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How an Assignment for the Benefit of Creditors Works in Illinois

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Despite what you may have heard, bankruptcy is not your only option if your business is struggling to pay its bills. And as a Chicago, Illinois bankruptcy attorney, the Law Office of Thomas W. Drexler wants to ensure you understand all your options if your company is in serious financial trouble.

So that you can make the best decision for your business, we’ll review what’s known as an assignment for the benefit of creditors. As you read, keep in mind that details of the law differ from state to state, and since our expertise is as a Chicago, Illinois bankruptcy attorney, we’ll focus on the process as it plays out in the state of Illinois.

Overview of an Assignment for the Benefit of Creditors

When someone decides to use this tool as an alternative to bankruptcy, they execute a contract in which the struggling business assigns-or transfers-ownership and control of its assets to a third party in trust. The business assigning ownership is known as the Assignor and the third party is known as the Assignee.

A key distinction from bankruptcy to point out here is that the business has the option to choose who the third party will be. This is not the case in bankruptcy.

Once the assets are assigned to the assignee, the assignee liquidates the assets of the company and applies the proceeds of that sale to the Assignor’s debts, based on Illinois state law.

The Benefits of An Assignment for the Benefit of Creditors

One of the main benefits of this contract is that it enables troubled business owners to relieve themselves of their business debts without the expense and complication of bankruptcy. In fact, the entire business may be liquidated without the need for court supervision. This allows you to spend more of the liquidation proceeds to pay off creditors which reduces your exposure if your debts are secured by a personal guaranty.

Also, unlike during a bankruptcy, the assignee may continue to operate the business and attempt to sell it as a going concern.

Learn More from a Chicago, Illinois Bankruptcy Attorney

As mentioned, an assignment for the benefit of creditors is not bankruptcy. But that doesn’t mean you don’t need a professional attorney to help guide your business through the process. To learn more about this process and how The Law Office of Thomas W. Drexler can help you navigate it, give us a call at 1-312-726-7335.

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The Road to an Assignment for the Benefit of Creditors (ABC): A Case Study

Road to an ABC

  • August 29, 2022
  • / Alternatives to Business Bankruptcy
  • / Howard Korenthal
  • Tags: Assignment for the Benefit of Creditors ,

How Does a Company Decide to Enter an Assignment for the Benefit of Creditors?

This is how a troubled company considered its duties and options before executing a strategy using an assignment for the benefit of creditors (ABC) . They successfully mitigated potential losses. The guarantor’s liability was minimized, the bank and going-concern buyer got what they wanted, and the enterprise continued. This story puts meat onto skeletal discussions of ABC rules and how they compare with competing resolution structures under the Bankruptcy Code and Uniform Commercial Code (UCC) .

A family-owned business in Illinois had lost large amounts of money for 3 years. Trade creditors had been stretched, and some were cutting the company off. Several breach of contract lawsuits were working their way through the courts, but no judgments had been entered. Some trade creditors received payments to induce them to continue shipping. The company had only paid some of their federal and state withholding taxes. It struggled to keep current on debt obligations to the bank, which had good liens on inventory, accounts receivable, and equipment, as well as a mortgage on the company’s real estate. Following difficult discussions with the bank, the board of directors and the majority shareholder/CEO — who had guaranteed the company’s debt to the bank — concluded that the company should sell or liquidate its assets. The board and shareholder agreed that a sale of the company as a going concern would generate more proceeds than would a liquidation. A sale would further pay down the bank loan and diminish the shareholder’s liability on his personal guarantee.

The shareholder had been quietly marketing the company for several months and was negotiating a letter of intent with a strategic buyer to purchase the assets of the business. The asset the buyer most desired was the company’s large but perishable customer base. The buyer believed it could retain that customer base if the sale closed quickly. The buyer also agreed to purchase the inventory and equipment but did not want the accounts receivable or environmentally challenged real estate. The buyer offered to purchase the inventory at 50% of book value and the equipment at 80% of orderly liquidation value. As part of the deal, the buyer would assist the company in collecting on accounts receivable for a period of time. The company and shareholder estimated that the purchase price, plus proceeds from the liquidation of the accounts receivable and real estate, could potentially yield net proceeds exceeding the debt to the bank.

The buyer planned to retain the shareholder/CEO for his strong relationships with a number of large customers. The buyer intended to move the business to an out-of-state facility, which meant termination of employment for most of the company’s 100 workers. The buyer would offer permanent future employment to a few employees, but most would be needed only for a limited post-sale transition period to ensure continuous operation.

The bank was willing — if such a sale would get the debt paid. Importantly, the shareholder, concerned for his reputation, wanted to keep financial issues as quiet as possible. He thought it better to sell assets on the “down low,” as it were.

Examining Options

After consulting insolvency counsel, the board recognized that insolvency gave the board fiduciary obligations to the creditors. The board had to preserve the assets and sell them for the highest value possible. The shareholder was anxious to address guarantee and federal withholding tax issues with net proceeds remaining after payment to the bank. They considered the following options.

