By: Donald L Swanson
There are lots of state statutes out there on assignments for benefit of creditors (“ABC”) with really-cool provisions. But the problem with those really-cool provisions is this: they are rarely used.
Put plainly: a failing businesses needs to shut its business down efficiently and with credibility—and won’t use an ABC remedy that is costly and creates unnecessary litigation.
Here are some basic rules, based on many hard-knocks:
- The last thing a failed start-up needs is an expensive, lawyer-heavy, court-supervised shut-down process—talk about a waste of non-existent resources;
- If an ABC statute has really-cool provisions that are not in the best interest of the failing business, that business won’t use it;
- A debtor’s voluntary liquidation, when creditors have confidence in the debtor, is always better than an involuntary or court-supervised liquidation;
- An ABC under the common law of trusts is the next best liquidation option, when confidence-in-debtor is missing;
- No need exists for a state law duplicate of Subchapter V, and states should avoid the temptation toward creating an ABC law that is bankruptcy-lite;
- A failing business in need any of the following should file bankruptcy:
- a court-supervised liquidation process;
- sale-free-and-clear powers to liquidate assets;
- automatic stay protections;
- bankruptcy-like preference avoidance; and/or
- a reorganization (as opposed to liquidation) process.
Law of Trusts
ABCs are a part of the law of trusts: a trustor (debtor) conveys assets to a trustee (assignee) for the benefit of beneficiaries (debtor’s creditors). ABCs have worked well—for centuries—under the common law of trusts.
But state legislatures have spoiled things by enacting ABC statutes with really-cool provisions (e.g., court supervision and preference avoidance) that have had one result: failing businesses stop using the ABC remedy.
Uniform Trust Code Model
Instead of creating bankruptcy-lite ABC statutes, state legislatures should model their ABC laws after the Uniform Trust Code (provided by the Uniform Law Commission and enacted in 36 states).
Uniform Trust Code provisions offer many advantages, including the following:
1. Court involvement is not required, is invoked by an ABC party to address specific issues, and is limited to the specific issues raised;
2. A bond is not required unless the court, upon request by an interested person, finds a bond necessary to protect the interests of beneficiaries; and
3. Enforcement of creditors’ rights can occur in state court, so the importance of involuntary bankruptcy, as a remedy for ABC abuse, is minimized.[Fn. 1]
Many provisions in ABC statutes look really-cool at first glance. But the reality is that such provisions place limitations on the trust law foundation for ABCs—and often make the ABC statutes unacceptable or unusable for failing businesses.
Returning ABC statutes to their trust law roots, by borrowing heavily from the Uniform Trust Code, is the best approach.
Footnote 1. Here are truncated provisions from the Uniform Trust Code that could be helpful in creating an ABC statute:
- Sec. 106. Common Law of Trusts; Principles of Equity. The common law of trusts and principles of equity supplement this Code, except to the extent modified by this Code or another statute of this State.
- Sec. 201. Role of Court in Administration of Trust. (a) The court may intervene in the administration of a trust to the extent its jurisdiction is invoked by an interested person or as provided by law. (b) A trust is not subject to continuing judicial supervision unless ordered by the court. . . .
- Sec. 702. Trustee’s Bond. (a) A trustee shall give bond to secure performance of the trustee’s duties only if the court finds that a bond is needed to protect the interests of the beneficiaries . . .
- Sec. 706. Removal of Trustee. (a) . . . (b) The court may remove a trustee if: (1) the trustee has committed a serious breach of trust; (2) . . . ; (3) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, . . .
- Sec. 801. Duty to Administer Trust. Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this Code.
- Sec. 802. Duty of Loyalty. (a) A trustee shall administer the trust solely in the interests of the beneficiaries. . . .
- Sec. 803. Impartiality. If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests.
- Sec. 804. Prudent Administration. A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
- Sec. 811. Enforcement and Defense of Claims. A trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust.
- Sec. 812. Collecting Trust Property. A trustee shall take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee, and to redress a breach of trust known to the trustee to have been committed by a former trustee.
- Sec. 813. Duty to Inform and Report. (a) A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests [and] . . . shall promptly respond to a beneficiary’s request for information related to the administration of the trust. . . .
- Sec. 815. General Powers of Trustee. A trustee, without authorization by the court, may exercise: (1) powers conferred by the terms of the trust; and (2) . . . (A) all powers over the trust property which an unmarried competent owner has over individually owned property; (B) any other powers appropriate to achieve the proper investment, management, and distribution of the trust property; . . .
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