ABC Under The Common Law: An Out-Of-Court Tool For Liquidating Assets With Efficiency & Credibility—But With Court Assistance Available (First Bank v. Unique Marble)

An assignment for benefit of creditors (an “ABC”) under the common law is an out-of-court tool for liquidating a business debtor’s assets in an efficient and credible manner.

Such a common law tool has been used, effectively and frequently, for many years in such states as Illinois and California.

Despite the out-of-court nature of an ABC under the common law, courts can still be enlisted to resolve discrete issues that may arise. Here is an example of a court’s involvement, within an ABC under the common law, to resolve an issue of compensation for the ABC assignee:

First Bank v. Unique Marble & Granite Corp., 406 Ill. App. 3d 701, 938 N.E.2d 1154 (2010), which opinion is summarized below.

Facts

Debtor is an Illinois business that fabricates granite and marble countertops for homes.

In 2008, the housing market suffers a slowdown, and on November 18, 2008, Debtor assigns its assets to Assignee for the benefit of creditors under Illinois law. The assignment agreement says that Assignee “shall receive reasonable compensation” at $250 per hour from the assigned assets.

First Bank has a blanket lien on all Debtor’s assets, and the total liquidation value of Debtor’s assets is expected to be below what’s needed to pay First Bank’s lien in full.

On April 30, 2009, First Bank informs the ABC Assignee that First Bank will be conducting its own UCC foreclosure auction of Debtor’s assets, instead of allowing the ABC to proceed.

Meanwhile, the ABC Assignee claims to have incurred $35,000 in outstanding fees for services rendered and is concerned that First Bank is trying to both, (i) reap the benefits of Assignee’s prior liquidation services, and (ii) prevent payment of Assignee’s fees.

On May 22, 2009, the trial court (i) allows First Bank to conduct a UCC foreclosure sale of its collateral, but (ii) orders First Bank to place $35,000 in escrow pending resolution of Assignee’s fee claim.

On November 2, 2009, the trial court rules in favor of First Bank on summary judgment, declaring that Assignee’s claim to payment of fees out of proceeds from sale of assigned assets is junior to First Bank’s lien against such assets.

Assignee appeals to the Appellate Court of Illinois, which reverses. What follows is a summary of the appellate court’s rationale.

ABCs under the Common Law

These are the essential features of an ABC under the common law:

it is a voluntary transfer by a debtor of debtor’s property to an assignee in trust for the purpose of applying the property or proceeds thereof to the payment of debtor’s debts and returning the surplus, if any, to debtor;
it is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly;
it is a unique trust arrangement in which the assignee (or trustee) holds property for the benefit of a special group of beneficiaries, the creditors—and thus, the assignee owes a fiduciary duty to the creditors;
it passes legal and equitable title to debtor’s property from debtor to the ABC assignee; and
it is valid without the consent of any of the debtor-assignor’s creditors;

The First Bank v. Unique Marble opinion also reveals this about an ABC under the common law:

although it is “an out-of-court remedy,” the assistance of a court can be enlisted by one or more parties to resolve a particular legal issue within the ABC; and
resolving a dispute over compensation of the ABC assignee is one of those issues that a court can be enlisted to resolve.

The First Bank v. Unique Marble opinion provides this explanation about compensation for an ABC assignee under the common law:

generally, an ABC assignee is entitled to compensation, out of the ABC assets, for services rendered; and
In re Marks, 267 F.2d 108, 110 (7th Cir. 1959), for example, declares that a bankruptcy court has authority under the Bankruptcy Act (of 1898, as amended) to allow fees to an assignee for the benefit of creditors when the assignment is followed by an involuntary petition in bankruptcy and a trustee is appointed in the bankruptcy case.

Legal Grounds for Compensating an ABC Assignee

–U.C.C. Rules

It is undisputed in First Bank v. Unique Marble that, on October 22, 2004, First Bank perfected its security interest in all Debtor’s assets, under the Illinois Uniform Commercial Code (the “U.C.C.”).

Under the Illinois U.C.C.:

an ABC is perfected as a security interest upon attachment;
no filing or other action is required to perfect an ABC;
an ABC is not a financing transaction; and
the debtor ordinarily will not engage in further credit transactions after an ABC assignment.

