ABC Details In Illinois: Under Common Law Of Trusts

An Illinois view (photo by Marilyn Swanson)

By: Donald L Swanson

Assignments for benefit of creditors (“ABC”) are rarely used in these United States.  That’s for two reasons: (i) some states have no ABC statute and do not recognize the common law of ABCs, and (ii) other states have onerous ABC statutes that no one wants to use.

The State of Illinois is an exception: ABCs are regularly and frequently used there, under the common law of trusts, because the ABC process is an efficient and effective tool for liquidating a failed or failing business.  There is no ABC statute in Illinois.

Illinois provides an example to the rest of us on how ABCs can work.  But since there is no ABC statute in Illinois, the details of its ABC process can be a mystery.

Fortunately, a treatise provides explanation of details for the ABC process in Illinois.  The treatise is titled, “Strategic Alternatives for and Against Distressed Businesses,” and is published by Thomson-Reuters—the foregoing link is to a 2022 edition. 

Chapter 25 of that treatise explains details of the ABC process in Illinois.  The contributing author for such Chapter 25 is Robert P. Handler, CTP, JD, of Commercial Recovery Associates LLC in downtown Chicago.

What follows is a summary of information from such Chapter 25 on ABC process details in Illinois.


In 1877 Illinois enacts a comprehensive ABC statute.  After enactment of the National Bankruptcy Act of 1898, however, the Illinois Supreme Court declares:

  • the Illinois ABC statute is suspended by the new bankruptcy law; but
  • ABCs continue to exist in Illinois under the common law of trusts.

Court involvement

An Illinois ABC does not generally involve the courts, but a state court’s assistance may be obtained to address specific needs, such as:

  • recovering or collecting property of the trust;
  • challenging claims; or
  • contesting the validity of the ABC assignment.

Additionally, three creditors may combine to file an involuntary bankruptcy petition and attempt to stay the ABC process.  However:

  • a bankruptcy court may choose to abstain or dismiss the involuntary bankruptcy case; and
  • if a debtor fails to answer an involuntary bankruptcy petition, the ABC assignee may move to intervene or to dismiss the involuntary petition—but may not answer or contest the petition because only the debtor may do that.


Once a sufficient authorization by owners is documented, the debtor executes an ABC trust agreement that creates the ABC trust, states the intent and purpose of the ABC trust, and specifies the powers and duties of the ABC assignee-trustee.

The ABC assignment must be in writing and contain an express declaration of trust to which both the debtor and the assignee-trustee are parties.  The ABC assignment document must (i) provide for debtor’s transfer of its property into the trust, and (ii) set forth the powers of the assignee-trustee.  The ABC trust must receive the debtor’s property, and the assignee-trustee must accept the appointment and agree to the terms of the ABC trust.

The transfer of debtor’s property to the ABC trust must be absolute and unqualified and must be of all debtor’s legal and equitable interests in the property.

The ABC trust agreement may include such representations, warranties, and covenants of the debtor and its officers and directors as:

  • the accuracy and completeness of the list of creditors; and
  • the obligation of officers and directors to:
    • provide information on debtor’s property and liabilities that the ABC assignee-trustee requests; and
    • cooperate with and assist the ABC assignee-trustee and provide any documents that may be needed.


The timing of a sale of ABC property is determined by the nature and type of property being sold and whether debtor marketed the property prior to the assignment.

The ABC assignee-trustee’s objective is to maximize value for creditors from sale of ABC property in a commercially reasonable manner. If the ABC assignment is accompanied by a purchase agreement or letter of intent with a potential buyer, the assignee-trustee must decide how to proceed—but at a minimum, the assignee-trustee needs to provide notice of the offer and solicit higher and better offers, using reasonable business judgment on assuring the sale is conducted in a commercially reasonable manner.

ABC assignee-trustees in Illinois typically sell the assigned property at public auction, either in the office of the assignee-trustee with a court reporter present or at the debtor’s premises with a professional auctioneer.

The ABC assignee-trustee may continue operating debtor’s business for a limited time, if that would be best for maximizing value.


The ABC assignee-trustee provides reasonable notice to creditors of the time deadline for filing claims—typically, 90 to 120 days.

The ABC trust agreement needs to set distribution priorities. Generally, creditors holding valid and enforceable liens or other encumbrances are paid the proceeds of their collateral. Then, remaining sale proceeds are distributed to:

  • costs for preserving the ABC property, including maintenance, insurance, expenses of operation, and other administrative expenses;

  • compensation for services of the ABC assignee-trustee and of attorneys and other professionals for the assignee-trustee;

  • federal claims owing on the date of assignment, including withholding, unemployment, income, excise, property and employment taxes;

  • state and county taxes owing on the date of assignment;

  • other debts owing on date of assignment entitled to priority under applicable law;

  • other valid claims of creditors, within each class, pro rata in accordance with the terms of each creditor’s indebtedness, until all such debts are paid in full; and

  • any surplus of the trust’s funds, are paid to debtor’s equity security holders in their order of priority.

Secured Creditor

Where the business has a secured creditor with a lien on most or all of debtor’s property, the ABC assignee-trustee needs consent from the secured creditor. That’s because the assignee-trustee’s rights and powers are junior in priority to a properly perfected secured creditor.

Secured creditors typically allow the ABC assignee-trustee to liquidate their collateral but only after an agreement is made on the liquidation process and budget.  Secured creditors also retain all rights and remedies in the collateral and may exercise those rights at any time, absent a specific agreement to forbear.


In Illinois, ABCs are often used, and a cadre of professional assignee-trustees exists.  These professionals lend credibility to the ABC process.

