ABC FAQ
The information provided herein is general in nature and is not intended as and cannot be a substitute for legal advice. Assignment law varies from state to state and creditors and other parties in interest should consult counsel regarding their legal rights and responsibilities in specific assignment cases.
ABCs, or assignments for the benefit of creditors, are an effective and efficient alternative to bankruptcy. The process in each is, by and large, the same – an independent professional (the trustee in bankruptcy; the assignee in an ABC) marshals and liquidates the assets of a company and then the sale proceeds are distributed to creditors according to the priorities set by law. Unlike bankruptcy, ABC law is different in each of the states and cases may or may not be court-supervised. Some frequently asked ABC questions are answered below.
Who is the assignee?
An assignee is an independent, disinterested fiduciary to whom the assigning company transfers (“assigns”) its assets, which includes everything from hard inventory assets to company goodwill, to a trust (the “assignment estate”), with the assets then liquidated and the proceeds distributed to creditors in accordance with applicable law.
Who is the assignor?
The assignor, which is commonly also called the debtor, is the company that makes an assignment of its assets for the assignee to administer via execution of a contract or trust agreement with the assignee. (In this FAQ, “assigning company” is used for ease of reading.)
What does “make an assignment” mean?
ABCs are created by contract between the assigning company and the assignee, or fiduciary. In states requiring that courts supervise assignment cases, additional documents are needed to implement the ABC agreement.
Who chooses the assignee?
The assigning company and the assignee are the parties to the contract that creates the ABC. As such, selection of the assignee is the company’s decision, which is typically made with input from senior lenders, equity, and professional advisors.
What is the “estate”?
“Estate” has a specific legal definition, but is also a general term that describes the property, as a whole, held in trust for beneficiaries in a collective proceeding, including probate, bankruptcy, and ABC proceedings.
What is a Proof of Claim?
A proof of claim is a creditor’s evidence of the validity and amount of its claim against the assigning company. Assignees typically provide a standard proof of claim form that creditors must submit by a fixed date in order to share in any distribution.
How are proceeds divided among creditors?
State law determines how proceeds are divided among creditors and the classes into which creditors are divided. Generally speaking, secured creditors get paid first. If there are funds remaining, classes of “priority creditors” specifically defined by law are next in line, followed by the other unsecured creditors and then equity.
Does the ABC mean the assignee is responsible for the assignor’s debts?
No. The Assignee’s responsibility is to administer the company’s assets for the benefit of the company’s creditors. Legal responsibility for the debts never leaves the assigning company.