Thus, Debtor’s assignment to Assignee was perfected on the date of the ABC assignment—about four years after First Bank perfected its blanket lien in all Debtor’s assets. So, under the U.C.C.’s first-to-file rules for perfection and priority, Assignee would lose.

–Common Law Rules

Illinois had a statute, between 1877 and 1939, governing ABCs, but ABCs also existed, and continue to exist, under the common law. That ABC statute no longer exists.

Debtor’s Assignee maintains that:

the inclusion of an ABC assignee in the U.C.C.’s definition of “lien creditor” does not give an assignee an actual security interest in the assigned assets;
the purpose of including an ABC assignee in that definition was meant only to grant the benefits of a status of lien creditor at a fixed point in time; and
an ABC assignee does not compete, under the common law, with senior secured parties to receive reasonable fees incurred in performing the fiduciary duties.

First Bank argues, to the contrary, that Illinois’s U.C.C. classifies an ABC assignee as a bona fide creditor subject to the priority rules outlined therein, and that the U.C.C. rules control here.

Appellate Court’s Rationale

The Illinois appellate court declares, “We disagree” with First Bank:

the inclusion of an ABC assignee within the U.C.C. definition of “lien creditor” does not transforms an ABC assignee into a creditor with a competing security interest for the debtor’s collateral.

Instead, the Illinois appellate court declares, “[w]e agree with” Assignee that an ABC assignee cannot be required to forgo the payment of reasonable fees and costs of administering the ABC assignment until perfected security interests have been fully satisfied. That’s because:

in construing a statute, we presume that the Illinois General Assembly did not intend an absurd, inconvenient, or unjust result:
it is a rare entity, in our view, that would have no secured creditors; and
thus, if ABC assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the task of liquidating assets, and ABCs would cease to be available as an efficient method of maximizing the liquidation value of troubled companies;

Further, First Bank’s interpretation would put an assignee in competition with the creditors that the assignee is bound to serve—and that is an absurd scenario because it transforms a fiduciary into a competing creditor.

Moreover, an ABC is a common-law vehicle used to liquidate a company’s assets, and, under that common law, the assignee has a right to a reasonable fee;

if the Illinois General Assembly, in enacting the U.C.C., “had intended to foreclose this common-law right, it would have, in our view, clearly and explicitly set forth in the statute that a perfected secured creditor such as First Bank has priority over the assignee’s right to fees”; and
“It did not do so.”

The Illinois appellate court declares:

“Because we conclude that the U.C.C. does not transform” an ABC assignee “into a creditor with a competing security interest for the debtor’s collateral”;
- Debtor’s ABC Assignee “is thereby entitled to receive reasonable compensation for his services” as Assignee “before the satisfaction of perfected secured creditors’ claims”;
“In sum, we conclude that the trial court erred in granting First Bank summary judgment”; and
“On remand, the trial court is to take into account” that Assignee’s compensation “is to be based at least in part on the benefits that First Bank received between the date it had notice” of Debtor’s ABC assignment to Assignee and the date First Bank notified Assignee to cease his liquidation efforts:
- “This is so because,” through Assignee’s efforts, “First Bank received certain payments and, by not objecting to the assignment upon notice thereof, First Bank, at a minimum, implicitly accepted the services” that Assignee rendered — “[i]n other words, in spite of First Bank’s status as a secured creditor,” Assignee’s “notice to the bank and the bank’s implicit acceptance of his services” enable Assignee to “collect reasonable compensation for his services; and
- “The calculation may be based on the concept of quantum meruit, which literally means ‘as much as he deserves.’”

Conclusion

Here are two lessons from the First Bank v. Unique Marble opinion:

an ABC under the common law is an out-of-court tool in which the services of a court can be invoked to resolve specific issues; but
before embarking on an ABC process, debtor and the assignee and their counsel should coordinate with debtor’s primary secured creditor(s) to pursue a cooperative course of ABC action, complete with a budget for compensating the assignee.

Editorial Note

The Uniform Law Commission has approved a Uniform Assignment for Benefit of Creditors Act that codifies the common law of ABCs.

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