the late 70’s and into the early 80’s there was an unusual increase in
Chapter 11 Bankruptcy filings by businesses of all sizes. Chapter 11
allows the business to continue to operate while under the protection of
the Bankruptcy Code. While in Chapter 11 a business is not required to pay
its existing debts, can cancel lease agreements, renegotiate loan payments
and modify labor agreements and has time to figure out how to return to
profitability without worrying about creditors taking legal action to
recover what they are owed.
During the late 80s and early 90s the majority of the
business schools in the United States added courses in bankruptcy to their
curriculum as bankruptcy was considered to be a business strategy right
along with marketing and advertising.
The present economy and the failure of large banks,
investment houses and insurance companies have caused Chapter 11 to no
longer be looked upon as the valuable business tool it once was. One only
has to look at the reluctance of several large firms in various industries
to file Chapter 11. Although opinion within and outside the companies is
they should file many are perplexed as to why they won’t. The answer is
painfully simple, the fear that they will not be able to emerge out of
reorganization because of the inability to obtain sufficient financing to
reorganize and thus be forced into Chapter 7, liquidation.
One only has to look at several companies who have
previously filed Chapter 11 and then had to convert to liquidation.
Companies like Linen ‘n Things, Mervyn’s, and Circuit City, for
example. Back in the 80s and 90s most companies that filed bankruptcy,
like UAL parent of United Airlines, immediately were able to obtain
millions of dollars from financial institutions or banks that permitted
them to remain in bankruptcy until they felt comfortable they had shed
enough debt and contracts to emerge and generate a profit again. Today,
those same banks and financial institutions have their own difficulties
and are reluctant to lend money to companies facing similar financial
So companies that once would have gotten
together with their creditors and worked out a plan acceptable to all
parties are avoiding bankruptcy, if at all possible, because they know if
they cannot obtain financing from financial institutions or investors or
sufficient credit from their trade creditors, the odds of emerging from
Chapter 11 are slim and many of the jobs they still provide will probably
vanish forever along with the companies.
The number of businesses filing bankruptcy in 2007
was the second lowest number of filings since 1980 according to the
American Bankruptcy Institute. And though we have seen the number of
bankruptcy filings begin to increase in 2008, historically bankruptcy
filings usually trail an economic downturn and so far the number of
filings is not even close to the number of Chapter 11 filings in previous
downturns. According to the American Bankruptcy Institute businesses that
would normally be in bankruptcy by now are holding off for as long as they
Although things look dismal for both the debtor and
creditor, there is an option to bankruptcy. Assignment for The Benefit of
Creditors is an alternative to formal bankruptcy proceedings. In an
Assignment, the debtor and their creditors work together to either
re-organize the debtor back to profitability, while the creditors still
get paid, or liquidate the business in orderly fashion to obtain maximum
return to the creditors.
Assignment for Benefit of Creditors proceedings are
governed by state law rather than federal law like bankruptcy. Many states
like California, Delaware, Georgia, and Texas to name a few have governing
laws found in their States Civil Procedures or Business & Commerce
Codes. In addition several foreign countries have similar laws that
provide an alternative to bankruptcy.
We will not cite any specific states law in this
article but rather cite the generalities found in most states statutes.
Specific information concerning an assignment can be found in the states
statutes where the organization is incorporated. Delaware corporations,
for instance, regardless of where they are headquartered can generally
avail themselves of Delaware’s voluntary assignment statutes and
procedures that have both similarities and differences from other states
laws. A full analysis of how an assignment would function in a particular
state and the affect it would have on both creditor and debtor will
require legal advice from knowledgeable counsel. The following, however,
highlights some of the key features of an assignment. Please note this
does not include all of the features of an assignment.
Court Filings; may or may not be required and
depends on the state law.
The Assignee; unlike the bankruptcy trustee, who is
selected from an authorized panel, the debtor is generally able to approve
Assignee as Fiduciary; the assignee is a fiduciary to
the creditors and is typically a professional in re-organization of
businesses and liquidation of assets.
Assignee Fees; the fees charged by assignees often
involve a upfront payment plus a percentage either based on the assets
liquidated or the return to creditors.
No Automatic Stay; in many states, like California
and Texas, an assignment does not give rise to an automatic stay like
bankruptcy does, although an assignee can often block judgment creditors
from attaching assets.
Event of Default; the making of a general assignment
for the benefit of creditors is usually considered a default under most
contracts. As a result contracts may be terminated upon the assignment.
Further consultation with legal counsel should be considered prior to
notifying anyone of a default situation.
Proof of Claim; for creditors, like bankruptcy, a
proof of claim is generally submitted to the assignee by a stated deadline
or bar date. Creditors are not required to file a proof of claim or
participate in an assignment. However, creditors who do not agree to an
assignment normally do not participate in the distribution of proceeds
from the sale of an asset or agreed to payout schedule.
Employee Priority; employee and other claims are
governed by state law and may involve different claim amounts than what is
covered under the Bankruptcy Code.
Administrative Claims; generally, state law does not
give creditors who provided goods within 20 days of an assignment, like in
bankruptcy, a priority claim.
Landlord Claim; unlike bankruptcy, there is generally
no ceiling imposed on a landlord’s claim for breach of a real property
Sale of Assets; in many states sales, by the
assignee, of the company’s assets are treated as a private transaction
without approval of any court. However, unlike a bankruptcy section 363
sale, there is usually no ability to sell secured assets without the
consent of the lien holders.
Avoidance Actions; most states, particularly
California and Delaware, allow assignees to pursue preferences and
Thus in an assignment for benefit of creditors,
simply put, the debtor and/or creditors engages the services of an outside
administrator (assignee) to assume the financial activities of the debtor
to liquidate the assets of the business while providing maximum benefit
(returns) to the creditors that often do not occur in bankruptcy. The
creditors sometimes agree to continue to supply the debtor with sold goods
while at the same time they receive payments distributed by the
administrator for their receivables. All payments from the debtor are
disbursed by the administrator including any payroll disbursements.
In a time where businesses are trying to stay afloat
and provide jobs while banks and lending institutions are still focusing
on their own problems and are reluctant to lend money, The Assignment for
Benefit of Creditors can be a win-win for both the debtor and their
I wish you well
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or