By: Donald L Swanson
For some reason, there is a fascination out there (not sure where, exactly) with having every assignment for benefit of creditors (“ABC”) supervised by a court from the get-go.
This fascination suggests that every ABC effort requires court action and judicial approvals, from the beginning and throughout the assignment, to assure that everything about the ABC and its administration is on the up-and-up.
Startling and Puzzling
This fascination is both startling and puzzling. Here are some reasons why.
- ABCs have existed, and worked well, for centuries under the common law, and the common law of ABCs has never required judicial involvement, except to resolve disputes arising out of the assignment or its administration (i.e., the common law of ABCs provides for availability of courts to resolve ABC disputes, instead of requiring judicial supervision of ABCs from the get-go).
- The common law of ABCs is a subset of the law of trusts (assignor is the settlor, assignee is the trustee, and assignor’s creditors are the beneficiaries), and the law of trusts has never required judicial involvement, except to resolve disputes arising out of the trust or its administration (i.e., the law of trusts provides for availability of courts to resolve trust disputes, instead of requiring judicial supervision of trusts from the get-go).
- Various of our United States have enacted ABC statutes that require judicial supervision of every ABC from the get-go (i.e., judicial supervision instead of court availability to resolve disputes).
- The effect on ABCs, of judicial supervision required by statute, is almost uniformly this: it discourages the use of ABCs by debtors—a discouragement so intense and pervasive that ABCs under such statutes are rarely, if ever, used by any debtor.
- Such discouragement arises because judicial supervision turns a quick and efficient ABC process into one that’s lawyer-heavy, slow and expensive.
Law of Trusts Example
The law of trusts shows us the better way: making courts available to resolve disputes, instead of requiring judicial supervision from the get-go.
Here are examples of provisions in the Uniform Trust Code (provided by the Uniform Law Commission) doing just that: making courts available to resolve disputes, instead of requiring judicial supervision.
- Sec. 111: “(b) Except as otherwise provided in subsection (c), interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. (c) A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this [Code] or other applicable law” (emphasis added).
- Sec. 201: ”(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. (c) A judicial proceeding involving a trust may relate to any matter involving the trust’s administration, including a request for instructions and an action to declare rights” (emphasis added).
- Sec. 702: “(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 or is required by the terms of the trust and the court has not dispensed with the requirement” (emphasis added).
Distrust of Fiduciary Accountability
The fascination with judicial supervision for ABCs represents a distrust of the fiduciary accountability of ABC assignees.
ABC assignees have the fiduciary duties of a trustee to the creditor beneficiaries, including duties of loyalty to creditors and impartiality among creditors.
Such fiduciary duties, and their enforceability (by injunction, removal or after-the-fact damages), are enough to assure trustee accountability to the creditor beneficiaries.
Adding judicial supervision from the get-go, on top of the assignee’s fiduciary duties, is an unnecessary burden upon ABC processes that impairs ABC efficiencies, effectiveness and usefulness.
The availability of courts to resolve ABC disputes is a far, far better thing than requiring judicial supervision of ABCs from the get-go.
The Uniform Trust Code shows us the better way . . . and how the better way works.
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