Chapter 11 Bankruptcy

The company could operate in chapter 11 as a debtor-in-possession . As such, the automatic stay would bar progress in the trade creditor suits. Company assets could be sold to the highest bidder through a sale under section 363 of the Bankruptcy Code. Such a sale could get the buyer title to the assets, free and clear of liens, claims, and encumbrances, which might result in a better price. However, the chapter 11 process through sale would take no less than 60 to 90 days. It would be a very public, court-supervised process that might involve a contentious creditors’ committee populated by those stretched and restive creditors. Each aspect of this process would increase expenses, and it was not clear that the bank would fund operations or expenses. It appeared that the buyer, having performed due diligence, would be willing to purchase the assets through a faster process, even with less protection for the title.

Chapter 7 Bankruptcy

Under a chapter 7 bankruptcy case, a chapter 7 trustee would be appointed by the U.S. Trustee and would immediately displace company management. It is unlikely  that a trustee would operate in a chapter 7 or secure bank financing to make that possible. The resulting liquidation would destroy going-concern value. The customer base would dissipate. The realization on inventory and receivables would diminish in liquidation. Even if the trustee received an Asset Purchase Agreement at the outset of the case and was willing to operate the business, the public and court-supervised process would still take at least 60 to 90 days at considerable cost.

Foreclosure and Sale Under Article 9 of the UCC

The board was willing to conduct a foreclosure sale of the company’s personal property assets, subject to the bank’s senior lien. An Article 9 foreclosure sale does not require court involvement. It can be concluded in 10 to 20 days, radically lowering the cost compared to sales in bankruptcy. The bank’s attorney, however, believed that, if an involuntary bankruptcy were filed, the company had to shut down for 20 days prior to a sale to diminish the potential effect of section 503(b)(9) claims by creditors. Shutting down the business for 20 days would destroy the value of the customer base to the buyer.

Assignment for the Benefit of Creditors

An assignment for the benefit of creditors is a well-established out-of-court process under Illinois common law. Other states, such as Massachusetts and Missouri, also have non-judicial common law ABC processes. In some states, the ABC process may be statutory and court-supervised.

When an assignment is made, all company’s assets are transferred to a trust administered by the assignee. The company, or the assignor, is allowed to select its own assignee to administer the assets. The U.S. Trustee’s office does not randomly select an assignee as is the case in a Chapter 7. There is no automatic stay in an ABC. However, it creates a similar effect because the assignee is accorded lien creditor rights as of the date of the assignment and thus stands ahead of all unsecured creditors and later-perfected secured creditors. Most creditors stop pursuing collection lawsuits against an assignor after an ABC begins because

(1) the defendant assignor no longer has any assets, and

(2) even if the plaintiff creditor adds the assignee as defendant, the assignee’s rights are prior to the creditor’s judgment and to any judgment lien the creditor might then file.

The ABC process is typically faster and less expensive than a chapter 7 or chapter 11 bankruptcy case. A sale of assets can be done in as few as 10 business days and can be done in conjunction with an Article 9 foreclosure. A buyer purchasing from an assignee receives the right, title, and interest in the company’s assets that was transferred to the assignee when the assignment was made.

[Editors’ Note : ABC may not be available in receiverships. To learn more, please see 90 Second Lesson: Receivership vs Bankruptcy . ]

Proposing an Assignment for the Benefit of Creditors

The buyer was willing to take some title risk to get the deal done quickly and to preserve the customer base. The bank recognized that the assignment for the benefit of creditors was its best option to maximize value from inventory and receivables. The bank agreed to support the ABC, lend funds to the proposed assignee, and pay the administrative costs of the trust estate. The buyer agreed to lease the company’s real property during the transition period following the sale date and to reimburse the trust for payroll costs and certain operating expenses.

[Editors’ Note : For more information on what a secured lender can do when its borrower is in trouble, please see What Secured Lenders Should Know If Their Borrower Files for Bankruptcy . ]

Principal Issues and Arrangements

Prior to formal acceptance of the assignment, the assignee and their attorney needed to work through substantive issues, including:

