In addressing the priority of payment requirements in an ABC, distributions to creditors may vary slightly based on the jurisdiction. However, one constant, regardless of the jurisdiction, is that priority for debts owed to governmental entities is universally recognized.12 Government indebtedness aside, with minimal exception, secured creditors will receive the remaining proceeds from the assignor's estate, and if the secured creditors are paid in full, the general unsecured creditors will receive a distribution.
In order to facilitate the ABC process, a secured creditor may agree to provide a carve-out to a general unsecured creditor, e.g., the assignor's pre-ABC counsel. In this circumstance, it is imperative that the assignee not agree to make such a payment on the secured creditor's behalf. Doing so could be viewed as a breach of the assignee's fiduciary duty. If the secured creditor elects to carve out a portion of the proceeds it receives for a general unsecured creditor, the secured creditor must act on its own, without assignee participation.
ABC Advantages and Disadvantages
As discussed throughout this article, an ABC provides numerous benefits. Chief among them is an ABC's speed and the autonomy that the assignee possesses in administering the estate. Another advantage is that the assignor can select the assignee, as opposed to a court-appointed receiver in a receivership or a randomly appointed trustee in a bankruptcy. Moreover, a major benefit of an ABC as it relates to secured creditors, particularly senior lenders, is the insulation a senior lender will obtain in an ABC sale of assets. In a secured party sale, a senior lender faces potential litigation if an interested party challenges the commercial reasonableness of the transaction. In an ABC sale of assets, a senior lender will not be subjected to such exposure. Instead, the assignee bears this responsibility, which is why in most instances the assignee will structure the sale as an "as is where is" transaction and require that it be indemnified.
However, an ABC is not foolproof. Disadvantages certainly exist. First, there is no automatic stay of any pending litigation. As a result, creditors can disrupt the process. For example, a creditor might file an involuntary bankruptcy while the ABC is pending. Second, the likelihood of a widely held public company filing an ABC is fairly remote because shareholder consent is required. Third, because of minimal court oversight in certain jurisdictions, a sale of assets in an ABC could face potential challenges as to its validity. Finally, because in some states ABCs are fairly rare, a lack of familiarity with the particular ABC statute may exist, potentially leading to an unfavorable result based on an incorrect interpretation of the statute.
ABCs in New York are particularly rare because the speed and autonomy advantages discussed above are not present in the state's ABC statute. The New York statute is voluminous and empowers the state court with, among other things, significant oversight in ordering the allowance or disallowance of claims, directing the distribution of a dividend and authorizing asset sales.13 For the most part, the New York statute as currently enacted defeats the purpose of why a company would select an ABC as an alternative to a bankruptcy or other insolvency proceeding.
In the right circumstances, including filing in a state with an ABC-friendly statute, an ABC is a useful bankruptcy alternative that will lead to an efficient liquidation of an assignor's estate. To facilitate the orderly administration of the estate, it is important that the assignor select an assignee with experience in handling ABCs. Assuming the assignee properly administers the estate and recognizes that it has a fiduciary duty to the assignor's creditors, the advantages of an ABC outweigh its disadvantages.
Barry M. Kazan is a partner, and Scott B. Lepene is counsel, at Thompson Hine in New York and Cleveland, respectively.
1. In Illinois and California, a court filing is not required to initiate the ABC. In these states, the ABC is created by contract.
2. See N.J. Stat. Ann. §2A:19-7 ("The assignee, upon receiving a general assignment, shall forthwith record it, including the inventory and list its creditors with their claims, in the county where the assignor resides and in any other counties or states where he may deem it necessary…"). In Delaware, an assignee is required to file an inventory and an inventory affidavit with the Chancery Court within 30 days of the general assignment. Del. Code Ann. Tit. 10, §7382.
3. See N.Y. Debt. & Cred. Law §4.
4. See N.J. Stat. Ann. §2A:19-10; see also Del. Code Ann. Tit. 10, §7384. New York's ABC statute also sets forth requirements regarding the posting of a bond and the appraisal of assets. See N.Y. Debt. & Cred. Law §§6, 24.
5. In New Jersey, the assignee is required to mail notice of the ABC to all of the assignor's creditors within 30 days of the general assignment. See N.J. Stat. Ann. §§2A:19-8. In New York, the judge may authorize the assignee to advertise for creditors to make claims in the ABC. The publication will take place in one newspaper selected by the judge, and the notice must provide the creditors with at least 10 days' notice from the publication date. N.Y. Debt. & Cred. Law §5. Parties/creditors with an interest in the assignor's estate also will receive notice at least 10 days in advance of: (a) all proposed sales of property, (b) the declaration and time of payment of dividends, (c) the filing of the interim account and the filing of the final account of the assignee and of the hearing thereon, and (d) the proposed compromise of any controversy. N.Y. Debt. & Cred. Law §12.
6. See Del. Code Ann. Tit. 10, §§7381-7387.
7. See UCC §9-612.
8. See N.Y. Debt. & Cred. Law §23, 39; PA Code §1; N.J. Stat. Ann. §2A:19-3; Del. Code Ann. Tit. 10, §7387.