ABC Statutes: Important-But-Ignored Stakeholders

By: Donald L Swanson

When state legislatures consider a legislative bill, it’s important that they hear from stakeholders who would be affected by that bill.

Important ABC Stakeholders

When faced with a legislative bill on assignment for benefit of creditors (“ABC”), its important that legislatures hear from a variety of stakeholders, including this important group:

• the legal and financial professionals who would be responsible for choosing and using (or not choosing and not using) what the bill provides–and in the case of ABCs, those professionals are debtor attorneys and financial advisors.

Over the past century and a half, lots of ABC statutes have been enacted.  Many of those statutes, while designated “ABC statutes,” create little more than a voluntary receivership with heavy court supervision and bond requirements (instead of a genuine ABC law under the common law of trusts).  Such statutes in many states are rarely used.

I’ll try to explain why that is.

Centuries of History

For centuries, receiverships and ABCs have existed, side-by-side, as similar-but-different processes for liquidating failed businesses. And both worked well . . . each in its own lane.

Historical differences and contrasts between the two processes include:

• one is court-supervised (receivership), the other is out-of-court under the law of trusts (ABC);[fn. 1]
• one is laborious (receivership), the other is efficient (ABC);
• one is expensive (receivership), the other is cost-effective (ABC);
• one is adversarial (receivership), the other is cooperative (ABC); and
• one takes time (receivership), the other is quick (ABC).

Such similar-but-different processes continue to exist today, side-by-side and in their historical forms—but only in a handful of these United States (e.g., in Illinois and California).  

And in states where both processes exist side-by-side in their historic forms, both processes are utilized frequently and effectively.

Blurred Differences

In many other states, however, differences between receiverships and ABCs are blurred by statute: i.e., by imposing court-supervision on ABCs and imposing bond requirements. 

Such blurring statutes have the effect of:      

• cancelling ABCs in their historic form;
• making ABCs little more than voluntary receiverships; and
• eliminating the historic role of an efficient, cost-effective, cooperative and quick ABC process.

A natural result, therefore, of turning ABCs into voluntary receiverships is this:

• many legal and financial professionals, who must choose among various remedies for their debtor clients, have no historic common law ABC option and stop choosing the blurred ABC process.

Ignored Stakeholders

Periodically, over the past century and a half, legislatures seem to get a kick out of enacting ABC laws with heavy court supervision and bond requirements that blur the lines between receiverships and ABCs.  The uniform effect of such blurring enactments is this:

• assuring that ABCs cannot happen in their historic sense and rarely happen in many of the enacting state.

In enacting such blurring statutes, it’s obvious that one major group of stakeholders has been ignored:

• legal and financial professionals who deal with stressed businesses—namely, the professionals who must choose among various liquidation processes and recommend what process to use.

My experience is that many of such professionals in the vast majority of states, who might be inclined to use an ABC under the common law of trusts, would rarely-if-ever choose to use an ABC that is little more than a voluntary receivership.

I am one of those professionals who make such choices and make such recommendations.  And I can say unequivocally:

• of the hundreds of stressed businesses I’ve represented over the decades, I can think of only a very few circumstances where I might have recommended using a voluntary receivership, even when the voluntary receivership masquerades under state statutes as an ABC.

Further, when I’ve heard other professionals, who regularly choose and use ABCs under the common law of trusts, asked about choosing a voluntary receivership (whether called an ABC or not):

• the answer is not merely “No,” it’s often “Heck no!!!”  

Conclusion

The Uniform Assignment for Benefit of Creditors Act, newly offered by the Uniform Law Commission, codifies ABCs under the common law and needs to be enacted.

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Footnote 1.  An important distinction exists between court supervision and court involvement for ABCs.  Court supervision is a statutory duty for courts to address specified issues within the ABC process.  Court involvement, by contrast, allows a court to address and resolve discrete disputes that one or more of the ABC parties may bring before it.  One is court supervision from the beginning; the other is court involvement as requested on specific issues.   

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