  • Negotiating the Asset Purchase Agreement — The completed Asset Purchase Agreement and Operating Agreement would trigger the ABC. Because of the assignee’s fiduciary duty to get the highest and best price possible, and because a public sale of the assets was feasible, the buyer had to agree to marketing and sale of the assets by public auction. The agreements provided that the auction would be 20 days into the assignment, giving the assignee time to reach out to other potential buyers. The sale would be advertised in the auction section of the Chicago Tribune for 2 consecutive weekends. The buyer’s deposit of 10% of the purchase price, and potential bidders had to post that amount before bidding. The agreements also afforded the buyer bid protection — new bids had to exceed the current bid by a set increment, and the prevailing bidder was obligated to close.
  • Environmental Issues with the Real Estate — The Buyer did not want the real estate since it had potential environmental issues. The company agreed to place the real property into an LLC owned by the company. The company’s LLC member interest would be transferred to the assignee as part of the assignment. The assignee would sell the real estate in a separate transaction.
  • Employee Layoffs and Terminations – The company had more than 100 employees and the buyer would not retain most of them. The company was subject to the federal WARN Act and its state law counterpart, so it made sense to complete the appropriate notice to state and local officials and employees before the assignment was accepted. Therefore, the WARN liability would be a pre-assignment liability, not an administrative cost of the estate. The WARN liability would be paid from proceeds left over after the bank was paid in full, rather than being paid ahead of the bank. Key employees agreed to stay with the business for a certain time with some stay-bonus arrangements.
  • Funding Agreement with the Bank — The assignee prepared a liquidation expense budget for the bank. The bank agreed to fund the budget and provide cash advances to the assignee.

Once these issues were resolved, the assignee accepted the ABC, and all company’s assets were moved into the agreed upon trust per the trust agreement. Immediately following the acceptance of the ABC, the assigne e sent a notice to creditors

  • informing them that the assignment had taken place,
  • informing them of the sale and auction,
  • providing a schedule of assets and liabilities,
  • providing a claim form for the creditor to complete and return to the assignee, and
  • disclosing the buyer’s plan to retain the shareholder/CEO after the sale

Such a notice initiates clear and reliable communication with creditors, which is critical to the success of an ABC. It reassures creditors that the assignee will honor its duties rather than balking and stretching as a company does when it’s in distress. Some creditors who received extra payments prior to the ABC inquired as to preference issues. However, in Illinois, an assignee has no power to avoid and recover preferential payments made by a company. Such creditors may be relieved that no bankruptcy case was filed, whereupon they would be exposed to such potential liability.

The assignee received responses to the auction marketing. Several parties performed due diligence on the assets, and one showed up to the auction and bid. The buyer prevailed at the auction, and the closing occurred 2 days later.

Following the closing:

  • The assignee and the buyer operated the facility for a short period of time while the buyer transitioned customers, inventory, and equipment to its other facility.
  • The buyer helped collect accounts receivable for approximately four months.
  • WARN claimants with pre-assignment unsecured claims, were entitled to no more than the dividend other unsecured claimants were entitled to.
  • The shareholder/CEO retained liability for federal tax liabilities.
  • The real estate was listed with a broker for later sale by the assignee.
  • The assignee sent 2 additional notices to creditors reporting the progress of the liquidation and their prospects for a dividend.
  • The bank and shareholder/CEO negotiated the latter’s liability related to his guarantee of the company’s obligations.

Conclusions

This tale illustrates how an assignment for the benefit of creditors might mitigate loss and preserve going-concern value. There are certain practical considerations when navigating an ABC:

  • Before deciding on an ABC, a distressed company, and its secured lender, must weigh the pros and cons of each bankruptcy option and sale options to determine the best fit.
  • Before an assignee formally accepts an ABC, he should consider situational factors and potential complications. These might include personnel issues like WARN Act rules and liability, financial and tax responsibilities, real estate issues like repair costs and environmental concerns, and packaging assets for maximum realization. Package them with the real estate or separate from the real estate? Exclude certain asset classes?
  • The assignee must work closely with the secured lender to ensure funding for the administration of the ABC.
  • The assignee should ensure good communication with employees, creditors, and other stakeholders.

[ Editors’ Note : To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure and each includes a comprehensive customer PowerPoint about the topic):

  • Bankruptcy Intersections  
  • Chapter 11 Potpourri  
  • The Nuts & Bolts of a Chapter 11 Plan  

This is an updated version of an article originally published in December 2013; it was previously updated on April 25, 2019 and was most recently edited by Nora Willi ]

© 2022. DailyDAC TM , LLC d/b/a/ Financial Poise TM . This article is subject to the disclaimers found here .

About Howard Korenthal

Howard Korenthal is a Principal and Chief Operating Officer at MorrisAnderson and Associates, Ltd.  He has over 30 years of experience  assisting financially distressed and  underperforming companies in senior management, interim management and financial advisory roles,  and  has been instrumental in over 200 turnaround and restructuring projects and complex chapter 11 proceeding. Howard has extensive…

Read Full Bio »   •   View all articles by Howard »

Howard Korenthal

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2023 CLE Event Assignments for Benefit of Creditors

RD has extensive experience representing assignees and assignors for the benefit of creditors. An Assignment for the Benefit of Creditors (ABC) is a business sale or liquidation tool available to insolvent debtors as an alternative to formal bankruptcy proceedings . An ABC can serve as a useful and efficient means of accomplishing a liquidation or going concern sale of a troubled business unable to reorganize. It can be used to maximize a secured creditor’s recovery from the assets of a distressed debtor and/or to facilitate a buyer’s acquisition of a troubled business or assets from an entity burdened with unsecured debt.

