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Is an Assignment for the Benefit of Creditors like a Bankruptcy?

Is an Assignment for the Benefit of Creditors like a Bankruptcy?

At first, an assignment for the benefit of creditors (ABC) may seem similar to a bankruptcy claim. However, upon a deeper look, it is clear that an assignment for the benefit of creditors is different. Similar to liquidation proceedings in chapter 7 or chapter 11 bankruptcy proceedings, an ABC can be used by either an individual or a business if they are going through significant financial difficulties. In both cases, the struggling debtor sells off all its assets in order to pay back its outstanding debts to its creditors. This mechanism helps to maximize the return for creditors.

An assignment for the benefit of creditors is distinct from bankruptcy proceedings because it is a much less formal process governed by state law rather than federal law. The informal nature of these proceedings means that it is faster and easier to marshal a debtor’s assets, liquidate same, and distribute proceeds equitably to creditors under an assignment rather than under federal bankruptcy law. Furthermore, an ABC often requires less court involvement and provides more flexibility to the assignee to make liquidation decisions as required. This is generally beneficial for both creditors and debtors because it is faster, less expensive, and more private than traditionally afforded bankruptcy liquidations.

Understanding Assignment for the Benefit of Creditors in New Jersey

In New Jersey, an assignment for the benefit of creditors is governed by New Jersey statutes that codify the preexisting common law. The proceedings are voluntary processes whereby the debtor designates an assignee who is empowered to marshal and liquidate (sell) the assets of the debtor and then distribute the proceeds of the sale to the debtor’s creditors. The assignee must ensure that all of the financial liquidations are done for the benefit of the creditors and with the sole goal of repaying outstanding debts. This is significant because in New Jersey, the debtor can choose its assignee rather than relying on a court-appointed trustee in bankruptcy who may not understand the nuances of the debtor’s finances. The ability to choose the assignee can be beneficial because an assignee with an understanding of the debtor’s finances can expedite the liquidation process rather than spend valuable time learning the ropes.

An ABC in New Jersey is generally cheaper than filing formal bankruptcy proceedings because it is faster and usually requires less litigation. The expeditious nature cuts down on the debtor’s and creditor’s legal bills and other costs associated with ongoing litigation. Still, creditors should be counseled to make sure that the liquidation is being conducted properly, and that the assignee is obtaining a fair return on the sale of the assets to maximize the recovery of the debts owed to the creditors.

FSKS is on Your Side

At FSKS, our attorneys are experienced in both bankruptcy and assignments for the benefit of creditors in New Jersey. We have a strong track record of success in the area of creditor’s rights and pride ourselves on being one of the strongest and most successful Creditors’ Rights firms in New Jersey, New York, and Pennsylvania. We’re ready to give you trusted advice and help maximize your return.

If you require assistance with or have questions regarding an assignment for the benefit of creditors in New Jersey, please contact Vincent DiMaiolo, Jr. ( [email protected] ), Nicholas Canova ( [email protected] ), or Tammy L. Terrell-Benoza ( [email protected] ) at (973) 538-4700 .

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Assignment for the Benefit of Creditors - Defenses to Preference Suit By an Assignee

At one time or another, many of our commercial litigation clients have been sued by an “assignee for the benefit of creditors.” When our clients receive a summons and complaint notifying them they are being sued by an assignee, it may be unclear to them why they are being sued. The answer is often that our client’s former customer has made an "assignment for the benefit of creditors." The former customer has authorized a person or entity, often an attorney, to collect and liquidate the customer’s assets and sue our client in an attempt to obtain payments that the former customer previously made to our client. In other words, having been paid for goods sold or services performed, our client now faces the possibility of having its money earned taken away. This post aims to explain why this is a possibility and the potential defenses to such an action.

What Is An Assignment for the Benefit of Creditors?

In layman’s terms, an “assignment for the benefit of creditors” is when a company, usually suffering from financial difficulties, can sell off its assets to pay its creditors. It functions much like a bankruptcy proceeding, except it is based upon state law. In New Jersey, assignment for the benefit of creditors proceeding are governed by the Assignment for Benefit of Creditors Statute (the statute), N.J.S.A. 2A:19-1 to 50. The statute's purpose is to treat all creditors equally and avoid disproportionately favoring any single creditor. N.J.S.A. 2A:19-2.

What is an Assignee?

An “assignee” is an independent third party to whom the business distributing its assets, known as the “assignor”, conveys or assigns, all of its assets in trust.

What can an Assignee Do?

