Why A Uniform ABC Law Is Needed

By: Donald L Swanson

Assignment for benefit of creditors (“ABC”) has existed for centuries under the common law of England and the United States.  And the ABC process has worked well under that common law!

ABC Function

ABC has been an effective tool in the toolbox of debtor and creditor remedies for resolving financial stress.  Specifically, ABC allows a failing business to shut down with efficiently and credibility:

• Efficiency comes from ABC’s foundation as an out-of-court process under the law of trusts; and
• Credibility comes from ABC’s interposition of an independent trustee (the assignee) responsible for liquidating debtor’s assets and distributing the proceeds, with accountability to creditors (the beneficiaries).

Common ABC Circumstance

A common circumstance in which the ABC tool works effectively is this:

• debtor is a business with (i) a blanket lien in amounts far exceeding the value of its assets, and (ii) numerous unsecured creditors;
• debtor’s business fails, debtor is out of cash, and debtor needs to shut down; but
• if debtor shuts down and winds up privately, unpaid creditors will wonder if they’ve been scammed.

So, ABC interposes an outside fiduciary to liquidate debtor’s assets in an appropriate manner, distribute the proceeds, and be accountable to creditors for actions taken.

That’s what an ABC is and does.  That’s it.  That’s all.  It’s a highly-specialized tool.  Can ABC laws be stretched into doing something more?  Probably—but that’s still a stretch.

Toolbox Analogy

To repeat, ABC is a specialized tool within the toolbox of debtor and creditor remedies to deal with particular situations.

• It’s like a screwdriver for debtors to choose and use (to extricate themselves from a tough situation).
• It’s not like the hammer that creditors choose and use (to bludgeon the debtor).

So, . . . when a debtor needs a screwdriver, a hammer just won’t do.

No ABC Laws & Unworkable ABC Laws

Some of the states in our United States follow the common law of ABCs (e.g., Illinois and California).  ABCs are commonly and effectively used in such states.

Unfortunately, however, for the vast majority of our United States, there is no screwdriver (i.e., a workable ABC law) in their debtor and creditor remedies toolbox. 

That’s true for two reasons.

1.      No ABC Law.

Many states, (i) have no ABC statute, and (ii) do not recognize the common law of ABC. 

My state, Nebraska, is an example.  Here’s a link to Chapter 6 of the Nebraska Revised Statutes—note that Chapter 6 is titled “Assignment for Creditors” and has 45 sections, each of which is designated “Repealed.  Laws 1945. c. 6, § 1.”  Further, the Nebraska Supreme Court has not recognized the common law of ABC.

2.      Unworkable ABC Laws.

Many other states have ABC statutes; however, such statutes include bells and whistles that convert the ABC from a debtor remedy into a creditor remedy that no debtor would ever choose to use.  In other words, in attempting create a screwdriver, these states have created something that looks suspiciously like a hammer.  

An adjoining state, Iowa, is an example.  Here’s a link to Chapter 681 of the Iowa Code titled “Assignment for Benefit of Creditors,” containing a thoroughgoing set of ABC statutes that include:

• “The assignee shall forthwith file . . . a true and full inventory and valuation . . . and shall then enter into bonds . . . in double the amount of the inventory and valuation . . . ” (§ 681.7);
• “The assignee shall forthwith give notice of such assignment by publication . . . once each week, at least six weeks . . . ” (§ 681.8);
• “No such sales [by assignee] shall be valid until approved by such court” (§ 681.25); and
• “Upon a written application of two-thirds of the creditors in number, and two-thirds in amount, the court shall remove the assignee . . . “ (§ 681.26).

However, such ABC statutes appear to go unused in Iowa.  Notwithstanding, for example, the heavy judicial involvement that’s required, it’s hard to find a single appellate opinion in Iowa, after 1940, for an actual ABC case.

False Assumptions

Here’s why the foregoing ABC provisions in Iowa are hammer-like.  They assume, from the beginning, that ABC assignees:

• will NOT act independently of the debtor;
• will NOT fulfill the fiduciary duties of loyalty to creditors and impartiality among creditors; and
• will need, in all cases, both statutory restrictions and court oversight to address their congenital bent toward malfeasance.   

Such assumptions are both unhinged from reality and harmful to the ABC process.

What’s Needed

What’s needed is a uniform ABC law that the various states can adopt.  

The uniform law should codify the common law of ABCs and be relatively brief and to the point.

States with no ABC law, or unworkable ABC statutes, are prime candidates for enacting such a uniform law.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.