We represent assignees, buyers, creditors, and other parties in connection with ABCs. Our attorneys seek to provide innovative, responsive and cost-effective legal solutions on behalf of our clients.

Assignments for the Benefit of Creditors: Overview | Practical Law

illinois assignment for the benefit of creditors statute

Assignments for the Benefit of Creditors: Overview

Practical law practice note overview w-006-7771  (approx. 19 pages).

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2019 Illinois Compiled Statutes Chapter 760 - TRUSTS AND FIDUCIARIES 760 ILCS 3/ - Illinois Trust Code. Article 5 - Creditor's Claims; Spendthrift and Discretionary Trusts

(760 ILCS 3/Art. 5 heading) Article 5. Creditor's Claims; Spendthrift and Discretionary Trusts. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/501) (This Section may contain text from a Public Act with a delayed effective date) Sec. 501. Rights of beneficiary's creditor or assignee. Except as provided in Section 504, to the extent a beneficiary's interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/502) (This Section may contain text from a Public Act with a delayed effective date) Sec. 502. Spendthrift provision. (a) A spendthrift provision is valid only if it prohibits both voluntary and involuntary transfer of a beneficiary's interest. (b) A term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust", or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest. (c) A beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision and, except as otherwise provided in this Article, a creditor or assignee of the beneficiary may not reach the interest or a distribution by the trustee before its receipt by the beneficiary. (d) A valid spendthrift provision does not prevent the appointment of interests through the exercise of a power of appointment. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/503) (This Section may contain text from a Public Act with a delayed effective date) Sec. 503. Exceptions to spendthrift provision. (a) In this Section, "child" includes any person for whom an order or judgment for child support has been entered in this or another state. (b) A spendthrift provision is unenforceable against: (1) a beneficiary's child, spouse, or former spouse

who has a judgment or court order against the beneficiary for child support obligations owed by the beneficiary as provided in the Income Withholding for Support Act, the Non-Support Punishment Act, the Illinois Parentage Act of 2015, the Illinois Marriage and Dissolution of Marriage Act, and similar provisions of other Acts that provide for the support of a child;

(2) a judgment creditor who has provided services

for the protection of a beneficiary's interest in the trust; and

(3) a claim of this State or the United States to

the extent a statute of this State or federal law so provides.

(c) Except as otherwise provided in this subsection and in Section 504, a claimant against which a spendthrift provision cannot be enforced may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary. The court may limit the award to such relief as is appropriate under the circumstances. Notwithstanding this subsection, the remedies provided in this subsection apply to a claim for unpaid child support obligations by a beneficiary's child, spouse, former spouse, judgment creditor, or claim described in subsection (b) only as a last resort upon an initial showing that traditional methods of enforcing the claim are insufficient. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/504) (This Section may contain text from a Public Act with a delayed effective date) Sec. 504. Discretionary distributions; effect of standard. (a) As used in this Section, "discretionary distribution" means a distribution that is subject to the trustee's discretion regardless of whether the discretion is expressed in the form of a standard of distribution and regardless of whether the trustee has abused the discretion. (b) Regardless of whether a trust contains a spendthrift provision, and regardless of whether the beneficiary is acting as trustee, if a trustee may make discretionary distributions to or for the benefit of a beneficiary, a creditor of the beneficiary, including a creditor described in subsection (b) of Section 503, may not: (1) compel a distribution that is subject to the

trustee's discretion; or

(2) obtain from a court an order attaching present

or future distributions to or for the benefit of the beneficiary, except as provided in Section 2-1403 of the Code of Civil Procedure.

(c) If the trustee's discretion to make distributions for the trustee's own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as trustee. (d) This Section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/505) (This Section may contain text from a Public Act with a delayed effective date) Sec. 505. Creditor's claim against settlor. (a) Whether or not the terms of a trust contain a spendthrift provision, the following rules apply: (1) During the lifetime of the settlor, the property

of a revocable trust is subject to claims of the settlor's creditors to the extent the property would not otherwise be exempt by law if owned directly by the settlor.

(2) With respect to an irrevocable trust, a creditor

or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor's benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor's interest in the portion of the trust attributable to that settlor's contribution.

(3) Notwithstanding paragraph (2), the assets of an

irrevocable trust may not be subject to the claims of an existing or subsequent creditor or assignee of the settlor, in whole or in part, solely because of the existence of a discretionary power granted to the trustee by the terms of the trust, or any other provision of law, to pay directly to the taxing authorities or to reimburse the settlor for any tax on trust income or principal that is payable by the settlor under the law imposing the tax.

(4) Paragraph (2) does not apply to the assets of an

irrevocable trust established for the benefit of a person with a disability that meets the requirements of 42 U.S.C. 1396p(d)(4) or similar federal law governing the transfer to such a trust.