The assignee is empowered with two roles. Subject to certain exceptions, the assignee has the power to dispose of all of the property that the assignor owned at the time of the assignment. The assignment is the document that establishes the transfer of property from assignor to assignee. Pursuant to N.J.S.A. 2A:19-13, the assignee

[M]ay sue for and recover in his own name everything belonging or appertaining to the estate. He may compromise, settle and compound all claims, disputes and litigations of the assignor, refer the same to arbitration, agree with any person concerning the same, redeem all mortgages and conditional contracts, and generally act as and do whatsoever the assignor might have lawfully done in the premises.

In short the assignee may do anything with the property of the assignor that the assignor could do. The second role of the assignee is to represent all of the assignor’s creditors.

How Can the Assignee Take Money Away From My Business?

The answer to this question lies in the second role of the assignee. Because the assignee is obligated to represent all of the assignor’s debtors equally, the assignee has a limited right to recover payments made by the assignor to third parties within 4 months of the general assignment. N.J.S.A. 2A:19-3. In short, if your former customer is the assignor, and your former customer paid you, then made a general assignment less than 4 months later, the assignee can sue you in an attempt to force you to return the money. The reasoning behind this is that in making the original payment to you prior to making the assignment, the assignor has given you preferential treatment in comparison to the other creditors. This type of payment is known as a “preference.”

How Can I Stop the Assignee from Claiming Taking My Money As a Preference?

Whether or not you can stop an assignee from taking your money boils down to the whether you received the money as a preference. The statute governing assignment for the benefit of creditors is vague and there is a limited amount of case law interpreting the statute. There is no definition of “preference” in the assignment for the benefit of creditors statute. One must look elsewhere for answers to this question.

The New Jersey statutory scheme governing corporations does define “preference.” In addition, New Jersey’s Rules of Court provide that "The practice relating to assignments for the benefit of creditors under N.J.S.A. 2A: 19-1 et seq. shall conform as nearly as practicable to the procedure relating to insolvent corporations." Thus, the definition of “preference” in the statute governing corporations is a good place to look. There, a preference is deemed to arise when:

(a) a corporation which, while insolvent, and within four months of the commencement of a receivership action by or against it, transfers any property to or for the benefit of a creditor for or on account of an antecedent debt; and

(b) the effect of such transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class; and

(c) the creditor receiving or to be benefited by the transfer, or his agent acting with reference thereto, has, at the time when the transfer is made, reasonable cause to believe that the corporation is insolvent.

N.J.S.A. 14A:14-14(1). Payments made to satisfy pre-existing debts within 4 months of an assignment would constitute preferences under this definition if the effect is to prefer the recipient of the payment to other creditors and the creditor has reasonable cause to believe the debtor is insolvent. By contrast, payments not meeting this description would not be recoverable by an assignee. This suggests that bankruptcy defenses to a preference, like a contemporaneous exchange for new value, where payment is made to the creditor not to satisfy a pre-existing debt, but to pay for newly delivered goods or services, are also valid defenses against an assignee.

Is It Worth Fighting An Assignee Trying to Recover a Preference From Me?

When the payment at issue is obviously a preference, it is likely not possible to stop the assignee from taking money that was made as part of a preferential transfer. In such situations, a careful analysis should be made as to whether or not it is more cost effective to fight a lawsuit filed by the assignee or agree to a settlement. However, where a payment is not clearly a preference, you may be able to stop the assignee from taking your money and there may be good reason to fight the assignee’s lawsuit.

New Jersey Business and Collection Lawyers

The New Jersey business lawyers at the Law Office of Bart J. Klein advise clients on issues relating to New Jersey a broad range of business disputes and commercial disputes , including breach of contract and commercial collection cases. We represent both creditors and debtors and are well versed in the law governing judgment collection. We welcome you to call us at (973) 763-6060, email [email protected] , or complete our online contact form for more information.

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For businesses – business organizations and transactions, assignment for benefit of creditors.

An “Assignment for Benefit of Creditors” is a unique process authorized under New Jersey law that allows a business to dissolve, sell all of its assets, use the proceeds to pay creditors, and avoid a bankruptcy proceeding. In an Assignment for Benefit of Creditors, the company chooses an “Assignee,” (usually a local attorney) to whom title to the company’s assets are assigned. The Assignee, through the use of auctioneers and brokers, arranges for the sale of the assets and then distributes the proceeds to creditors.

The method of distribution of assets in an Assignment for Benefit of Creditors is different than the distribution scheme set forth under the bankruptcy laws. In many cases, an Assignment for Benefit of Creditors is preferrable to a bankruptcy filing because of the way creditors are paid.

Maselli, Mills & Fornal, P.C. has experience acting as an Assignee, and also advising a client to proceed with an Assignment for Benefit of Creditors. This is a little used legal remedy that many lawyers are unfamiliar with, even though it can provide substantial relief in the right situation.

