By: Donald L Swanson
It’s time for a uniform law on the subject of assignment for benefit of creditors.
Assignment for benefit of creditors laws are commonly known by the acrostic “ABC Laws”–for obvious reasons.
Such laws are a tool for owners of a distressed business in shutting the business down.
Here’s what happens in an ABC: debtor’s assets are transferred to an assignee, who then liquidates those assets and distributes proceeds to creditors.
There are a variety of tools for liquidating a debtor’s business, including:
- voluntary liquidation by debtor;
- voluntary Chapter 11 bankruptcy;
- voluntary Subchapter V bankruptcy (a new subset of Chapter 11);
- voluntary Chapter 7 bankruptcy; and
- involuntary bankruptcy.
Some of these tools are the exclusive province of creditors, like receiverships and involuntary bankruptcy.
A debtor’s owners can choose among the voluntary options, of which ABC is one.
It’s important to note that the voluntary options are not redundant of each other: voluntary liquidation is not the same as voluntary bankruptcy, and voluntary bankruptcy is not the same as an ABC. Here’s an illustration.
- I’ve been helping business owners walk through financial stress for decades—am fond of saying that I’ve helped hundreds of stressed businesses but have only put dozens into bankruptcy.
- What needs to be added is this. I’ve been frustrated many times over the inadequacy of available options—would have liked to use ABC for dozens more, but couldn’t because the State of Nebraska has no ABC law: neither by statute nor by common law. We simply don’t have one.
Inadequacies of the voluntary options, other than ABCs, can be significant:
- A voluntary liquidation is often prevented by one or more recalcitrant creditors insisting on a race to the courthouse; and
- Bankruptcy has liquidation deficiencies: Chapter 7 only works for individual debtors (exceptions are exceedingly rare), Chapter 11 can be expensive (Subchapter V is an improved option), and risks for insiders in bankruptcy (e.g., preference and fraudulent transfer exposure) are often unacceptable.
The voluntary alternatives are like tools in a toolbox: if you need a screwdriver, a hammer and wrench are of little use. Likewise, if you need an ABC, voluntary liquidation and bankruptcy are insufficient.
ABC laws have been around for a long time. Nebraska, for example, enacted such a law in 1877. But it then revoked that law in the early 1900s. And we haven’t had one since—neither by statute nor by common law!
The disuse of ABC laws in most of the 1900s was a common reality, throughout the United States. That changed in the early 2000s with the dot-com experience. All of a sudden, start-ups were happening everywhere, with many failing and needing to be shut down. ABCs became the best tool to fill the need—not only in dot-com start-ups, but in other contexts as well. The result is that ABCs have gone from general disuse in the 1900s to a commonly-used tool today.
State ABC laws are all over the place:
- some, like Nebraska, have no such law;
- some have ABCs by common law only;
- some have short, minimalist ABC statutes; and
- some have extensive-and-verbose ABC statutes.
Need for Uniformity
There is a need for ABC Law uniformity. The reason is the same as what’s behind the U.S. Constitution’s Bankruptcy Clause. That clause reads:
“The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (U.S. Const., Article I, §8, cl. 4, emphasis added).
The reason for requiring bankruptcy uniformity came out of confusion from conflicting state laws and from interstate travel, interstate commerce, and interstate locations of debtors and creditors alike.
Such confusion existed, back in the late 1700s, when we had only 13 states, with no railroads and no McAdamized roads. Today, of course, we have fifty states, a bunch of territories, and lots of planes, trains and automobiles going everywhere. So, the need for uniformity today is much, much greater than it was back then.
Here’s how ABC’s non-uniformity works in practice, as compared to a uniform bankruptcy law.
- If the debtor of one of my creditor clients files bankruptcy in Delaware or in the Southern District of New York, I can go onto that court’s electronic docket and find the filings I know will be there: i.e., schedules, statement of financial affairs, operating reports, plan, etc. And I know, generally, how the case will progress and the urgencies and deadlines my client needs to meet and the filings (e.g., a proof of claim) it needs to make.
- If that same debtor pursues an ABC in another state, I have no idea what the applicable law might be , or what the general processes might be, or what actions my client will need to take, or what the deadlines might be.
Here are some initial thoughts on constituencies who might be interested in ABC laws and their uniformity:
- Private equity funds and holding companies who buy and sell businesses would be in favor—e.g., angel investors in start-up or fledgling businesses would favor a uniform law;
- Business lenders/creditors would favor a uniform law—e.g., banks and trade creditors;
- Owners and officers of failed businesses would favor a uniform law—though such businesses aren’t an identifiable constituency until on failure’s doorstep;
- Organizations of restructuring professionals would have an interest in helping to create a uniform law; and
- Can’t think of a group that would be opposed, other than those who might have a specialized axe to grind or turf to protect.
The time has come for a uniform law on the subject of assignment for the benefit of creditors.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.