The ABC assignee-trustee is typically a turnaround or workout professional who, in many cases, has already performed turnaround consulting services for the debtor prior to the assignment.

Neither a bond or proof of financial status is required of the ABC assignee-trustee.

Unlike a court-appointed bankruptcy trustee or receiver, the ABC assignee-trustee is selected by the principals of the failing business, usually with the advice of counsel.


Generally, the ABC assignee-trustee is paid a retainer prior to the assignment, intended to cover the assignee-trustee’s initial fees and expenses. The source of the retainer can be the debtor’s property or may be advanced by a secured creditor. In some cases, the debtor’s principals fund the retainer, particularly when personal guarantees are involved.

Additional fees are paid from liquidation proceeds of the trust property as specified in the trust agreement.

Most ABC assignee-trustees in Illinois favor strict hourly-fee arrangements, sometimes with caps on total fees. Others favor a contingent-fee arrangement, particularly where a business is being sold as a going concern.

Standard of Care

The ABC assignee-trustee owes a fiduciary duty to the trust beneficiaries—i.e., debtor’s creditors (and to equity holders, once creditors are paid).  As such, the assignee-trustee is obligated to (i) carry out the terms of the ABC trust, (ii) act with highest degree of fidelity and good faith, and (iii) exercise reasonable business judgment. In reality, the assignee-trustee is carrying out the debtor’s fiduciary duty to creditors during insolvency.

The ABC assignee-trustee’s duty to unsecured creditors includes ensuring that: (a) the secured creditors’ liens are proper and, if not, disputing those liens, and (b) value of the assigned property is maximized through a fair and equitable liquidation process.

Some of the risks ABC assignee-trustees face include:

  • assigned real estate may have environmental issues;
  • if a large number of employees must be terminated, requirements of both state and federal laws must be satisfied;
  • 31 U.S.C. § 3713(b) requires an assignee of an insolvent debtor to pay all debts owing to the U.S. before any other claim and imposes personal liability upon an assignee who fails to do so; and
  • general business risks like assuring that adequate insurance exists with assignee-trustee named as an additional insured and loss payee.


Under Illinois law, the ABC assignee-trustee has rights of a lien creditor, which block post-assignment collection efforts by unsecured creditors. 

Foreclosure proceedings by secured creditors and some related receiverships cannot be blocked—that can only be accomplished through an intervening bankruptcy and its automatic stay.

The ABC assignee-trustee can choose to defend lawsuits that assert claims—it’s a business decision balancing costs of defense v. merits and amount of the claim in litigation. 

ABC assignee-trustees in Illinois have the power to avoid transfers under the Uniform Voidable Transactions Act.  Practical questions include, (i) is money available to fund the avoidance litigation, and (i) would an avoidance judgment can be collectable.

The Uniform Commercial Code in Illinois grants the status of a hypothetical “lien creditor” to the ABC assignee-trustee.  This gives the assignee-trustee power to do such things as:

  • avoid an unperfected security interest; and
  • exercise discretion in managing the assigned property.

An ABC assignment places assigned property beyond the reach of judicial processes like attachment, garnishment and execution.


The ABC assignee-trustee should send notice of the assignment to all creditors of record, along with a claim form, instructions on filing a claim, and a statement of the property and liabilities of the debtor.

An assignee-trustee should also give notice of the assignment:

  • to state and local governmental authorities, including taxing authorities;
  • to Internal Revenue Service; and
  • by filing notice of the assignment with the Secretary of State as a UCC-1.

Creditor Consent

Creditor consent is not necessary for an ABC to be valid, since beneficiary consents are not required for the validity of a trust. 

However, an ABC can be declared void, if it contains onerous conditions for creditor participation.  An ABC cannot, for example, force a creditor to release its claim against debtor as a condition for receiving a distribution from the ABC trust.

In practice, the consent of a secured creditor is needed to (i) use the secured creditor’s collateral, or (ii) sell the secured creditor’s collateral for less than the full amount of its claim.


ABC assignments are commonly used in Illinois, particularly for small-to medium-sized, closely held businesses.  Lenders and creditors’ attorneys are familiar with the ABC process and with the professionals involved.

Pros and Cons

Distribution priorities are, (i) payment of secured creditors, (ii) then debts due to the U.S., including trust fund taxes, and (iii) then debts due to the state of Illinois. These priorities are different from priorities under the Bankruptcy Code, where wages have priority over state and federal taxes. Accordingly, it is more likely that trust fund taxes are paid in an ABC than in a bankruptcy.

Illinois has no preference recovery statute for an ABC assignee-trustees to use, beyond what is in the Uniform Voidable Transactions Act. 

Where a sale of property will not pay a junior lienholder’s claim in full, that junior lienholder’s consent to the sale is required. Frequently, however, in conjunction with an ABC assignee-trustee’s sale, a senior secured creditor will simultaneously foreclose its lien on the same property, thereby eliminating the junior creditor’s rights.

Sale of assigned property can be accomplished as quickly as is commercially reasonable. 

The ABC assignee-trustee can borrow or finance the completion of work in process or the cost of fulfilling orders, usually through use of a secured creditor’s cash collateral with that creditor’s consent or through new borrowings from the existing lender, a new lender, or a prospective purchaser.

Debtor’s employees may be retained by the ABC assignee-trustee for the liquidation process, either as employees or independent contractors.


The ABC process in Illinois stands as an example and illustration of how ABCs can work efficiently and effectively.

And here’s a “Thank you” to Robert P. Handler and Thomson-Reuters for providing information on how that process works.

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

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