When your company is in financial disarray, you need an attorney familiar and experienced in all of the legal forms of relief that are available, including an Assignment for the Benefit of creditors. Maselli, Mills & Fornal, P.C. is the law firm with the experience to help.

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Assignments For The Benefit Of Creditors

Assignments For The Benefit Of Creditors

What Is Assignment For The Benefit Of Creditors

An assignment for the benefit of creditors is a state court-administered proceeding somewhat similar to a Chapter 7 bankruptcy proceeding whereby an individual, a partnership, or a corporation in financial difficulty is able to liquidate its assets in an orderly manner and pay its creditors a pro-rata share of their individual claims. However there are significant differences between an assignment for the benefit of creditors, a state court receivership or a bankruptcy proceeding, that must be taken into account when an attorney is advising a client in financial distress. These differences will be highlighted in this presentation.

An Assignment is voluntary and is commenced by the “assignor” executing a formal “Deed of Assignment” in favor of an “assignee”. In substance it is similar to a deed of real estate and must be recorded in the county clerk’s office of the county of the assignor or the clerk of the Superior Court. The contents of the Deed of Assignment should confirm to N.J.S.A. 2A:19-4, and contain an inventory of assets. (See 44 New Jersey Practice Series Form 3.111) The deed effectively transfers all the assets of the assignor to the assignee who is empowered to liquidate the assets after receiving court approval, for the best prices available, at auction, or otherwise, in the assignee’s discretion, all, however for the benefit of the creditors of the assignor who will receive their pro-rata dividend depending on the amount of their claim, after payment of administration expenses.

History of Assignment for the Benefit of Creditors.

Assignments have an interesting history. They originated in the Middle Ages and were utilized by merchants who belonged to Guilds. When a merchant found himself in financial trouble he would voluntarily turn over all his assets to a member of the Guild who would make arrangements for sale and disposition of the property and pay the debtor’s creditors a fair share of the proceeds. The concept then was that members of Guild were the most knowledgeable people in the industry and could produce the most at a sale. For example, if the debtor was a jeweler, a furrier, or a cabinet maker, the Guild members who knew the market for the products would be able to get the best prices. The assignee would be a member of the Guild and the members would have confidence in that person to fairly and effectively liquidate the debtor’s assets.

The concept of a voluntary assignment was retained through the ages and ultimately was codified by statute. In New Jersey assignments are governed by N.J.S.A. 2A:19-1 et seq. The interesting thing about the codification of the common law is that the law retained the provision that the assignor can select his own assignee. In a state court receivership or a bankruptcy preceding the person designed to liquidate the assets is a “Receiver” or “Trustee”, and in each of these cases the debtor has no say in who is to be designated to liquidate the assets. The court makes the decision. This is an important concept to take into account when an attorney is considering what avenue to recommend when advising his/her client who is in financial difficulty.

Some General Observations

An assignment is rarely appropriate for an individual because, unlike a bankruptcy proceeding, the assignor does not receive a discharge. Accordingly, unless the attorney for the debtor was able to negotiate a release of the creditor’s claims in advance, and an agreement to the assignment, this avenue would not be appropriate. However, it should be mentioned that since Assignments generally proceed much quicker, more efficiently, and often produce better results and a higher dividend for creditors, in a given case, especially where the debtor has had a good relationship with his creditors the attorney should consider seeking the approval of the creditor body for the assignment and obtain agreement in writing from each of the creditors to accept the dividend in full satisfaction of their claim. When the attorney for the debtor decides to take the assignment route he should select an attorney as assignee who is familiar with liquidation proceedings, knows how to protect the assets pending their disposition by sale or otherwise, and knows experienced appraisers and  auctioneers who are familiar with the markets, who will properly appraise the assets and advertise the assets in a manner designed to command the best prices.

Assignee’s Powers and Duties & Administration of the Estate

Execution of the deed vests in the assignee legal title to all the assignor’s real and personal property, including property located outside of New Jersey. In effect, the assignee stands in the shoes of the assignor and has the right to commence actions on behalf of the estate, settle claims and take any other action relative to the handling of the assets that the assignor could have done had he/she not make the assignment. The assignee will immediately inspect the premises of the debtor, obtain insurance if necessary to protected the assets, change locks at the debtor’s place of business, deal with the utilities, the landlord, arrange with the postmaster for forwarding mail to the assignee, and in general do all that is necessary to protect the assets, just as the assignor would have done. All these steps are taken on an emergent basis, another reason why the debtor’s attorney should select an experienced attorney knowledgeable about the process of dealing with insolvent estates, someone who deals with locksmiths, landlords, impatient creditors, taxing authorities, lien holders, all clamoring for payment of their overdue bills. When necessary the assignee will seek court approval for retention of experts, such as accountants, appraisers, and auctioneers, and any other experts the assignee deems necessary for the proper administration of the estate.

