Common Law ABC Is On The ADR Spectrum, But Most ABC Statutes Are Not

By: Donald L Swanson

Assignment for benefit of creditors (“ABC”) under the common law is to bankruptcies and receiverships, what arbitration is to state and federal court lawsuits.

The Alternative Dispute Resolution Act:

• defines alternative dispute resolution (“ADR”) as “any process or procedure, other than an adjudication by a presiding judge, in which a neutral third party participates to assist in the resolution of issues in controversy”; and
• identifies several processes as being on the ADR spectrum, including mediation and arbitration. 28 U.S.C. § 651(a).

Both ABC under the common law and arbitration are out-of-court processes designed to resolve disputes through a neutral third person.  Whereas, most ABC statutes in these United States require supervision and adjudication by a presiding judge.

• Hence, the unmistakable conclusion is that common law ABC is on the ADR spectrum—right next to arbitration—while most state ABC statutes are not.

The Uniform Assignment for Benefit of Creditors Act (the “Uniform Act”), by contrast to other ABC statutes, is designed to update and codify the common law of ABC—which means that the Uniform Act does not require court supervision or adjudication.  Therefore, the Uniform Act, unlike most other state ABC statutes, qualifies as an ADR process.

Some ABC History

Common law ABC has been around for centuries as an effective tool for liquidating the assets of a failed business.  Such effectiveness has continued to the present time in such states as Illinois and California that continue to proceed under the common law.

Many other states, by contrast, have enacted ABC statutes that superimpose requirements for judicial supervision and control, along with bond requirements, that destroy both the cost-effectiveness and the ADR character of the ABC process.  The result in many such states is that ABCs simply don’t happen—and when they do happen, the costs can be overpowering.  

ADR & Cost Effectiveness

One purpose for an ADR is to create efficiency—which is what a common law ABC does.

A recent academic report[fn. 1] offers the following observations about state ABC statutes in these United States.

ABC provides a cost-effective liquidation process, when state statutes allow.  The various types of ABC statutes can be characterized like this:

• ABCs are popular in such states as California and Illinois, under the common law, where they are most often accomplished without any court involvement;
• the ABC statutes of some other states, such as Delaware, require “some court oversight”; but
• the ABC statutes of “most other states require extensive court involvement.”

Those states requiring court involvement in an ABC “do not allow the [ABC] to be cost-effective because they require as much, if not more, time and work in terms of court filings and hearings, as bankruptcies.”

Conclusion

ABC under the common law (and as now codified in the Uniform Act) provides for liquidating the assets of a failing business without court supervision or control and through the efforts of a neutral third party.  

That is an ADR process, fitting easily on the ADR spectrum right next to arbitration.

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Footnote 1.  The report is, Jessica G. McKinlay, Assignments for the Benefit of Creditors as an Alternative to Bankruptcy Proceedings, 9 Bus. Entrepreneurship & Tax L. Rev. 74 (2025).  The author is Assistant Professor, University of Idaho College of Law. J.D., University of Utah S.J. Quinney College of Law; B.S., University of Utah, and the information cited and quoted herein is from its “Introduction.”

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