(5) After the death of a settlor, and subject to the

settlor's right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor's death is subject to claims of the settlor's creditors, costs of administration of the settlor's estate, the expenses of the settlor's funeral and disposal of remains, and statutory allowances to a surviving spouse and children to the extent the settlor's probate estate is inadequate to satisfy those claims, costs, expenses, and allowances. Distributees of the trust take property distributed after payment of such claims; subject to the following conditions:

(A) sums recovered by the personal

representative of the settlor's estate must be administered as part of the decedent's probate estate, and the liability created by this subsection does not apply to any assets to the extent that the assets are otherwise exempt under the laws of this State or under federal law;

(B) with respect to claims, expenses, and taxes

in connection with the settlement of the settlor's estate, any claim of a creditor that would be barred against the personal representative of a settlor's estate or the estate of the settlor is barred against the trust property of a trust that was revocable at the settlor's death, the trustee of the revocable trust, and the beneficiaries of the trust; and

(C) Sections 18-10 and 18-13 of the Probate Act

of 1975, detailing the classification and priority of payment of claims, expenses, and taxes from the probate estate of a decedent, or comparable provisions of the law of the deceased settlor's domicile at death if not Illinois, apply to a revocable trust to the extent the assets of the settlor's probate estate are inadequate and the personal representative or creditor or taxing authority of the settlor's estate has perfected its right to collect from the settlor's revocable trust.

(6) After the death of a settlor, a trustee of a

trust that was revocable at the settlor's death is released from liability under this Section for any assets distributed to the trust's beneficiaries in accordance with the governing trust instrument if:

(A) the trustee made the distribution 6 months

or later after the settlor's death; and

(B) the trustee did not receive a written notice

from the decedent's personal representative asserting that the decedent's probate estate is or may be insufficient to pay allowed claims or, if the trustee received such a notice, the notice was withdrawn by the personal representative or revoked by the court before the distribution.

(b) For purposes of this Section: (1) during the period the power may be exercised,

the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power; and

(2) upon the lapse, release, or waiver of the power,

the holder is treated as the settlor of the trust only to the extent the value of the property affected by the lapse, release, or waiver exceeds the greater of the amount specified in Section 2041(b)(2) or 2514(e) of the Internal Revenue Code.

(Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/506) (This Section may contain text from a Public Act with a delayed effective date) Sec. 506. Overdue distribution. (a) In this Section, "mandatory distribution" means a distribution of income or principal that the trustee is required to make to a beneficiary under the trust instrument, including a distribution upon termination of the trust. The term does not include a distribution subject to the exercise of the trustee's discretion even if (1) the discretion is expressed in the form of a standard of distribution, or (2) the terms of the trust authorizing a distribution couple language of discretion with language of direction. (b) Whether or not a trust contains a spendthrift provision, a creditor or assignee of a beneficiary may reach a mandatory distribution of income or principal, including a distribution upon termination of the trust, if the trustee has not made the distribution to the beneficiary within a reasonable time after the designated distribution date. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/507) (This Section may contain text from a Public Act with a delayed effective date) Sec. 507. Personal obligations of trustee. Trust property is not subject to personal obligations of the trustee, even if the trustee becomes insolvent or bankrupt. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/508) (This Section may contain text from a Public Act with a delayed effective date) Sec. 508. Lapse of power to withdraw. A beneficiary of a trust may not be considered to be a settlor or to have made a transfer to the trust merely because of a lapse, release, or waiver of his or her power of withdrawal to the extent that the value of the affected property does not exceed the greatest of the amounts specified in Sections 2041(b)(2), 2514(e), and 2503(b) of the Internal Revenue Code. (Source: P.A. 101-48, eff. 1-1-20.)

(760 ILCS 3/509) (This Section may contain text from a Public Act with a delayed effective date) Sec. 509. Trust for beneficiary with a disability. (a) As used in this Section: (1) "Discretionary trust" means a trust in which the

trustee has discretionary power to determine distributions to be made under the trust.

(2) "Resources" includes, but is not limited to, any

interest in real or personal property, judgment, settlement, annuity, maintenance, support for minor children, and support for non-minor children.

(b) A discretionary trust for the benefit of an individual who has a disability that substantially impairs the individual's ability to provide for his or her own care or custody and constitutes a substantial disability, is not liable to pay or reimburse this State or any public agency for financial aid or services to the individual except to the extent the trust was created by the individual or trust property has been distributed directly to or is otherwise under the control of the individual, except that this exception does not apply to a trust created with the property of the individual with a disability or property within his or her control if the trust complies with Medicaid reimbursement requirements of federal law. Notwithstanding any other provisions to the contrary, a trust created with the property of the individual with a disability or property within his or her control is liable, after the reimbursement of Medicaid expenditures, to this State for reimbursement of any other service charges outstanding at the death of the individual with a disability. Property, goods, and services purchased or owned by a trust for and used or consumed by a beneficiary with a disability shall not be considered trust property distributed to or under the control of the beneficiary. (c) Except as otherwise prohibited by law, the court or a person with a disability may irrevocably assign resources of that person to either or both of: (i) an ABLE account, as defined under Section 16.6 of the State Treasurer Act; or (ii) a discretionary trust that complies with the Medicaid reimbursement requirements of federal law. A court may reserve the right to determine the amount, duration, or enforcement of the irrevocable assignment. (Source: P.A. 101-48, eff. 1-1-20.)

