Assignments For The Benefit Of Creditors
10/23/2017 | By: Mark B. Brenner, Esq. | GDB 2017 Fall Newsletter
There isn’t anything you can do about them…or is there?
Companies facing overwhelming financial problems typically have 3 choices:
i) lock the doors, dissolve the company and have the owners walk away, ii) file for bankruptcy, iii) assign the company’s assets to a third party who, in turn, liquidates those assets and distributes the net proceeds to company creditors. This last option is known as an Assignment for the Benefit of Creditors, or an “ABC” proceeding.
When personal guarantees make walking away from a company impractical, and the cost of a bankruptcy filing for the company is too high, an ABC proceeding, which is often far less complicated and expensive than a bankruptcy, is a good option to consider. The advantages for a debtor company include the fact that, unlike a chapter 11 trustee, an Assignee is not authorized to run a debtor’s business. There is also no creditor’s committee. A disadvantage for a debtor company is that, a state court in an ABC proceeding has less control over the debtor’s out-of- state assets and creditors than a bankruptcy court. In particular, a state court order directing that all collection efforts stop does not have the scope and power of the “automatic stay” that goes into effect upon the filing of a bankruptcy petition.
Creditors who are obviously trying to maximize their payout often agree to comply with state court ABC proceeding liquidation rules, believing there is nothing they can do to oppose an ABC proceeding. They are mistaken.
A recent case in the United States Bankruptcy Court for the Southern District of New York, In re Scandia Seafood (New York) Inc., demonstrates that creditors can successfully challenge a company’s decision to file an ABC proceeding if the debtor company cannot show that it made a good faith effort to obtain a fair price for the company’s assets.
Scandia was a New York corporation with a New Jersey office that filed an ABC proceeding in New Jersey after choosing a person to serve as the “Assignee.” To commence the ABC proceeding, a “Deed of Assignment” of the debtor’s assets to the Assignee was filed in New Jersey Superior Court, and creditors received notice of the assignment from the Assignee together with his petition seeking proposed court orders. This first notice was followed by an Assignee motion to approve a proposed sale of the assigned assets. Creditors of the company did not object to the ABC proceeding at first. Then the Assignee commenced proceedings known as “preference” actions to claw back payments made to certain company creditors, but not others, within 120 days before the ABC proceeding started. The ostensible purpose of a preference case is to allow all creditors to share payments rather than permit “preferred” payees to receive an exclusive benefit.
Following service of the preference actions, the targeted creditors hired defense counsel who carefully reviewed Scandia’s ABC filings in New Jersey Superior Court. Those papers revealed that the proposed sale of the company was for a very low price and that the buyer was a new company created by the former owners of the same company whose assets the Assignee was selling.
Based on this information, defense counsel filed an involuntary bankruptcy proceeding against Scandia on behalf of his clients in the US Bankruptcy Court for the Southern District of New York. Scandia responded by filing motions to dismiss the proceeding and to impose sanctions on the petitioning creditors and their attorney for bringing the involuntary bankruptcy case in bad faith. During the hearing on the creditors’ petition and the debtor’s motions, evidence presented showed that the Assignee had discussed with Scandia’s prior owners the terms of the proposed sale transaction before the Assignee was appointed, and that the Assignee at no time considered other bids for Scandia’s assets, and that a Scandia trademark somehow was never transferred to the Assignee.
After trial, US Bankruptcy Judge Michael D. Wiles denied Scandia’s motions to dismiss the bankruptcy filing, and to impose sanctions, finding that “there was an appalling lack of diligence in ensuring that [Scandia’s] prior owners paid a fair price for keeping the business and its assets.” Although the petitioning creditors had “some responsibility to pay attention to legal proceedings, they also had the right to assume that an Assignee, who is appointed as the representative of their interests, will act diligently to protect those interests.”
The lesson of this case is that if you are served with notice of an ABC proceeding, it is up to you to promptly hire counsel to review the paperwork that has been filed and to take prompt action to protect your rights. If you own a company that files an ABC proceeding, be sure that the assignment of the company’s assets and the selection of an Assignee are undertaken in good faith for the benefit of all creditors pursuant to the requirements of state and federal law.
Should you have any questions about bankruptcy or ABC proceedings, please do not hesitate to contact the attorneys at our firm who are available to assist you.