The assignee will give proper notice to the creditors of the estate and advise them that their claims must be filed by a certain date or be barred from participation in any dividend.

The assignee with meet with the assignor for the purpose of familiarizing himself with the nature of the business, determining what causes of action should be investigated, as well as the validity of claims filed by creditors .

In unusual circumstances it might be advisable to continue the assignee’s business for a limited period of time either to wind down certain operations, collect receivables , or some other valid reason. The assignee must receive formal approval from the court in order to take this step.

After taking possession of the debtor’s property and making a determination of the extent of the assets of the debtor’s estate, the assignee, before disposing of the debtor’s property by private or public sale, must immediately conduct proper searches to learn whether there are any valid liens on the property. This search includes a title search if real estate is involved, a Uniform Commercial Code search to see if there are any encumbrances on inventory or accounts receivable. Tax searches and a judgment search must be made to see if there are any private or governmental  liens on the debtor’s property. Having conducted all the proper searches the assignee should promptly proceed to liquidate the assignor’s property and convert it to cash, terminate any leases and surrender the property to the landlord.

It is common to liquidate the assets of the estate at a public auction, and the assignee will take steps to select an appraiser, and auctioneer that he is familiar with, and advertise the date of the public sale of assets and give notice to the creditors. On occasion a private sale might be appropriate, but in this instance court approval should be obtained and notice should be given to creditors. These are all steps which are, subject to court sanction, within the powers of the assignee.

Other powers of the assignee are recovery of fraudulent transfers and preferential transfers. There are significant differences in the time periods involved here that are different from the bankruptcy statutes and must be taken into account by the assignor’s attorney when deciding if an assignment is appropriate for the client. For example, the preference period under the assignment statute is 120 days, one month longer than that provided for in the Bankruptcy Code. Another important difference between an Assignment and a Bankruptcy proceeding is the limit of the recovery of former employees for unpaid wage, benefit, or vacation time. Under the Bankruptcy Code an employee may recover up to $11,725.00 for any unpaid wage claim; the limit under the Assignment Act is $400.00 These two factors alone might be important consideration in deciding which proceeding to employ.

Assignee’s Final Account and Procedure

Once all assets have been liquidated, all claims examined and approved, the assignee makes a final accounting with the court, on notice to creditors and the procedure is not essentially different from that in a state court receivership or a bankrupcty court, except the forms and the time periods are different. If the court approves the accounts, formal papers are filed to complete the case and creditors are given their dividends. The Surrogate of the county examines and approves the final accounting of the assignee. The judge assigned to the case awards fees to the assignee from the proceeds of the sale of assets. After payment of dividends to the creditors this concludes the case.

Get Information on Assignments For The Benefit Of Creditors;  call Michael McLaughlin, LLC, for  an initial consultation  at  (908) 373-8500 and get the legal answers you seek.

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Bankruptcy Alternatives – The Assignment for the Benefit of Creditors

Most people understand the concept of “ bankruptcy ,” but aren’t necessarily familiar with bankruptcy alternatives – especially with the concept of an assignment for the benefit of creditors (“ABC”). An ABC is a well-established New Jersey state law alternative to federal bankruptcy. This article will give you an understanding of why ABCs, as far as bankruptcy alternatives go, can be a great option and some of the ways that ABCs are used to preserve valuable business assets.

Bankruptcy Alternatives – What is an ABC?

An ABC is one of the more cost-effective bankruptcy alternatives. ABCs are New Jersey state court proceedings used primarily to liquidate businesses and to sell their assets with the approval of the Chancery Division of the Superior Court of New Jersey (the “Court”). In an assignment, a distressed company (the “Assignor”) transfers its assets to a trusted, third-party fiduciary (the “Assignee”). The Assignee then liquidates the business assets through the court-supervised proceeding.

In considering bankruptcy alternatives, ABCs are used for a variety of different reasons. Some Assignors just want to be “done” with their company. They’re overwhelmed with financial and legal issues, and want a streamlined process to wind down the business. Other Assignors have valuable business assets, but the business itself is saddled with debt or litigation. These Assignors may seek to have the business assets sold for maximum value through the court-supervised ABC. This may be accomplished by an auctioneer hired by the Assignee. Other Assignors may be running valuable “turnkey” businesses and wish to sell the entire running operation through an ABC rather than just sell off individual assets. In this situation, the Assignee may obtain court approval for the Assignor to continue to run and operate the Assignor business through sale. 

Who is the Assignor?

