Assignment for the Benefit of Creditors: An Alternative to Bankruptcy
 
September 1, 1999
 

In general, officers and directors of corporations are subject to fiduciary duties requiring them to act in the best interests of the corporation and its shareholders. When a corporation enters the realm of insolvency, however, officers and directors must consider not only the interests of the corporation and its shareholders, but also the interests of its creditors.

When liquidation is the only viable option, officers and directors of troubled corporations have typically chosen a traditional Chapter 7 bankruptcy filing as their solution to the corporations' financial predicaments. Recently, however, many corporations in Florida have considered alternatives to bankruptcy when faced with financial difficulties. One such alternative is an assignment for the benefit of creditors (Assignment Proceeding).

An Assignment Proceeding is a statutory device by which a corporate debtor (the Debtor or Assignor) conveys all of its assets to a third party (Assignee) to be liquidated and distributed pro rata to the creditors of the Debtor, with any surplus being returned to the Debtor. This article will provide a brief overview of an Assignment Proceeding utilizing Florida's assignment statute, Chapter 727 of the Florida Statutes, as a model.

Many states have enacted assignment statutes; this article does not address the laws of other states.

Commencement of an Assignment Proceeding - An Overview

An Assignment Proceeding is commenced when the Debtor irrevocably assigns all of its assets and liabilities to an Assignee of its choice, which assets are to be held and administered for the benefit of the creditors of the Debtor.

In Florida, the statutory form of the assignment document provides for the transfer of all of the Assignors' assets to the Assignee, "except such assets as are exempt by law from levy and sale under an execution."(--1) The assignment document directs the assignee to "take possession and administer the estate, liquidate the assets of the estate with reasonable dispatch and convert the estate into money,... and pay and discharge all reasonable expenses,... then pay and discharge in full, to the extent that funds are available in the estate after payment of administrative expenses... all the debts and liabilities now due from the assignor."

After the Debtor assigns its assets and liabilities to the Assignee and after the assignment documents are executed, the Assignee files a Petition for Assignment for the Benefit of Creditors in state circuit court. The Assignee then takes physical possession of all the assets and notifies creditors of the date by which claims must be filed. The claims bar date is 120 days from the date of the filing of the Petition(--2).

After filing the Petition and taking possession of the assets, the Assignee must perform the following functions, among others:

(1) give notice of the commencement of the Assignment Proceeding to all known creditors by mail and by publication in a local newspaper;

(2) within 30 days of the filing of the Petition, the Assignee must conduct an examination of a representative of the Assignor concerning the acts, conduct, assets, liabilities and financial condition of the Assignor and any other matter related to the Assignee's administration of the estate(--3);

(3) collect and liquidate the assets of the Debtor;

(4) pursue claims and causes of action that the Debtor may have against third parties, including collection actions, fraudulent transfer actions and, if necessary, actions seeking turnover of property of the Debtor;

(5) evaluate and determine the amount and validity of claims of creditors, and object to claims if necessary;

(6) distribute funds to creditors with allowed claims in the following priority: Class 1 - secured creditors, Class 2 - administrative creditors, including the Assignee and his or her professionals, Class 3 - tax claims, Class 4 - claims for wages, salaries, or commissions, earned within 90 days of the filing date, but only to the extent of $2,000, Class 5 - claims for consumer deposits (up to $900), and Class 6 - all other unsecured claims; and

(7) file a final report and close out the Assignment Proceeding.

Comparing an Assignment Proceeding to a Chapter 7 Filing

An Assignment Proceeding is generally more efficient, less costly, of shorter duration, more successful in terms of the value received for the assets and amounts paid to creditors and more tailored to the needs of debtors and their creditors than a Chapter 7 filing. In short, an Assignment Proceeding offers the best a Chapter 7 filing has to offer, without the attendant administrative and economic constraints.

In an Assignment Proceeding, the Debtor has the ability to choose the party it wants to be responsible for the liquidation of its assets. Of course, there are limitations. An Assignee cannot be a creditor or an equity security holder or have any interest adverse to the interests of the estate. Also, an Assignee may not be a corporation. In a Chapter 7 filing, an independent trustee and the United States Trustee's Office oversee the liquidation of the Debtor's non-exempt assets.

An Assignment Proceeding is typically under less intense scrutiny than a Chapter 7 case. Bankruptcy cases are supervised by bankruptcy judges who specialize in insolvency cases, while Assignment Proceedings are generally supervised by state circuit court judges whose expertise usually lies outside the insolvency arena.

There is no "automatic stay" in an Assignment Proceeding. While the assignment statute prevents unsecured judgment creditors from executing against assets of the estate, the statute does not prevent creditors from commencing or continuing litigation against the Debtor based on pre-assignment claims. Nor does it prevent secured creditors from immediately exercising their rights in collateral pledged by the Debtor. In the face of contested litigation or difficult creditor relationships, particularly where a secured creditor is involved, the lack of an automatic stay may render an Assignment Proceeding meaningless.

The Assignee in an Assignment Proceeding lacks several of the powerful weapons available to bankruptcy trustees under the Bankruptcy Code. For instance, an Assignee has no authority to bring preference actions which are available in traditional bankruptcy proceedings. Also, the assignment statute does not contain a provision for assuming, curing and assigning executory contracts or unexpired leases. This tends to limit the Assignee's ability to negotiate the termination and/or sale of valuable contracts and leases.

The Assignee is powerless in preventing disgruntled creditors from commencing an involuntary bankruptcy case against the Debtor, which could potentially preempt the Assignment Proceeding. There are, however, several cases in which bankruptcy courts have dismissed involuntary bankruptcy cases in favor of an Assignment Proceeding when it is in the best interest of the creditors and the Debtor to do so(--4).

Finally, as the Assignment Proceeding is outside of bankruptcy, an assignment may avoid the stigma and, arguably, the attendant devaluation of assets sometimes associated with bankruptcy filings.

Conclusion

An Assignment Proceeding is typically a simpler and less expensive form of liquidation than a Chapter 7 filing. It can offer great advantages, as detailed above. An Assignment Proceeding, however, may not be appropriate in all circumstances. Any questions regarding the suitability of or issues relating to an Assignment Proceeding should be directed to an attorney experienced in addressing such issues.

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(--1) § 727.104, Florida Statutes.

(--2) § 727.112(2), Florida Statutes.

(--3) § 727.107(3), Florida Statutes.

(--4) See, e.g., In re Sun Coast Broadcasters, 5 B.R. 719 (M.D. Fla. 1980).