Assignments for the Benefit of Creditors in Minnesota

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Introduction

In August 2012, Minnesota enacted a new, more user-friendly statute governing the once seldom-used tool of Assignments for the Benefit of Creditors (“ABC”). Since then, ABC’s have become more common. Unlike receiverships,[1] ABC’s are typically initiated by debtors, giving the debtor control over when an ABC is commenced, the assets included in the ABC, and selection of the “administrator” or assignee. Creditors, including (and especially) lenders are rightly concerned about the debtor having control over these options. Understanding how an ABC works, however, is essential to a creditor re-establishing control of the debt collection process.

GENERAL PURPOSE OF AN ABC

An ABC is commenced by the filing of a written assignment agreement in a form substantially similar to the form included in the statute. Minn. Stat. §577.12 and .13. The Assignment must be filed with the court administrator of the district court in the county where the assignor, or any of them if there is more than one, resides or has its principal of business. Minn. Stat. §577.12.  An ABC provides a debtor with an opportunity to use neutral party and a court‑supervised process to liquidate some or all of its assets in an orderly fashion to satisfy creditor claims. This process can insulate the debtor from having to deal directly with creditors and avoid any claims that the debtor preferred one creditor over another. As a court-supervised process, an ABC can help to narrow disputes and give all parties closure.

CAST OF CHARACTERS IN AN ABC

The cast of characters in an ABC includes the assignor, the assignee, the creditors of the assignor, the Court, and potentially holders of equity interests in the assignor.[2] Unlike a receivership, where a party, typically a creditor or shareholder, recommends and the Court selects and appoints a receiver, in an ABC the assignor is authorized to select the assignee. However, the assignee must be eligible to serve as receiver and therefore must meet the same criteria required of a receiver. See Minn. Stat. §577.12[3]  To determine whether a proposed assignee is eligible to serve, the Court will evaluate the proposed assignee’s qualifications and independence. See Minn. Stat. §576.26.[4] The assignor may assign assets to one or more assignees. Minn. Stat. §577.12.  For example, an assignor can assign real property to an assignee with particular experience in liquidating real estate while assigning other assets to a different assignee.

The assignee takes possession and control of the assigned assets (the “Assignment Property”); gives notice to those statutorily entitled to the same pursuant to Minn. Stat. § 576.34,   and liquidates the Assignment Property for purposes of paying the assignor’s creditors. The assignee serves the same purpose as a general receiver under Minnesota’s receivership laws, Minn. Stat. § 576.[5]

Creditors of the assignor, both secured and unsecured, may receive distributions from the liquidation process. Creditors may be required to file claims forms detailing what is owed to them and why. See Minn. Stat. §576.49 and .50. Certain creditors are stayed from pursuing certain claims against the assignor, the assignee, or the Assignment Property outside of the ABC process. See, Minn. Stat. §576.45.

The Court in which the ABC is filed has jurisdiction over the Assignment Property, the assignee, and the ABC proceedings.

THE ASSIGNMENT PROPERTY

The language of the assignment form as set forth in Minn. Stat. §577.13,[6] and the statute provides that the assignor can assign all or some of its assets to the assignee.[7] The assets so assigned are the Assignment Property pursuant to Minn. Stat. §577.11(c).  The Court then has jurisdiction over the Assignment Property, and the assignee is given control over the assets, but not the entity which owns the assets (i.e., the assignor).

INITIAL ORDER

The Assignment agreement does not contain all of the usual terms and provisions of a typical receivership order. Accordingly, best practice suggests that the assignee upon appointment, or as soon thereafter as practical, should seek a court order approving and validating the assignment and otherwise delineating the powers, duties, and process for the ABC.  This order could also include the provisions typical in a receivership appointment order (e.g., duties of and restrictions on the other parties involved in the ABC, a periodic reporting protocol for the assignee with an objection process and statement that failure to timely object is a waiver of the objection as to matters described in the report, as set forth in Minn. Stat. §576.36, lay out the claims process, including claim form exemplars, claim administration, objections to allowance of claims, extend the limited stay if appropriate, and other matters relevant to the case), as well as other provisions specific to the particular situation.

