The Uniform Law Commission (“ULC”) is the same organization that brought us the Uniform Commercial Code, the Uniform Trust Code, and other “Uniform” state laws.
The ULC is now offering a Uniform Assignment for Benefit of Creditors Act (the “Uniform ABC Act”).
The new Uniform ABC Act codifies the common law of ABCs. Such common law has its foundation in the law of trusts: i.e., debtor is the trustor, assignee is the trustee, and debtor’s creditors are the beneficiaries.
A hallmark of ABCs under the common law is the absence of court supervision (focusing, instead, on fiduciary duties of the assignee to creditors), which furthers the ABC goal of liquidating a debtor’s assets with efficiency and credibility.
But many state ABC statutes require court supervision—just like a receivership. Such requirements are costly for receiverships and ABCs alike. And rules requiring ancillary proceedings illustrate why.
Ancillary Proceedings: An ABC Problem
–Two Receivership Rules
An ancillary receiver is a person appointed by a court in one state to assist a receiver appointed by a court in another state.
These two long-standing rules of receiverships require ancillary proceedings:
- the power of a receiver “is coextensive only with” the “territorial jurisdiction” of the appointing court[fn. 1]; and
- the appointment of an ancillary receiver is needed when a receiver has been appointed by a state court or federal court of one state or district, when the debtor has property located in another state or district.[Fn. 2]
–Same Two Rules Apply in Court-Supervised ABCs
The same two rules apply with equal force to state statutes on ABCs that require court supervision:
- i.e., both a primary ABC and one or more ancillary ABCs are needed when the debtor’s/assignor’s assets are located in more than one state.
To illustrate: a debtor wants to do an ABC but has assets located in both the state of Iowa and the adjacent state of Minnesota. Both Iowa (see, e.g., Iowa Code § 681.16) and Minnesota (see, e.g., Minn. Stat. § 577.18) have statutes requiring that an ABC be court-supervised. So, to do an effective ABC, the debtor with assets in both states needs to:
- initiate an ABC proceeding in a court of either Iowa or Minnesota; and also
- initiate an ancillary ABC proceeding in a court of the other state.
–The ABC Problem
The ancillary ABC requirement is a problem for debtors with assets in more than one state. That’s because a primary purpose of any ABC is to liquidate a debtor’s assets with efficiency. And it’s hard to make parallel court proceedings efficient—in fact, parallel court proceedings are the very embodiment of inefficiency.
The Uniform ABC Act Solution
The new Uniform ABC Act provides a solution to the ancillary proceedings problem for debtors with assets in more than one state. That’s because the Uniform ABC Act codifies the common law of ABCs, which does not require court supervision.
The solution is this:
- once the Uniform ABC Act is enacted in all states where the debtor’s assets are located, the debtor can do a single assignment of all its assets to a single assignee under the Uniform ABC Acts of all states; and
- the need for ancillary proceedings is, thereby, eliminated.
Obviously, however, this solution requires that the new Uniform ABC Act be enacted in all states where the debtor’s assets are located. Otherwise, ancillary proceedings will still be required.[Fn. 3]
Uniform ABC Act’s Litigation Provisions
The Uniform ABC Act contains the following provisions relating to ABC-related litigation.
While the Uniform ABC Act backs away from court supervision for ABCs, Section 21 thereof authorizes a state court to hear and resolve specific ABC disputes that are brought before it. Before such a suit is brought in an ABC under the Uniform ABC Act (when assignee’s assets are in more than one state), questions may arise on which state is the best forum for the suit — but such questions are a far cry from the ancillary proceedings required in every court-supervised ABC with multi-state assets.
Notably, moreover, Section 21(c) of the Uniform ABC Act provides that an assignee’s acceptance of the assignment “constitutes the assignee’s consent to the jurisdiction” of a court in the state of the assignment.
Conclusion
The new Uniform Assignment for Benefit of Creditor’s Act, offered by the Uniform Law Commission:
- codifies the common law of ABCs under the law of trusts;
- replaces court supervision requirements with fiduciary duties of the assignee toward creditors; and
- thereby, eliminates the need for ancillary ABC proceedings for debtors with assets in more than one state, when each of those states has enacted the Uniform ABC Act.
The moral of the story is this: all states need to enact the new Uniform ABC Act as soon as possible!
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Footnote 1. First National Bank in Albuquerque v. Robinson, 107 F.2d 50, 54 (10th Cir. 1939).
Footnote 2. This rule is from the often-cited Bodge v. Skinner Packing Co., 115 Neb. 41, 45, 211 N.W. 203, 204 (1926).
Footnote 3. Section 22 of the Uniform ABC Act provides for ancillary ABC proceedings in the enacting state when, (i) an ABC is initiated in another state that requires court supervision, and (ii) the assignor has assets in the enacting state too.
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