Just about any person, partnership or company can use an ABC. However, ABCs are primarily used by companies because, unlike in bankruptcy, no discharge is granted in an ABC. Instead, the Assignor is a liquidating company which will no longer exist after the ABC.  So generally Assignors are companies that want to wind down and sell their assets off to buyers, or to sell their entire operating business to buyers. Note that an Assignor can file an ABC even if it believes that it has “no assets” to liquidation, as there is no requirement that an Assignor have any specific amount of assets to liquidate through an ABC.

Who is the Assignee?

The Assignee is the person chosen by the Assignor to liquidate the business. The Assignee takes on a fiduciary duty to the Assignor company and to its creditors. The Assignee must obtain court authority to take on this role. Once the role of Assignee is assumed, the Assignee must act in the best interests of the Assignor’s creditors, and has many statutory obligations under New Jersey law. These obligations include to collect all of the Assignor’s assets, which include preferential payments made by the Assignor in advance of the ABC. Once all assets are collected, the Assignee has the obligation to sell them for maximum value, and to disburse the net proceeds to creditors.

Bankruptcy vs. Bankruptcy Alternatives – Why Not Just File Bankruptcy?

Bankruptcy is not the best option for everyone and bankruptcy alternatives should be considered in the quest for a debt-free life. First and foremost, unlike bankruptcy, the Assignor can actually choose their Assignee, while in bankruptcy a trustee is assigned to a case. Also, bankruptcy is federal law, and may come with more stigma for owners of distressed businesses, while ABC is a lesser-known and potentially less stigmatizing liquidation under New Jersey state law. Bankruptcy is very highly regulated, overseen by the U.S. Department of Justice, and has fairly high filing fees to be paid to the Bankruptcy Court. Meanwhile, bankruptcy alternatives, like ABCs are handled in the relatively “sleepy” Chancery Division of the New Jersey Superior Court, and generally there are no filing fees due by the Assignor to commence the ABC as the Assignee generally handles all administrative matters. Bankruptcy Courts also maintain dockets that are much more easily accessible to the general public, while dockets in ABCs are less accessible and have lower visibility, which may be valuable to Assignors who would like a little less attention drawn to the winding down of their business.

What Assets are Assigned in an ABC?

Assignors assign to the Assignee all of their right, title, and interest in their real, personal and intangible assets. In short, the Assignor transfers all asses to the Assignee. These assets include the right for the Assignee to sue other businesses as if it were the Assignee. Once the assets are assigned to the Assignee, the Assignor has no further right to operate the business or to take any action with the assets. Later, once those assets are sold, the Assignor becomes a shell of a company that has no ability to operate and, for all intents and purposes, does not exist. 

What are Preference and Avoidance Claims in an ABC?

Assignees are given powers under New Jersey law. These powers include the right and obligation to “claw back” payments made by the Assignor in advance of the ABC that preferred one creditor over another. An Assignee’s action to “claw back” these payments is called a preference action. These powers also include the right and obligation of the Assignee to “unwind” certain transfers of assets from the Assignor to others. An Assignee’s action to “unwind” transfers is called an avoidance action. 

What are the Rights of Creditors in an ABC?

Just as in bankruptcy, creditors in ABCs have different rights. Secured creditors have the right to obtain payment from certain collateral, such as a mortgage on a building gets first payment from the value of the building. Priority creditors have the right to get paid before lesser general unsecured creditors, such as the right of a taxing authority to receive money from an Assignor’s assets before a credit card receives anything at all. Creditors like the credit card receive what’s left over, but are still ahead of the Assignor’s owners, its equity holders, which only receive a distribution if there is a surplus of funds after everyone else is paid. Creditors should, in all instances, file a claim in the ABC to alert the Assignee to their rights and interest in the value of the Assignor’s estate.

What is the ABC Procedure?

  • As one of the more prominent bankruptcy alternatives, an ABC in New Jersey starts with the Assignor signing a deed of assignment for the benefit of creditors naming the Assignee as the assignee (the “Deed”). This Deed explicitly states that the Assignor assigns all of its rights, title and interest in the Assignor to the Assignee. The Deed must include a list of the Assignor’s asses and its debts.
  • The Deed is then recorded in the county by the Assignee’s office, and is transmitted internally by the Court to commence the ABC with the Chancery Division. A case number is assigned to the ABC.
  • The Assignee makes a number of initial motions to the Chancery Division, including a motion for authorization to act as the Assignee. The Assignee also moves for authorization to retain and pay other professionals, including auctioneers and accountants.
  • If the Assignor intends to operate the business through the ABC, on an interim basis, in order to preserve the value of the business pending sale, the Assignee will also obtain authorization from the Chancery Division.
  • The Assignee gives notice of the ABC to all creditors, who are given a deadline to file a standard proof of claim with the Assignee’s office.
  • The Assignee and their professionals conduct due diligence on all matters affecting the ABC, including locating assets and pursuing claims. The Assignee also moves to sell assets and to hold the proceeds in trust pending further court approval. The Assignee will normally seek the assistance and cooperation of the Assignor throughout this process.
  • Once the Assignee has undertaken all of their duties, motions will be filed with the Chancery Division to close out the ABC. 