SALES OF ASSIGNMENT PROPERTY

Typically the assignee is required to sell real and personal property as part of the ABC process. If the sale of such property is in the ordinary course of the assignor’s business, the assignee can sell such property without Court authorization. Minn. Stat. § 576.29, Subd. 1(b)(4). If, however, the sale of such property is not in the ordinary course of business (such as an auction, for example), the assignee is required to obtain prior Court approval. Minn. Stat. § 576.29, Subd. 1(b)(5). Depending on the nature and value of the property, the assignee may want to seek such approval before having a buyer identified or may want to wait until it has received a purchase offer.

The assignee may sell Assignment Property[8] subject to liens or free and clear of liens, except liens for unpaid real estate taxes or assessments or liens airing under federal law. Minn. Stat. § 576.46, Subd. 1. Any owner of property or lien holder may object to a proposed sale. If the Court determines that the amount likely to be realized from the sale is less than the objecting party would realize in the absence of the sale, the Court will not permit the sale to go forward. Upon the sale of property free and clear of liens, all liens encumbering the property shall transfer and attach to the proceeds of the sale, less reasonable expenses incurred in the disposition of the property. Minn. Stat. § 576.46, Subd. 1(c). The Court may then authorize the assignee to pay secured creditors out of the sale proceeds.

The Court may not authorize the sale free and clear of a co‑owner’s interest in property. Minn. Stat. § 576.46, Subd. 2. Rather, the assignee shall have the assignor’s rights and powers afforded by state and federal law, including any rights of partition.

A secured creditor may credit bid at a sale provided that the creditor tenders cash sufficient to pay the reasonable expenses incurred in the disposition of the property and all senior liens. Minn. Stat. § 576.46, Subd. 3.

CLAIM PROCESS

Not surprisingly, the claims process is usually the most time-consuming portion of the ABC. Unlike the more formal claims process in federal bankruptcy proceedings, the ABC/receiver statute provides the assignee and the Court with a great deal of latitude with respect to the claims process. Minn. Stat. § 576.49. The assignee is to “submit to the Court a recommendation concerning a claims process appropriate to the particular” ABC proceeding. The Court is then required to establish a claims process addressing specific topics in the statute.[9]

In some ABC proceedings, it makes sense for the assignee to immediately submit a claims process recommendation to the Court. Sometimes, however, it makes more sense for the assignee to wait until the assignee has a better understanding of the value of the Assigned Property and the claims the assignee anticipates will be filed. For example, if the value of the Assigned Property is unlikely to result in a distribution to general unsecured creditors, it does not make sense to immediately recommend a claims process that requires unsecured creditors to file claims and requires the assignee to evaluate, and potentially object to, those claims. See Minn. Stat. § 576.51 (establishing a priority schedule for allowed claims to receive distributions). Rather in such a circumstance, it might make sense to require secured creditors to file claims immediately and wait to determine whether to require unsecured creditors to file claims until more is known about whether a distribution to unsecured creditors is likely.

Likewise, in some proceedings it may make sense to have creditors file claims with the Court, whereas in other proceedings it may make sense to have creditors file claims with the assignee or claims processing agent retained by the assignee, depending on: (1) the anticipated number of claims; (2) the sophistication of the creditor, will creditors have the ability to electronically file claims with the Court; and (3) whether sensitive or confidential information is likely to be included along with claim forms.

The assignee should also evaluate the information it received from the assignor to determine whether claims should be allowed without requiring the specific creditor to file a proof of claim. For example, the assignor may have kept detailed books and records that show the assignor owed specific creditors specific amounts. The assignee should determine whether it is necessary for those creditors to file a proof of claim.

Once claims have been filed, the assignee and “any party in interest” may object to specific claims. Minn. Stat. § 576.50. The objection must state the grounds for the objection and comply with any other Court imposed requirements. Generally, objections must be filed with the Court and served on certain identified parties at least 30 days before a hearing on the objection. The Court is allowed to estimate claims if fixing or liquidating such claims would unduly delay the administration of the ABC process. Minn. Stat. § 576.50, Subd. 3.

Finally, unlike the claims process in bankruptcy proceedings, the ABC claims process does not include a cap on landlord claims associated with commercial leases. In bankruptcy proceedings, a debtor can reject a lease and a landlord’s resulting bankruptcy claim is capped by 11 U.S.C. § 502(b)(6) up to the rent reserved by the lease for the greater of one year or 15%, not to exceed three years, of the remaining term. In certain circumstances, the difference between lease rejection claims under the bankruptcy code and the Minnesota ABC process may be of sufficient size that it impacts the decision of whether to file bankruptcy or an ABC proceeding.

