By: Donald L Swanson
An assignment for benefit of creditor (“ABC”) is, historically, a nonjudicial process for administering the affairs of a failed business. ABC laws are rooted in English common law and predate enactment of federal bankruptcy laws in the U.S.[Fn. 1]
An ABC is made by a formal, voluntary transfer of most-or-all of a business’s assets to an assignee, in trust, to apply the property or its proceeds to the payment of debts and to return any surplus to the debtor.
Like a bankruptcy trustee, the assignee is a representative of creditors, charged with responsibility to administer the debtor’s assets and distribute the proceeds ratably among creditors.
Unlike a bankruptcy trustee, the Illinois assignee need not seek court approval for the numerous acts of administration.
For creditors, such out-of-court proceedings often result in quicker and larger distributions, compared with bankruptcy, and debtors gain the advantage of avoiding bankruptcy court while still having a qualified professional to generate the largest-possible returns for creditors from disposition of debtor’s assets.
An ABC creates an express trust, under which (i) the assignee acts as trustee, (ii) debtor is the assignor, and (iii) creditors are beneficiaries. As with other express trusts, a beneficiary’s consent is not a condition of the assignment’s validity.
Common Law
Since 1839, Illinois has recognized the validity of common law ABCs, and the rules for such assignments have remained largely intact over the intervening years—for nearly two centuries. The following two cases illustrate the longevity and continuity of such common laws.
–From 1839
In Cross v. Bryant, 3 Il.. 36 (1839), the Illinois Supreme Court declares:
- “A debtor may lawfully convey his property in trust to another for the benefit of any one creditor or class of creditors, and may direct by his conveyance how and to whom the proceeds shall be appropriated and paid”; and
- “A general assignment of a debtor’s property in trust for all his creditors, is valid when it is coupled by no unjust conditions for the purpose of coercing the creditor.”
–From 2010
In First Bank v. Unique Marble & Granite Corp., 938 N.E.2d 1154, 345 Ill. Dec. 233 (2010), the Appellate Court of Illinois, Second District, declares:
- “An assignment for the benefit of creditors is a voluntary transfer by a debtor of [its] property to an assignee in trust for the purpose of applying the property or proceeds thereof to the payment of [its] debts and returning the surplus, if any, to the debtor”; and
- “A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly.”
Illinois’ Old ABC Statutes
–Enacted
In 1877 the Illinois legislature enacted an ABC statute titled, the Voluntary Assignment Act of 1877.
–Suspended
In 1900, however, the Supreme Court of Illinois declares that the Federal Bankruptcy Act of 1898 “suspends or supersedes” Illinois’ Voluntary Assignment Act of 1877.
In Harbaugh v. Costello, 184 Ill. 110, 56 N.E. 363 (1900), the Illinois Supreme Court reasons as follows:
- The final provision of the Federal Bankruptcy Act of 1898 says, “Proceedings commenced under State insolvency laws before the passage of this act shall not be affected by it”—this means that no assignment can be made, under Illinois’ Voluntary Assignment Act, after passage of the Federal Bankruptcy Act of 1898; and
- Since the Federal Bankruptcy Act of 1898 and the Illinois Voluntary Assignment Act both seek a pro rata distribution of debtor’s assets among debtor’s creditors, the two laws “cannot be in force together without direct and positive collision,” so that “the Federal act suspends or supersedes the State law.”
–Revoked
All prior federal bankruptcy acts were repealed (the 1800 Act in 1803; the 1841 Act in 1843, and the 1867 Act in 1878), so the Illinois legislature expected (and waited for) a repeal of the Federal Act of 1898 as well—that’s because a repeal of the Federal Act would automatically reinstate Illinois’ Voluntary Assignment Act.
But Congress never repealed the Federal Act of 1898—instead, that Act remained in effect until Congress replaced it, in 1978, with the current Bankruptcy Code.
After waiting four decades for a repeal of the Federal Act of 1898, without the desired result, Illinois’ legislature finally gave up and repealed Illinois’ Voluntary Assignment Act of 1877.
Common Law ABCs Continue in Illinois
Notwithstanding repeal of Illinois’ Voluntary Assignment Act, the Illinois courts have continued to recognize and allow common law assignments for benefit of creditors (see, e.g., First Bank v. Unique Marble discussed above), which assignments are governed by case law.
Conclusion
ABC laws in Illinois are alive and well, despite revocation of the old Illinois ABC statute.
Good for them!
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Footnote 1. Information in this article is from:
- a 2006 article by Alan P. Solow, Bruce L. Wald and Daniel A. Zazove, titled “Illinois Common Law Assignments for the Benefit of Creditors,” published by Illinois Institute for Continuing Legal Education; and
- the court opinions cited and discussed above.
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