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An Option for Struggling California Businesses: Introduction to Assignments for Benefit of Creditors

By Neil Sheaffer

It is the unfortunate truth that many businesses in all industries are struggling as we proceed through uncharted economic times. In recent days, both J. Crew and Neiman Marcus filed for Chapter 11 bankruptcy protection, and this is likely only the beginning of a large wave of bankruptcy filings as businesses struggle to find their footing.

While Chapter 11 reorganization may be right for some companies and Chapter 7 liquidation may be right for others, many companies may opt for a different option entirely: an assignment for the benefit of creditors, commonly known as an “ABC.” ABCs provide flexibility that is not present in bankruptcy cases and allows for a relatively quick and streamlined approach to creditor claims. In an ABC, the business (the assignor) assigns all of its assets and liabilities to another person or business (the assignee), which then sells the assets and distributes the sale proceeds to creditors.

An ABC is most comparable to a Chapter 7 bankruptcy, where the assigned trustee liquidates a company’s assets, but ABCs are governed by state law as opposed to federal law. Importantly, initiating an ABC does not require a court filing, and thus, is not subject to ongoing court oversight. Instead, an ABC is merely a contract pursuant to which the company transfers legal and equitable title, as well as custody and control, of its assets to an independent third party assignee who is required to sell the transferred assets and distribute the proceeds of their sale. Unlike a trustee who is randomly assigned by the bankruptcy court, an assignee is selected by the assigning company. This is important, because a hand-picked assignee with specialized knowledge and experience is in the best position to maximize the value of the assets.

Furthermore, ABCs can proceed much faster than bankruptcy, because there is no court oversight or strict procedural requirements that an assignee must follow. The lack of court oversight and procedural obligations is also why ABCs generally cost less than other options.

The ABC can also benefit the management of a struggling company, because it places the responsibility for winding down the business and disposing of the assets directly on the assignee, who has a fiduciary duty to the creditors. Creditors of the assignor simply must submit proofs of claim to the assignee and will ultimately receive payment by the assignee from the proceeds of the assignment estate. After liquidation, the assignee determines the distribution amounts, with claim priority determined first by state statute and then by the federal Bankruptcy Code. Secured creditors are the first to receive distribution, followed by tax and wage claims.

Financially troubled companies who are not able to take advantage of Chapter 11 reorganization and would prefer a more efficient approach to liquidation should explore the benefits offered by assignments for the benefit of creditors.

Griswold Law, APC regularly manages and sells business assets and is well positioned to serve as an assignee for companies looking to pursue an assignment for the benefit of creditors. To learn more about ABCs, please visit www.griswoldlawca.com or contact the office at (858) 481-1300.

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