DISTRIBUTION

The ABC/Receiver statute provides the assignee and the Court with a great deal of flexibility in  the distribution to creditors of Assignment Property. Minn. Stat. §576.53. The assignee is permitted to make interim and final distributions after filing a proposed distribution schedule. The assignee is required to give notice of filing the proposed distribution schedule on all persons on the master service list and all persons that filed proofs of claims. Provided that no objections to the proposed distribution schedule are filed within 21 days of notices, the Court may enter an order authorizing the proposed distribution. If there are objections to the proposed distribution schedule, the Court will rule on those objections and then a distribution can be made.

The assignee’s proposed distribution schedule must comport with the statutory order of priority: (1) secured claims, subject to reimbursing the assignee for the reasonable and necessary expenses of preserving, protecting or disposing of the collateral, including allowed fees and expenses of the assignee and its professionals; (2) other expenses incurred during the ABC process; (3) wages incurred within 90 days of the filing of the ABC, capped at $13,650 (see 11 U.S.C. § 507(a)(4)); (4) security deposits for the purchase, lease or rental of non‑commercial property, capped at $3,025 (see 11 U.S.C. § 507(a)(7)); (5) past due domestic support obligations; (6) unsecured claims of governmental units for taxes that accrued before the commencement of the ABC; (7) all other unsecured claims; and (8) interest on unsecured claims. Minn. Stat. § 576.51.

Notwithstanding this priority schedule, the United States government claims the right to be paid first. See 31 U.S.C. § 3713. This can include tax claims, contract claims, and even claims where the United States is recovering funds on behalf of others. Moreover, the United States claims the right to recover, personally, from any party that makes distributions to others, including paying ABC expenses (including the assignee’s fee) before paying the United States.

Since the ABC/receivership statute was re‑written in 2012, there have not been any reported decisions in Minnesota addressing the conflict between these two statutes. Assignees as well as recipients of distributions should be careful and proactive in evaluating United States government claims before making or taking any distributions. Under the correct circumstances, the United States government may chose not to demand payment first. The United States government may permit secured creditors and/or the assignee to be paid before the United States government. It may also permit certain other creditor classes to be paid.

EFFECT OF AN ABC PROCEEDING-STAYS, PREFERENCES, AND DISCHARGE

The filing of the ABC triggers two separate stays. The first stay acts as a stay against acts to obtain possession of or exercise control over Assignment Property or to create or perfect a lien against Assignment Property. Minn. Stat. § 576.42, Subd. 3. This first stay is permanent. The second stay acts as a stay of commencement or continuation of legal actions against the assignor or the receiver/assignee that were or could have been commenced before the ABC filing and commencement or continuation of a legal action to enforce a lien having priority over the assignee. Minn. Stat. §576.42, Subd. 4. This second stay expires 30 days after the filing unless extended by the Court. In order to extend the stay, the assignee or other party in interest must file a motion seeking extension of the stay within the initial 30 day period. The filing of such a motion extends the stay for an additional 30 days. In order to extend the stay, the Court must do so within 60 days of the filing of the ABC proceeding.[10]

Unlike bankruptcy proceedings, the commencement of an ABC proceeding does not give the assignee the right to recover “preference payments” ‑ payments made within 90 days of the filing to satisfy a pre‑existing debt. Depending on the circumstances, the assignor and other parties in interest will want to evaluate whether the pursuit of preference claims will benefit the process.

Significantly, an ABC proceeding does not conclude with the assignor receiving a discharge from its obligations (as a debtor can obtain by filing for bankruptcy). Rather, creditors continue to have claims against the assignor to the extent such clams are not paid through the distribution process. This may not be a particularly relevant concern for an entity filing an ABC proceeding as part of a liquidation of all its assets, but is certainly relevant for an individual or an entity that hopes to continue operating.

TERMINATION AND REMOVAL OF THE ASSIGNEE

At the conclusion of the ABC, the assignee will file a final report and seek approval of the final report and a discharge. Minn. Stat. § 576.38. The final report shall include a description of the activities of the assignee, a schedule of all Assignment Property as of the commencement of the ABC proceeding, a list of expenditures, a list of unpaid expenses incurred during the ABC proceeding, a list of all dispositions of Assignment Property, a list of all distributions, and, if not done separately, a request for payment of fees and expenses of the assignee. Minn. Stat. § 576.38, Subd. 3. The final report may incorporate the prior interim reports by reference. A discharge of the assignee excuses the assignee from further performance of any duties and discharges any lis pendens recorded by the assignee.