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The law of assignment for the benefit of creditors in the State of Illinois

Being an analysis of an act concerning voluntary assignments, approved may 22, 1877, in force july 1, 1877, and amended by acts in force july 1, 1879 and july 1, 1883, and a collation of all the decisions of the supreme and appellate courts of illinois in which the act has been construed, by sydney richmond taber.

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illinois assignment for the benefit of creditors statute

There are several ways we address financial problems business face.

Chapter 11 and Small Business Bankruptcy – Subchapter V

Chapter 11 is the bankruptcy remedy for business problems. Under chapter 11,we formulate a plan for payment of some or all business debts over a period of time. The plan is binding on all creditors as long as a majority in number and two-thirds in amount vote for the plan. All chapter 11 cases are handled under strict supervision of the court. A trustee or creditors’ committee might be appointed but in small business bankruptcy, there is no creditors committee. And in Subchapter V bankruptcy, the trustee’s job is to facilitate a plan. We have enjoyed success in representing small and medium sized businesses in chapter 11.

Read more about chapter 11 here:

Chapter 11 – Bankruptcy Basics | United States Courts (uscourts.gov)

Assignments for the Benefit of Creditors

Companies an avoid bankruptcy by making an assignment of all their assets to an assignee who will liquidate them for the benefit of creditors. In Illinois, there are no statutes that address this. It is a “common law” process. A general assignment for the benefit of creditors creates an express trust with the assignee acting as trustee. Since 1839, the Illinois Supreme Court has recognized the validity of common law assignments.

The assignee must sell or liquidate assets, usually in an auction process. Creditors get paid pro rata from the proceeds of sale. Sometime, the owner of the debtor company may organize a new venture with new capital to bid at the auction thereby regaining control of the company. If there are no competing bids or the new venture makes the highest bid, the new venture might be able to take over where the old company left off. We have to address possible “successor liability” claims but frequently, this concern can be overcome.

Orderly Liquidation Under the Illinois Business Corporation Act

Illinois law allows a corporation to liquidate and wind up its business without bankruptcy. This is done through Article 12 of the Business Corporation Act. The fee for this is rather low. All creditors are given a chance to file claims. The corporation closes down and the officers and directors liquidate assets. Then they pay a pro rata dividend to the creditors who file claims. When this process is handled effectively and efficiently, it is a much better alternative to chapter 7 bankruptcy for most corporations.

Chapter 7 Bankruptcy

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MEDIATBANKRY

On Bankruptcy and Mediation

A History of ABC Laws in Illinois

illinois assignment for the benefit of creditors statute

By:  Donald L Swanson

An assignment for benefit of creditor (“ABC”) is, historically, a nonjudicial process for administering the affairs of a failed business. ABC laws are rooted in English common law and predate enactment of federal bankruptcy laws in the U.S.[Fn. 1]

An ABC is made by a formal, voluntary transfer of most-or-all of a business’s assets to an assignee, in trust, to apply the property or its proceeds to the payment of debts and to return any surplus to the debtor.

Like a bankruptcy trustee, the assignee is a representative of creditors, charged with responsibility to administer the debtor’s assets and distribute the proceeds ratably among creditors.

Unlike a bankruptcy trustee, the Illinois assignee need not seek court approval for the numerous acts of administration.

For creditors, such out-of-court proceedings often result in quicker and larger distributions, compared with bankruptcy, and debtors gain the advantage of avoiding bankruptcy court while still having a qualified professional to generate the largest-possible returns for creditors from disposition of debtor’s assets.

An ABC creates an express trust, under which (i) the assignee acts as trustee, (ii) debtor is the assignor, and (iii) creditors are beneficiaries.  As with other express trusts, a beneficiary’s consent is not a condition of the assignment’s validity.

Since 1839, Illinois has recognized the validity of common law ABCs, and the rules for such assignments have remained largely intact over the intervening years—for nearly two centuries.  The following two cases illustrate the longevity and continuity of such common laws.

–From 1839

In Cross v. Bryant , 3 Il.. 36 (1839), the Illinois Supreme Court declares:

  • “A debtor may lawfully convey his property in trust to another for the benefit of any one creditor or class of creditors, and may direct by his conveyance how and to whom the proceeds shall be appropriated and paid”; and
  • “A general assignment of a debtor’s property in trust for all his creditors, is valid when it is coupled by no unjust conditions for the purpose of coercing the creditor.”

