An “Assignment for the Benefit of Creditors” (an “ABC”) is an alternative to bankruptcy available under California law—as well as the laws of other states.  An ABC is often a more cost-efficient alternative to filing a bankruptcy case, and ABCs are often employed by secured lenders when speed and flexibility are required in a sale of the assets of the entity and the tools available in a bankruptcy proceeding (such as the ability to reject leases or bind certain classes of creditors) are unnecessary.  An ABC continues to be a very important tool that is routinely employed to assist in the restructuring of Southern California businesses.

In a recent decision, the United States Court of Appeals for the Eleventh Circuit decided that the assignee of an entity which had previously made a general assignment for the benefit of its creditors under Florida law could not file a bankruptcy case for the entity.  Ulrich v. Welt et al. (In re Nica Holdings, Inc.), —F.3d—, 2015 WL 9241140 (11th Cir. 2015).  The assignee, who had been accused of breach of fiduciary duty in his conduct of the assignment estate, sought to use the bankruptcy case to stop and then settle litigation by a creditor unhappy with the course of the assignment.

The 11th Circuit first made a couple of general observations regarding ABC’s, including that “[e]ntities may opt to use the ABC process because in their particular circumstance, it’s more flexible, fast, more private, and less supervised than bankruptcy.”  Id., 2015 WL 9241140 *6 (citation omitted).  The 11th Circuit also observed that, “ABCs and bankruptcies are alternative proceedings.  An entity deliberately chooses one or the other.”  Id.

The 11th Circuit then went on to reverse the decisions of the United States Bankruptcy Court for the Southern District of Florida as well as the district court, finding that under the Florida statutes which govern assignments for the benefit of creditors, and the wording of the specific assignment agreement itself, the assignee had no power to file a bankruptcy for the entity.  The 11th Circuit found that while the entity in question chose to use the ABC process, that decision did not give the assignee the power to file a bankruptcy case for the entity, because it “. . . did not . . . grant [the assignee] the freewheeling power to pull it out of the very framework from which his powers as assignee arose and plunge it into a different legal system not of its choosing.”  Id., 2015 WL 9241140 *6.  The 11th Circuit further declined to “read this extraordinary power” into the form language that is used for general assignments under Florida law. Id.; see Fla. Stat. § 727.704(b) (providing language that must be used in general assignments).

While the 11th Circuit seemed skeptical of the motives of the assignee and his counsel, its decision was based on a review of the “general assignment” made by the company as well as the Florida statutes in question.  Unlike Florida, California statutes do not provide any detailed instructions about the provisions to be used in a “general assignment” document commencing an ABC.  The California Code of Civil Procedure has a much more general provision, which provides that:

As used in this chapter, “general assignment for the benefit of creditors” means an assignment which satisfies all of the following requirements:

(a)        The assignment is an assignment of all the defendant’s assets that are transferable and not exempt from enforcement of a money judgment.

(b)        The assignment is for the benefit of all the defendant’s creditors.

(c)        The assignment does not itself create a preference of one creditor or class of creditors over any other creditor or class of creditors, but the assignment may recognize the existence of preferences to which creditors are otherwise entitled.

CCP § 493.010 (“General Assignment for Benefit of Creditors—Requirements”); see also CCP § 493.020 (“General Assignment by Defendant”) (“Notwithstanding any other provision of this title, the defendant may make a general assignment for the benefit of creditors.”)

In California, the scope of an assignment and the power of an assignee are regulated by case law and practice that has developed over the last 100 years in interpreting the general assignment power provided in the California Code of Civil Procedure.  While not directly applicable because it analyzed Florida law, the NICA Holdings decision remains a cautionary tale that the “general assignment” document that commences an ABC should be carefully reviewed and scrutinized.  A standardized form of “general assignments” has been developed over time.  Although an ABC is more often than not employed specifically to avoid the filing of a bankruptcy case, there are situations where the assignee might want or need the power to commence a bankruptcy in the proper circumstances, and if so such power should be included in the form of “general assignment.”