This process, from start to finish, generally takes a number of months. If there is a lot of work to do, it can sometimes take years. However, once the ABC is commenced, the Assignor has minimum involvement in the ABC, and mainly has a duty to provide cooperation to the Assignee. The benefit of the process is that the Assignor is no longer in charge of the business, and has handed off that duty to the Assignee. In exchange, the Assignee has the right to a court-approved commission based upon the liquidation of assets of the Assignor’s ABC estate.

Bankruptcy Alternatives with Middlebrooks Shapiro

Liquidating bankruptcies can cost a company many thousands of dollars in legal fees and court costs. ABCs, on the other hand, are normally considerably less expensive to the Assignor, as the Assignee, who is chosen by the Assignor, is generally paid through liquidation of assets. This makes ABCs the most cost effective method of liquidation, as far as bankruptcy alternatives go. Moreover, an ABC is simply not a “bankruptcy,” which may be important to the principals of a company in future contexts. However, as with any legal matter, the pros and cons of ABC versus bankruptcy, or other bankruptcy alternatives, must be carefully considered on a case by case basis with competent counsel.

Middlebrooks Shapiro is prepared to provide the competent counsel you deserve. Our dedicated attorneys have over 30 years of experience in bankruptcy, bankruptcy alternatives, like ABCs . If you have found yourself dealing with overwhelming financial hardships due to the pandemic or other extenuating circumstances, schedule a consultation and we can help decide which is the best avenue for you. 

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Related posts, business insolvency – finding the right legal solution for you, insolvency and liquidation – the advantages of bankruptcy alternatives, closing business debts – without bankruptcy or assignment, chapter 7 for businesses vs. the abc liquidation process, bankruptcy in new jersey – everything you need to know in 2021.

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Assignment for the Benefit of the Creditors? One Creditor's Experience With an Archaic State Insolvency Process

Day Pitney Litigation Senior Associate Michael J. Fitzpatrick and Partner Mark Salah Morgan authored an article titled, "Assignment for the Benefit of the Creditors? One Creditor's Experience With an Archaic State Insolvency Process," for the New Jersey Law Journal . The article is an interview with Neil Glasser, Chief Financial Officer for MJH Life Sciences, which is one of the largest privately held healthcare communications companies in the U.S., regarding his experience with an Assignment for the Benefit of Creditors (ABC) and his perspective on the law.

Read the full article here .

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Assignment For The Benefit Of Creditors

If you do not want to file a bankruptcy petition and cannot get creditors to agree to a workout, you might want to look to the state courts for some relief. In most states (including New York and New Jersey), companies look to a set of statutes governing the assignment for the benefit of creditors or an “ABC”.  However, this option is only used in the event the company has a lot of creditors and the company managers have decided to wind up the business.

In an ABC, the company’s board of directors makes the decision to liquidate through the ABC process and authorizes an officer to commence that proceeding.  That officer prepares and signs a written assignment of all of the company’s assets and debts to a third party.  The assignment contents must comply with very specific state requirements.

Once the assignment is complete, the assignee will look to see if the company can be sold as a going concern. The assignee will also send each creditor a claim form to assert their claim against the debtor.  If the assignee cannot sell the company as a going concern, the assignee will put each individual asset up for sale. The assignee will use his/her contacts to find buyers for assets and use publication notices specific to the industry to find buyers and generate cash to pay creditors.

This process almost always yields more for creditors than a chapter 7 bankruptcy because the administrative expenses of a chapter 7 bankruptcy are much higher than they are in state court, and the sale process is usually less cumbersome than it would be under a bankruptcy filing.  Once all of the assets are sold and there is nothing left to liquidate, the assignee will pay creditors in the order of their priority, which is set under the state’s statute.  The entire process usually takes about 6 months.

It should be noted that to the extent any of the company’s managers have personally guaranteed debt, unless the debt is paid in full through an ABC, the guarantor will not be relieved of his/her guaranty obligations.

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ABC: Preference Litigation vs. Bankruptcy Preference Litigation

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While the process for an assignment for the benefit of creditors (commonly referred to as "ABC") and a business bankruptcy are similar, corporate bankruptcy lawyers are quick to point out that there are some fundamental differences.

One of the areas where bankruptcy and an ABC are different are the rules governing the recovery of preference payments. In an assignment for the benefit of creditors in New Jersey, the preference period is four months prior to when the deed of assignment was executed. However, in a bankruptcy the preference period is 90 days prior to when the bankruptcy petition is filed. In preference litigation within an assignment for the benefit of creditors, the assignee must prove that there was intent to prefer the creditor over other creditors, but in a bankruptcy proof of intent to prefer a creditor is not necessary in preference litigation.

