2023 Bankruptcy Alternative: Uniform Law On Assignments For Benefit Of Creditors?

By: Donald L Swanson

2023 is the year that the need for a uniform state law on assignments for benefit of creditors became obvious. 

And a Drafting Committee at the Uniform Law Commission began working in 2023 to create such a law.

Here are some of the reasons why the need became obvious.

Background and Purpose

Assignments for benefit of creditors (“ABCs”) have been around for centuries.  Their purpose has always been to maximize the value of a financially distressed debtor’s business assets by liquidating those assets efficiently and with credibility in order to pay the debtor’s creditors.

An ABC is initiated by the debtor, in agreement and concert with debtor’s major creditor(s).

ABCs are often described as “bankruptcy lite.”  But that description is incorrect.  ABCs are actually “trust heavy”:

• ABCs arise out of the common law of trusts (debtor is the trustor, assignee is the trustee, and debtor’s creditors are the beneficiaries);
• the common law of ABCs is entirely consistent with the law of trusts; and
• the details of bankruptcy laws, over the past centuries, are an outgrowth of the common law of ABCs—not the other way around. 

Poison Pills

In the early eras of these United States, ABCs were commonly utilized.  And by all accounts, they worked well.

But after the Civil War and for decades to follow, many states started codifying the ABC process—and changing the common law rules in material ways.  Unfortunately, many of those changes amounted to nothing less than a poison pill.  By “poison pill” I mean a provision intended to protect against abuse of the ABC that adds inefficiencies, costs and burdens that discourage the use of the ABCs.

In my State of Nebraska, for example, the ABC statutes required that an assignment for benefit of creditors be made to the local sheriff as assignee, who would then convene a meeting of the assigning debtor’s creditors for choosing a replacement assignee.

Someone, apparently, saw such an approach as a good idea and got the law enacted, but unfortunately:

• no one wanted to use that law—and no one did . . . surprise, surprise!; and
• in 1945 the Nebraska Unicameral repealed the entirety of its ABC statutes (see this link).

Also unfortunately, most states have enacted ABC statutes with poison pill provisions.  Such provisions typically focus on the idea that abuse is going to happen and must be controlled by heavy court oversight, by heavy bonding requirements, etc. 

The result of such poison pill provisions is this:

• they have killed ABCs as a viable process in many of those states.

Merging ABCs and Receiverships

One poison pill approach that has gained traction in recent decades is this: enacting statutes that merge ABCs with receiverships—making them the same.

This is another poison pill approach that no one wants to use.  Here’s why.

Receiverships are typically initiated by a creditor with this primary purpose in mind: to remove debtor’s management, involuntarily, and gain control of debtor’s business and assets.

And because of the involuntary nature of receiverships:

• the filing of a request for receivership often pushes debtor into filing a voluntary bankruptcy petition, to keep control of the business and its assets; and
• due process requirements (such as heavy court supervision and bonding) become paramount and create heavy legal costs.  

Such details are the complete opposite of what an ABC has always been under the common law of trusts: i.e., an efficient, effective and voluntary way to maximize the value of debtor’s assets for the benefit of creditors.

And since ABCs are a voluntary debtor action, due process concerns vanish—as do the costs of providing due process protections.  That’s why due process protection requirements are nothing more than a poison pill.

Common Law of ABCs—Today

ABCs still happen today under the common law and in a few states where court supervision has been surgical to address specific concerns.  And such ABCs work well to accomplish their intended purpose.

There are a number of states that operate to a large degree under the common law of ABCs.  Illinois is the cleanest example: i.e., the Illinois courts explicitly recognize and follow the common law of ABCs, and Illinois has few ABC-specific statutes.

ABCs are occurring frequently and effectively in Illinois—which is in sharp contrast to the virtual non-existence of ABCs in states with poison pill statutes.

Conclusion

2023 is the year that the drafting process began toward a uniform state law on assignments for benefit of creditors.  Hopefully, that process will result in a return to usefulness of ABCs with uniformity throughout these United States.

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