–From 2010

In First Bank v. Unique Marble & Granite Corp. , 938 N.E.2d 1154, 345 Ill. Dec. 233 (2010), the Appellate Court of Illinois, Second District, declares:

  • “An assignment for the benefit of creditors is a voluntary transfer by a debtor of [its] property to an assignee in trust for the purpose of applying the property or proceeds thereof to the payment of [its] debts and returning the surplus, if any, to the debtor”; and
  • “A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly.”

Illinois’ Old ABC Statutes

–enacted.

In 1877 the Illinois legislature enacted an ABC statute titled, the Voluntary Assignment Act of 1877.

–Suspended

In 1900, however, the Supreme Court of Illinois declares that the Federal Bankruptcy Act of 1898 “suspends or supersedes” Illinois’ Voluntary Assignment Act of 1877.

In Harbaugh v. Costello , 184 Ill. 110, 56 N.E. 363 (1900), the Illinois Supreme Court reasons as follows:

  • The final provision of the Federal Bankruptcy Act of 1898 says, “Proceedings commenced under State insolvency laws before the passage of this act shall not be affected by it”—this means that no assignment can be made, under Illinois’ Voluntary Assignment Act, after passage of the Federal Bankruptcy Act of 1898; and
  • Since the Federal Bankruptcy Act of 1898 and the Illinois Voluntary Assignment Act both seek a pro rata  distribution of debtor’s assets among debtor’s creditors, the two laws “cannot be in force together without direct and positive collision,” so that “the Federal act suspends or supersedes the State law.”

–Revoked

All prior federal bankruptcy acts were repealed (the 1800 Act in 1803; the 1841 Act in 1843, and the 1867 Act in 1878), so the Illinois legislature expected (and waited for) a repeal of the Federal Act of 1898 as well—that’s because a repeal of the Federal Act would automatically reinstate Illinois’ Voluntary Assignment Act.  

But Congress never repealed the Federal Act of 1898—instead, that Act remained in effect until Congress replaced it, in 1978, with the current Bankruptcy Code.

After waiting four decades for a repeal of the Federal Act of 1898, without the desired result, Illinois’ legislature finally gave up and repealed Illinois’ Voluntary Assignment Act of 1877.

Common Law ABCs Continue in Illinois

Notwithstanding repeal of Illinois’ Voluntary Assignment Act, the Illinois courts have continued to recognize and allow common law assignments for benefit of creditors ( see, e.g., First Bank v. Unique Marble discussed above), which assignments are governed by case law.

ABC laws in Illinois are alive and well, despite revocation of the old Illinois ABC statute.

Good for them!

————————-

Footnote 1.   Information in this article is from:

  • a 2006 article by Alan P. Solow, Bruce L. Wald and Daniel A. Zazove, titled “ Illinois Common Law Assignments for the Benefit of Creditors ,” published by Illinois Institute for Continuing Legal Education; and
  • the court opinions cited and discussed above.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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Illinois Common Law Assignments for the Benefit of Creditors

illinois assignment for the benefit of creditors statute

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IMAGES

  1. Illinois Common Law Assignments for the Benefit of Creditors

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  2. Illinois assignment: Fill out & sign online

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  3. List Chapter 11 Form

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  4. General Form of Assignment to Benefit Creditors

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  5. Assignment of benefits: Fill out & sign online

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  6. Fillable Online Assignment of Benefits

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COMMENTS

  1. Illinois Compiled Statutes

    Except as provided in Section 504, to the extent a beneficiary's interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary's interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means.

  2. Benefit of Creditors

    As mentioned, an assignment for the benefit of creditors is not bankruptcy. But that doesn't mean you don't need a professional attorney to help guide your business through the process. To learn more about this process and how The Law Office of Thomas W. Drexler can help you navigate it, give us a call at 1-312-726-7335.

  3. The Road to an Assignment for the Benefit of Creditors (ABC ...

    How Does a Company Decide to Enter an Assignment for the Benefit of Creditors? This is how a troubled company considered its duties and options before executing a strategy using an assignment for the benefit of creditors (ABC). They successfully mitigated potential losses.

  4. Assignments for Benefit of Creditors

    Assignments for Benefit of Creditors RD has extensive experience representing assignees and assignors for the benefit of creditors. An Assignment for the Benefit of Creditors (ABC) is a business sale or liquidation tool available to insolvent debtors as an alternative to formal bankruptcy proceedings.

  5. DOC Chapter 7

    Willerton, 258 Ill.App. 390 (3d Dist. 1930). Since 1839, the Illinois Supreme Court has recognized the validity of common law assignments. Cross v. Bryant, 3 Ill. 36 (1839). assignment for the benefit of creditors places the debtor's property in the hands of the assignee and out of the reach of the debtor's creditors.