An assignee can also be removed if: the assignee fails to execute and file the bond required by the Court; the assignee resigns, refuses or fails to serve for any reason; or for other good cause. Minn. Stat. § 576.37. Upon removing the assignee, the Court shall determine whether a successor assignee should be appointed. A removed assignee is required to file a final report within 14 days of removal for matters up to the date of the removal.

CONCLUSION

Since the ABC statute was amended in 2012, there has been a significant increase in the number of ABC proceedings in Minnesota. In the right circumstances, ABC proceedings can be more advantageous than a bankruptcy or a lender exercising its rights under its loan documents. There are, however, limitations and disadvantages that all parties should be aware of prior to proceeding with an ABC. As a relatively new method of handling the assets of an insolvent entity, there is much uncertainty about the advantages and disadvantages of these proceedings. The authors hope that this article has helped clarify those considerations.

[1] ABC’s are governed by Minnesota Statute § 577.11‑.18 and once commenced are conducted similar to general receiverships as described in Minnesota Statute §576.21‑.53.

[2] Some of these terms are defined in Minn. Stat. §577.11, which provides as follows:
(a) The definitions in this section and in section 576.21 apply throughout this chapter unless the context requires otherwise.
(b) “Assignee” means the person to whom the assignment property is assigned.
(c) “Assignment property” means the property assigned pursuant to the provisions of this chapter.
(d) “Assignor” means the person who assigns the assignment property.
(e) “Time of assignment” means the date and time endorsed by the court administrator pursuant to section 577.14

[3] See Minn. Stat. §577.12[3] (“Every assignment for the benefit of creditors subject to this chapter made by an assignor of the whole or any part of the assignor’s property, real or personal, for the benefit of creditors, shall be: (1) to a person eligible to be a receiver under section 576.26, . . .).

[4] The Court will consider, among other things, whether the proposed assignee has: sufficient knowledge and experience; the financial ability to post the necessary bond; been previously disqualified from serving as a receiver or assignee; been convicted of a felony or other crime involving moral turpitude; and been found liable in civil court for fraud, breach of fiduciary duty, civil theft or similar conduct. In evaluating the proposed assignee’s independence, the Court will consider, among other things: the relationship the proposed assignee has to the parties and the property proposed in the ABC; whether the proposed assignee has a material financial interest in the outcome of the underlying dispute; and whether the proposed assignee is a creditor or holder of any equity interest in any of the parties to the ABC.

[5] Minn. Stat. §577.18 provides: “Except as otherwise provided in this chapter, an assignee shall be treated as a general receiver, the assignment property shall be treated as receivership property, and all proceedings following the filing of the assignment shall be governed by sections 576.21 to 576.53.”

[6] The statute says in pertinent part:: “. . . the assignor, . . . hereby assigns to the assignee, . . . the assignor’s property, . . . which property is set forth on Schedule A attached hereto

[7] Minn. Stat. §577.12 states that the assignor can assign “the whole or any part of the assignor’s property, real or personal, for the benefit of creditors,. . .”

[8] The receivership statute provides that a receiver cannot sell agricultural land or homesteaded property unless the owner of the property has consented to the sale following the time of appointment. Minn. Stat. § 576.46, Subd. 1. Because an ABC proceeding is commenced by the assignor transferring to the assignee title to the Assignment Property, this provision should not prevent the sale of such property. That said, some title companies have been reluctant to insure title to real property being sold out of an ABC proceeding without having the assignor consent to the specific sale at issue.

[9]  The statutory requirements to be included in the claims process are: (1) whether proofs of claims must be submitted; (2) the deadline or deadlines for submitting proofs of claims; (3) where the claims are filed ‑ with the Court or the assignee; (4) whether to permit claims based on the amounts established in the books and records of the assignor without requiring the filing of formal claims; and (5) other matters bearing on the claims process.

[10] The Court is empowered to modify both stays upon the motion of a party in interest. Minn. Stat. §576.42, Subd. 5. Moreover, the stay is inapplicable to certain types of proceedings, including, criminal proceedings against the assignor, actions by a governmental unit to enforce its police or regulatory power or to establish tax liability, actions related to establishing paternity, actions to establish or modify an order for alimony, maintenance or support, setoff, acts to maintain or continue the perfection of a lien, or commencement of bankruptcy case. Minn. Stat. § 576.42, Subd. 6.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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