One of the advantages in bankruptcy for creditors is that they have statutory defenses at their disposal. However, in an assignment for the benefit of creditors there are no statutory defenses to preference litigation.

Contact a Corporate Bankruptcy Lawyer

If you are operating an insolvent business or are involved in insolvency litigation, contact a corporate bankruptcy lawyer so you can be guided accordingly as to what your options are and what option is best for you. The insolvency process can be difficult to navigate, so it is important that you have someone representing you who is familiar with the process to make sure everything goes smoothly.

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David E. Sklar

Prior to joining Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, David Sklar graduated from Rutgers University-Newark School of Law with a J.D., Cum Laude. Mr. Sklar was the recipient of a Pro Bono Award and was honored by the New Jersey Bar Association for his commitment to the Street Law Program by being awarded the Street Law Prize.

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United States: Assignment For The Benefit Of Creditors: An Overview

View Kyriaki  Christodoulou Biography on their website

What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

  • an ABC does not afford a debtor an automatic stay from creditor collection; and
  • a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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2022 New Jersey Revised Statutes Title 22A - Fees and Costs Section 22A:2-35 - Fees on assignments for the benefit of creditors

22A:2-35. Fees on assignments for the benefit of creditors

22A:2-35. Fees on assignments for the benefit of creditors. The surrogate, as surrogate and deputy clerk of the Superior Court, shall receive for services with respect to an assignment for the benefit of creditors, for the use of the county in which the fees are collected, up to but not including any accounting, a fee of $75.00.

L.1953, c.22, s.11; amended 1988,c.109,s.2.

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IMAGES

  1. Assignment Of Benefits Form

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  2. Assignments for the Benefit of Creditors , Alternative to Formal

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  3. General Assignments for the Benefit of Creditors: The ABCs of ABCs (5th

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  4. General Form of Assignment to Benefit Creditors

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  5. assignment for the benefit of creditors, state court receiverships,and

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  6. Creditors Claim Form

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COMMENTS

  1. Understanding Assignment for the Benefit of Creditors in New Jersey

    An assignment for the benefit of creditors (ABC) in New Jersey is used by either an individual or business to liquidate its assets to pay back outstanding debts to creditors. Learn more in our blog.

  2. New Jersey Assignment for the Benefit of Creditors

    A New Jersey assignment for the benefit of creditors (an "ABC" or "assignment") is a liquidation under statute. Unlike a Chapter 11 bankruptcy, an assignment for the benefit of creditors is not a reorganization process, and the business does not emerge from insolvency. Rather, the subject business is liquidated through this state court process.

  3. Assignment for the Benefit of Creditors

    In New Jersey, assignment for the benefit of creditors proceeding are governed by the Assignment for Benefit of Creditors Statute (the statute), N.J.S.A. 2A:19-1 to 50. The statute's purpose is to treat all creditors equally and avoid disproportionately favoring any single creditor. N.J.S.A. 2A:19-2. What is an Assignee?

  4. In the Matter of The General Assignment for The Benefit of Creditors of

    Appellants, Direct Coast to Coast, LLC (Direct), and Selective Transportation, Corp. (Selective), are creditors of Village Sundries and Tobacco, Inc. (Village), the debtor in this assignment for the benefit of creditors (ABC) action.1 They appeal from the Chancery Division's March 18, 2015 order allowing commissions to Village's assignee, Barry ...

  5. Assignment for Benefit of Creditors

    An "Assignment for Benefit of Creditors" is a unique process authorized under New Jersey law that allows a business to dissolve, sell all of its assets, use the proceeds to pay creditors, and avoid a bankruptcy proceeding.

  6. Assignment for the Benefit of Creditors? One Creditor's Experience With

    An Assignment for the Benefit of Creditors ("ABC") is the state court analogue to a federal bankruptcy. Most, if not all, states have some version of an ABC (sometimes called a general...

  7. Rule 4:54

    The practice relating to assignments for the benefit of creditors under N.J.S. 2A:19-1 et seq. shall conform as nearly as practicable to the procedure relating to insolvent corporations. Accounts of assignees for the benefit of creditors shall be settled pursuant to R. 4:87-1 and 4:87-2. N.J. Ct. R. 4:54

  8. In the Matter of The General Assignment for The Benefit of Creditors of

    ASSIGNMENT FOR THE BENEFIT OF CREDITORS OF EXPORT TRANSPORT CO., INC., to DAVID L. BRUCK, ESQ., Respondent. ________________________________ PENSKE TRUCK LEASING CO., L.P., Plaintiff-Appellant, v. COOL TRANS NJ LIMITED LIABILITY COMPANY and ERIC BIERMAN, Defendants-Respondents. __________________________________ May 6, 2016

  9. Assignments For The Benefit Of Creditors

    An assignment for the benefit of creditors is a state court-administered proceeding somewhat similar to a Chapter 7 bankruptcy proceeding whereby an individual, a partnership, or a corporation in financial difficulty is able to liquidate its assets in an orderly manner and pay its creditors a pro-rata share of their individual claims.