  6. A History of ABC Laws in Illinois

    USA August 25 2022. An assignment for benefit of creditor ("ABC") is, historically, a nonjudicial process for administering the affairs of a failed business. ABC laws are rooted in English ...

  7. Assignment for the Benefit of Creditors: Effective Tool for Acquiring

    An assignment for the benefit of creditors (ABC) is a business liquidation device available to an insolvent debtor as an alternative to formal bankruptcy proceedings. In many instances, an ABC can be the most advantageous and graceful exit strategy.

  8. ABC: Assignments for the Benefit of Creditors

    But here we are talking about a type of business liquidation process in the United States known as an Assignment for the Benefit of Creditors ("ABC"). An ABC is governed by state law and has long been viewed as an alternative to a liquidation under Chapter 7 of the US Bankruptcy Code.

  9. Assignments for the Benefit of Creditors: Overview

    Assignments for the Benefit of Creditors: Overview by Steven J. Mitnick and Marc D. Miceli, SM Law PC, with Practical Law Bankruptcy & Restructuring Maintained • USA (National/Federal) A Practice Note providing an overview of assignments for the benefit of creditors.

  10. PDF The ABCs of Assignments for the Benefit of Creditors (ABCs)

    In Illinois, for example, it is common for assignees to provide some preliminary economic data to creditors regarding the value of the assets available for liquidation and distribution and the potential claims on those assets.

  11. FIRST BANK v. (James Gallo, as Assignee for the Benefit of Creditors of

    A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, ... In Illinois, between 1877 and 1939, a statute governed voluntary assignments, but they also existed at common law. 2 DePaul Bus. L.J. 269. 3. This term does not appear in the Bankruptcy Code (11 U ...

  12. Assignment for Benefit of Creditors: Alternative to Business ...

    Basically, the ABC company, called the "assignee," will liquidate your assets and pay off your creditors (for a percentage of what it is able to sell your assets for), while you and your co-owners move forward with your lives. Why Choose an Assignment for the Benefit of Creditors?

  13. The Illinois law of voluntary assignments for the benefit of creditors

    The Illinois law of voluntary assignments for the benefit of creditors : being a treatise on the act concerning voluntary assignments, approved May 22; 1877, in force July 1, 1877, and amended by acts in force July, 1, 1879, and July 1, 1888, -and- the decisions of the supreme and appellate courts of Illinois construing these laws, with appendix...

  14. 2019 Illinois Compiled Statutes

    2019 Illinois Compiled Statutes Chapter 760 - TRUSTS AND FIDUCIARIES 760 ILCS 3 ... if a trustee may make discretionary distributions to or for the benefit of a beneficiary, a creditor of the beneficiary, including a creditor described in subsection (b) of Section 503, may not: ... duration, or enforcement of the irrevocable assignment. (Source ...

  15. assignment for benefit of creditors

    Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be ...

  16. Chapter 7

    ABC Illinois - Free download as Word Doc (.doc), PDF File (.pdf), Text File (.txt) or read online for free. Assignment for the Benefit of Creditors is a nonjudicial alternative to bankruptcy. Like a bankruptcy trustee, the assignee is a representative of creditors. Like an assignment, a trustee is not required to seek court approval.

  17. PDF Acquisitions and Dispositions of Assets of Troubled Companies

    Three methods are commonly used to sell assets of troubled companies in Illinois: (1) a "363 Sale" of assets under Section 363 of the United States Bankruptcy Code; (2) a sale of assets following an "Assignment for the Benefit of Creditors"; and (3) a "Code Sale" by a secured party under Article 9 of the Revised Uniform Commercial Code.

  18. The law of assignment for the benefit of creditors in the State of Illinois

    The law of assignment for the benefit of creditors in the State of Illinois being an analysis of an act concerning voluntary assignments, approved May 22, 1877, in force July 1, 1877, and amended by acts in force July 1, 1879 and July 1, 1883, and a collation of all the decisions of the supreme and appellate courts of Illinois in which the act has been construed

  19. Corporate Restructuring Lawyer in Chicago, IL

    A general assignment for the benefit of creditors creates an express trust with the assignee acting as trustee. Since 1839, the Illinois Supreme Court has recognized the validity of common law assignments. The assignee must sell or liquidate assets, usually in an auction process. Creditors get paid pro rata from the proceeds of sale.

  20. ABC: Assignments for the Benefit of Creditors

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    Generally, assignments may be accomplished without the consent of creditors, though certain states (e.g., Massachusetts) require creditors to assent to an assignment. Addressing Disputes In an ABC

  22. A History of ABC Laws in Illinois

    An Illinois city (Photo by Marilyn Swanson) By: Donald L Swanson An assignment for benefit of creditor ("ABC") is, historically, a nonjudicial process for administering the affairs of a failed business. ABC laws are rooted in English common law and predate enactment of federal bankruptcy laws in the U.S.[Fn. 1] An ABC is made by a…

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