By: Donald L Swanson
State laws on assignments for benefit of creditors (“ABC”) have been around for a long time. But times have changed over the last half-century. Specifically, the bankruptcy alternative has changed dramatically:
- from a harsh remedy under the Bankruptcy Act of 1898;
- to the current Bankruptcy Code, with its helpful remedies under chapters 7, 12, 13 and Subchapter V of Chapter 11.
There is no longer a need to avoid bankruptcy at-all-cost. Instead, consumers, small businesses and farmers can all find relief under a beneficient Bankruptcy Code. As a result, the function an ABC law needs to fill, in today’s world, is sharply different from the function it needed to fill in decades gone by.
So . . . it’s time to re-envision old ABC laws in light of present circumstances and to get away from the formality, inefficiency and judicial supervision of old. Existing deed of trust laws provide a model for what ABC laws could be.
For situations in which formality, deliberative proceedings, judicial supervision and a discharge are desired, bankruptcy remedies are readily available. But for those who need a simple, efficient and inexpensive way to liquidate a business—ABC laws must provide the way.
Two Examples of Old ABC Laws
Delaware’s current ABC statutes were enacted in 1915, revised in 1935, and revised again in 1953. [Note: that’s all during the existence of the Federal Bankruptcy Act of 1898 and before enactment of the Bankruptcy Code]. Such statutes consist of 7 short sections (10 Del. C. § 7881 through § 7887), with judicial supervision required over assignee bonds, accountings and replacements.
Illinois has no ABC statute—but ABCs happen in Illinois anyway. Here’s the deal:
- Prior to 1939, Illinois did have ABC statutes; but
- Illinois’ legislature repealed those statutes in 1939; and
- Since 1939, ABCs in Illinois are governed by case law (aka the “common law”), which does not require court action or supervision. [Fn. 1]
A 1955 Perspective
A 1955 article [fn. 2] on Florida’s ABC statutes observes the following.
The notion of an ABC is this: a simple procedure adapted from the law of trusts. ABC statutes arose in many states, with varying degrees of comprehensiveness but with the same objective: an informal, yet equitable, system for liquidating a debtor’s estate.
Florida’s ABC statutes (back in 1955) are brief, covering only a single page in the compiled statutes. However, their brevity:
- does not detract from their intricateness or usefulness; and
- is desirable—verbosity does not assure effectiveness.
Early ABCs in Florida “rarely found themselves in the courts”: e.g., the earliest known ABC case is Holbrook v. Allen, 4 Fla. 87 (1851), with only three dozen ABC cases adjudicated in Florida during the ensuing century. And, the 1955 author says:
- “This is as it should be,” since ABCs are to achieve “an amicable, unlitigated settlement.”
–Better than Bankruptcy Harshness (Back in 1955)
ABCs offer the attraction of liquidation without stigma:
- Rehabilitation of the debtor can be accomplished informally and expeditiously;
- The “harshness” of bankruptcy proceedings (in 1955) is avoided; and
- Administrative expenses can be minimized.
The 1955 author further emphasizes the harshness of bankruptcy proceedings, back then (under the Federal Bankruptcy Act of 1898), like this:
- ABC possibilities should be explored before resorting to the harshness of a Federal Bankruptcy liquidation;
- The Federal Bankruptcy Act can be used to prod informal arrangements under state laws—that is one of its purposes; and
- The Federal Bankruptcy Act is to be used only after other proceedings (e.g., ABCs) are eliminated—the harshest remedy (bankruptcy) is to be the final alternative.
Question: How much discretion should a debtor be given in selecting the assignee?
Back in 1955, debtors have wide latitude in choosing the assignee (similar to the latitude in appointing an agent or trustee):
- Florida’s law, back then, has no eligibility requirement for an ABC assignee, other than posting a bond; and
- In practice, this latitude of discretion works well:
- A debtor must be careful to select an assignee that’s acceptable to creditors; because
- Disgruntled creditors can replace the assignee with remedies under state laws and under the Federal Bankruptcy Act.
A contrasting latitude-of-discretion example is from an old Nebraska ABC law, under which:
- the debtor must make its ABC assignment to the sheriff;
- the sheriff then summons a conference of creditors; and
- the creditors elect a trustee.
The 1955 author opines, “one might question the desirability of imposing such formalities upon what has traditionally been an informal proceeding,” and there is “little advantage in adopting this procedure in Florida.”
Perhaps the 1955 author’s opinion explains why Nebraska’s ABC law (initially enacted in 1877) was repealed by Nebraska’s unicameral legislature in 1945.
Today’s Need & Examples
What’s NOT needed from today’s ABC laws is a state law procedure that mirrors Subchapter V or to chapters 7, 12 or 13 of the Bankruptcy Code.
What IS needed from today’s ABC laws is something to fill the cracks that the Bankruptcy Code fails to cover.
One example of such cracks is the liquidation of a failed start-up. Here’s what I’ve heard many times:
- “We need to shut this start-up down, and we want to do so with credibility. Can’t we just run it through bankruptcy?” When I mention the cost of doing so in Chapter 11 (even Subchapter V), the discussion ends with, “Ok. Never mind.”
- The next question is, “But what about Chapter 7?” When debtor’s answer to “Any unencumbered assets or assets with equity over liens?” is, “No”: that’s the end of the subject—because the Chapter 7 trustee would simply abandon the assets.
Then, there’s the failing business with too much debt to qualify for Subchapter V or Chapter 12. Regular Chapter 11 puts us back, in many respects for such situations, to the harshness of the Bankruptcy Act. This is another example of a crack that ABC laws could fill.
Deed of Trust Model
What’s needed, in today’s world, is an ABC law akin to existing deed of trust laws.
Deed of trust laws provide a simple, quick, inexpensive and non-judicial process for foreclosing liens on real estate. Such laws are working well.
Deed of trust laws provide an informal process and eliminate up-front judicial scrutiny. There is, of course, opportunity for judicial review after the fact. But that’s fine: creditors are more than happy to trade away safety in exchange for speed and efficiency. It’s like this adage:
- You can have quick or safe; but
- You can’t have both quick and safe at the same time.
Deed of trust laws provide a model for re-envisioned ABC laws to follow.
We need a re-envisioned ABC law for today’s world—based on today’s circumstances. What’s needed is a quick, efficient and non-judicial ABC process, modeled after existing deed of trust laws.
What we don’t need are the concepts of old (like laborious processes and heavy judicial supervision) that were designed to replace and provide protection from harsh, costly and ineffective remedies under the Bankruptcy Act of 1898.
Footnote 1. See “Chapter 7—Illinois Common Law Assignments for the Benefit of Creditors,” by Alan P. Solow, Bruce L. Wald, Danial A. Zazove, Sec. 7.2, at 2.
Footnote 2. The article is “The Florida Law of Assignments for Benefit of Creditors,” by Julius Jay Perlmutter, 9 Miami Law Quarterly, 303-310 (5/1/1955).
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