all of its assets to an independent third party, called an assignee, for the purpose of liquidating the assets and paying off the creditors.
An assignment for the benefit of creditors is a formal, voluntary transfer of all or substantially all of business’ assets to an assignee, in trust, to apply the property or its proceeds to the payment of debt. The assignee for the benefit of creditors serves essentially as a non-judicial trustee has fiduciary obligations to creditors.