  10. Bankruptcy Alternatives

    As one of the more prominent bankruptcy alternatives, an ABC in New Jersey starts with the Assignor signing a deed of assignment for the benefit of creditors naming the Assignee as the assignee (the "Deed"). This Deed explicitly states that the Assignor assigns all of its rights, title and interest in the Assignor to the Assignee.

  11. New Jersey Revised Statutes Section 2A:19-1 (2022)

    "General assignment" means a transfer or conveyance by a debtor in writing, whereby the debtor transfers or conveys to an assignee, in trust for the benefit of his creditors, all of his property. A "general assignment" includes an assignment by a debtor made under section 2A:20-6 of this title. b.

  12. 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.

  13. PDF Original Wordprocessor Version

    A-6338-11 - In the Matter of the General Assignment for the Benefit of Creditors of Arcadia Group, Inc. Original Wordprocessor Version (NOTE: The status of this decision is Unpublished.) NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-0 In the Matter of the

  14. Assignment for the Benefit of the Creditors? One Creditor's Experience

    One Creditor's Experience With an Archaic State Insolvency Process," for the New Jersey Law Journal. The article is an interview with Neil Glasser, Chief Financial Officer for MJH Life Sciences, which is one of the largest privately held healthcare communications companies in the U.S., regarding his experience with an Assignment for the Benefit ...

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

    What Is an Assignment for the Benefit of Creditors? The third alternative to liquidating your own business or filing for bankruptcy is to follow a procedure called an "assignment for the benefit of creditors," or ABC.

  16. Assignment For The Benefit Of Creditors

    In most states (including New York and New Jersey), companies look to a set of statutes governing the assignment for the benefit of creditors or an "ABC". However, this option is only used in the event the company has a lot of creditors and the company managers have decided to wind up the business.

  17. Chapter 11 Bankruptcy vs. Assignment for the Benefit of Creditors

    New Jersey Chapter 11 Bankruptcy vs. Assignment for the Benefit of Creditors. Like with anything, both chapter 11 bankruptcies and Assignments for the Benefit of Creditors have their advantages and disadvantages. An Assignment for the Benefit of Creditors can be a cost effective way of winding up the business of the Assignor and selling the assets of the Assignor under state court supervision.

  18. In the Matter of the General Assignment for the Benefit of Creditors of

    On or about April 28, 2014, Gift Box executed a Deed of Assignment for the Benefit of. Creditors ("Deed of Assignment"), naming Stephen B. Ravin, Esq., as assignee. The Deed of Assignment was ...

  19. PDF ASSIGNMENTS FOR THE BENEFIT OF CREDITORS

    An assignment for the benefit of creditors is a form of insolvency proceeding which is conducted only in state court (the Superior Court of New Jersey), pursuant to state law.1 Although it is somewhat similar to a bank- ruptcy proceeding under federal law, there are significant differences between the two.2 Individuals may employ this procedure,...

  20. ABC: Preference Litigation vs. Bankruptcy Preference Litigation

    In an assignment for the benefit of creditors in New Jersey, the preference period is four months prior to when the deed of assignment was executed. However, in a bankruptcy the preference period is 90 days prior to when the bankruptcy petition is filed.

  21. Assignment For The Benefit Of Creditors: An Overview

    An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by ...

  22. 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. ... New Yorkers Get Paid Leave for COVID-19 Vaccinations ...

  23. New Jersey Revised Statutes Section 22A:2-35 (2022)

    22A:2-35. Fees on assignments for the benefit of creditors . 22A:2-35. Fees on assignments for the benefit of creditors. The surrogate, as surrogate and deputy clerk of the Superior Court, shall receive for services with respect to an assignment for the benefit of creditors, for the use of the county in which the fees are collected, up to but not including any accounting, a fee of $75.00.

  24. Funding Opportunities: Bond Guarantee Program, FY 2024; Notice of

    H. Review of Bond and Bond Loan documents: Each Qualified Issuer and proposed Eligible CDFI will be required to certify that its appropriate senior management, and its respective legal counsel, has read the Regulations (set forth at 12 CFR part 1808, as well as the CDFI certification regulations set forth at 12 CFR 1805.201, as amended, and the ...