How the Common Law Of ABCs And Bankruptcy Work Together (In re Computer World)

Working together? (Photo by Marilyn Swanson)

By: Donald L Swanson

Illinois follows the common law of assignments for benefit of creditors (“ABC”): a non-judicial, trust-like process for liquidating a failed business. 

That ABC process can work, hand-in-hand, with the Bankruptcy Code.  The case of In re Computer World Solutions, Inc., Case No. 07-21123, Northern Illinois Bankruptcy Court, shows us how.

FACTS

Debtor is an importer and distributor of computer monitors, televisions and other electronic products, owing $20 million to Bank, which holds a first-lien on virtually all of Debtor’s assets.

Financial problems arise, and Debtor’s owner returns to his homeland in Asia—permanently.

Beginning on August 14, 2007, assets totaling $1,503,204 are transferred to two creditors on account of antecedent debts.

ABC Begins

As a result, on October 29, 2007, Debtor’s remaining representatives make an ABC assignment of all Debtor’s assets, under Illinois law, to ABC Assignee.  The ABC assignment is made with the blessing of Debtor’s main creditors—including Bank.

Involuntary Bankruptcy

Eleven days later (on November 9, 2007), Bank and two other creditors file an involuntary petition against Debtor under Chapter 11 of the Bankruptcy Code.

On November 16, 2007, Debtor consents to the involuntary petition (Doc. 5).

Excusing ABC Assignee from Turnover Requirements

Six days later (on November 15, 2007), Bank files an “Emergency Motion” (Doc. 4) to excuse ABC Assignee from complying with the Bankruptcy Code’s turnover requirements of § 543 [fn. 1] and to allow ABC Assignee to retain possession, custody and control of Debtor’s property. 

Grounds for the Emergency Motion include:

  • “interests of creditors would be better served if the Assignee retained possession, custody and control over the Debtor’s property”;
  • “the Assignee possesses extensive knowledge of the Debtor’s property, as well as the Debtor’s liabilities and outstanding obligations”;
  • “Assignee should be given the opportunity to market the Debtor’s assets in anticipation of a likely sale”;
  • “Assignee will likely be better positioned than the Debtor (as a debtor-in-possession) to arrange for a sale or sales.”

The next day (November 16), Bankruptcy Court grants Bank’s “Emergency Motion” and excuses ABC Assignee from complying with turnover requirements of § 543 (Doc. 9).

ABC Liquidation & Disbursement

Then, ABC Assignee:

  • liquidates substantially all of Debtor’s assets, including real estate, inventory, accounts receivable, income tax refunds and a recreational vehicle; and
  • disburses the liquidation proceeds (exceeding $4.2 million) to Bank on its secured claim.

Preference Litigation

Meanwhile, on March 25, 2008, Debtor files a Complaint in the bankruptcy case (Adv. No. 08-00180) against the two entities that received the $1,503,204 transfers (during the 90 days before bankruptcy filing) as preferences under § 547 of the Bankruptcy Code.  Such transfers are:

  • $   200,000 received on August 14, 2000
  • $1,200,000 received on August 28, 2007
  • $   103,204 received in September 2007

On March 18, 2010, the Bankruptcy Court enters Judgment (Adv. Doc. 93) against the two defendants for return of the entire $1,503,204 amount, plus interest.

Judgement Collection Efforts

Unfortunately for Debtor, the two defendant entities are both involuntarily dissolved by the Illinois Secretary of State in January of 2010—a couple months before entry of the preference Judgment.

Turns out, the two defendant entities have no assets, and Debtor is not able to collect anything from them on the Judgment.

So, in June and July of 2010, Debtor files thirteen adversary proceedings against other parties to collect on the preference Judgment—the amounts of claims in those lawsuits total $1,804,065.  The defendants in each of said lawsuits file an answer and contest the claim.

Conversion to Chapter 7

On April 21, 2011, Debtor’s case converts from Chapter 11 to a case under Chapter 7 (Doc. 211), and a Chapter 7 Trustee is appointed (Doc. 212).

Settlement

Then, defendants in the thirteen adversary proceedings make a combined offer of $140,000 to to the Trustee to settle all claims of the bankruptcy estate against them.  Trustee accepts that offer and seeks approval of the settlement from the Bankruptcy Court (Doc. 226).

The bankruptcy Court approves the settlement (Doc. 228). 

Chapter 7 Trustee’s Final Report

On November 16, 2012, Debtor’s Chapter 7 Trustee issues his “Final Report” (Doc. 275) that includes the following:

  • $190,007.25 – gross receipts realized by the Trustee
  • $  31,711.14 – disbursements for administrative expenses
  • $       582.64 – payment of bank service fees
  • $157,713.47 – remaining balance is distributed to allowed professional fees.

Conclusion

The common law of ABCs and the Bankruptcy Code can work together. 

The case of In re Computer World Solutions, Inc., shows us how.

 —————–

Footnote 1.  11 U.S.C. § 543 , titled “Turnover of property by a custodian,” reads in part (note: an assignee for benefit of creditors is a “custodian”—see § 101(11)(B)) as follows:

(a) A custodian with knowledge of the commencement of a case under this title concerning the debtor may not make any disbursement from, or take any action in the administration of, property of the debtor, . . . except such action as is necessary to preserve such property.

(b) A custodian shall—(1) deliver to the trustee any property of the debtor . . . ; and (2) file an accounting of any property of the debtor . . .

(c)The court, after notice and a hearing, shall—(1) protect all entities to which a custodian has become obligated . . . ; (2) provide for the payment of reasonable compensation for services rendered . . . by such custodian; and (3) surcharge such custodian . . . for any improper or excessive disbursement . . . .

(d)After notice and hearing, the bankruptcy court—(1) may excuse compliance with subsection (a), (b), or (c) of this section if the interests of creditors . . . would be better served by permitting a custodian to continue in possession, custody, or control of such property, and (2) shall excuse compliance with subsections (a) and (b)(1) of this section if the custodian is an assignee for the benefit of the debtor’s creditors that was appointed or took possession more than 120 days before the date of the filing of the petition, unless compliance with such subsections is necessary to prevent fraud or injustice. (Emphasis added.)

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