assignment for the benefit of creditors tax treatment

• assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

• Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
• Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
• Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
• Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
• After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
• After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
• Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
• Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
• Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

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Assignments for the Benefit of Creditors: Overview | Practical Law

Assignments for the Benefit of Creditors: Overview

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

ABC's - An Alternative to Bankruptcy Liquidations

April 27, 2023

By: Daniel J. Garfield

ASSIGNMENTS FOR THE BENEFIT OF CREDITORS

An Alternative to Chapter 11 and Chapter 7 Liquidations

Distressed companies faced with unlikely prospects for reorganization often take advantage of the liquidation option via bankruptcy, where the debtor’s assets can be sold free and clear of all liens, claims, and encumbrances.

In a Chapter 7 bankruptcy liquidation, a trustee is appointed to liquidate assets, taking a commission. In a Chapter 11 liquidation, ownership or management typically continues operating the business throughout the bankruptcy process, whether in a reorganization or liquidation.

A state-law alternative to a federal bankruptcy liquidation, known as an assignment for the benefit of creditors (ABC), can facilitate a business liquidation without many of the time-consuming delays, complications, or added costs associated with the federal bankruptcy process. In Colorado, for example, ABCs have few formal requirements, which allows for a quick sale process.

What is and is  not  an ABC?

An ABC is not an appropriate vehicle for a company looking to reorganize. By contrast to a bankruptcy case, no automatic stay is imposed to limit creditor action upon the commencement of an ABC.

An ABC also will not discharge any debt or liability that is not repaid in full. What the ABC can do for the debtor and insiders, if properly managed by the assignee, is diminish creditors’ concerns that the board or management is standing in the way of recovering value for creditors, while the assignee sets about doing just that. Additionally, an ABC is often a good option for distressed companies with debt that is largely unsecured.

ABC’s have long existed in law and are usually addressed in state statutes. A simple and accurate way to think of an ABC is as a trust agreement whereby the owner of a distressed company irrevocably transfers title, custody, and control of its assets to an impartial third party, the assignee. The assignee is entrusted with the assets and has duties to liquidate the assets in an efficient, orderly manner and distribute net proceeds to creditors on a  pro rata  basis, subject to court approval. The court approval process can vary greatly from state to state.

When might an ABC make more sense that a liquidating bankruptcy?

An ABC is a liquidation vehicle. It is not a process by which a company can reorganize, obtain a discharge, or otherwise emerge from insolvency. Thus, the company’s board of directors, officers, and investors need to accept that their control over the company and its assets will cease following commencement of an ABC. In addition, shareholder equity will have no value unless there is money left to distribute after the costs of the ABC are funded and all creditors have been paid in full.

Factors that drive a company to consider an ABC typically include:

Negative cash burn coupled with an inability to raise additional debt financing or equity investment.

An unwillingness by current lenders to extend loan/forbearance periods and confirmation that no further loan advances will be made.

Increasing risk for board members and officers that cash will be insufficient to handle key fiduciary items at wind down ( e.g. , accrued payroll, vacation, taxes, etc.).

A more realistic assessment of the lack of value of the company and/or its assets, particularly relative to its debt or ability to continue to function as an operating entity ( i.e. , an unsuccessful M&A process has occurred)

Benefits and Limitations

While every situation must be evaluated independently, an ABC offers many strategic benefits to companies, boards, and other stakeholders. It allows the company to select an assignee with appropriate industry expertise to conduct the liquidation process, resulting in a greater opportunity to maximize the value of the assets.

Second, the assignee is responsible for the sales process and any risks associated with it. Board members and officers are not parties to the sale of the assets from an ABC. Any such sale or liquidation is conducted by the assignee, an independent fiduciary for the benefit of creditors who takes no direction from the assignor’s board or officers. Therefore, any attempted attack or claim by a creditor of the assignor or other interested stakeholder concerning the process or ultimate terms should lack merit and be dismissed by the court.

Third, ABCs tend to have lower administrative costs than Chapter 11 filings due to less extensive court filings (or no filings, depending on the jurisdiction) and the lack of a creditors’ committee.

Fourth, certain investor groups or board members may prefer an ABC to a federal bankruptcy filing due to the lower visibility of an ABC.

Finally, secured creditors generally support an ABC if they believe that the budget for the process is reasonable and that the assignee will return proceeds in a timely manner post-ABC after investigating and validating the creditors’ secured position.

An ABC does have challenges and limitations that should be understood by the board of directors and officers of a company as they consider the most appropriate insolvency process to undertake. While ABC law varies from state to state, there are a few common limitations.

First, an assignee cannot use the collateral of secured creditors without their consent. Therefore, secured creditors have significant leverage in an ABC in regards to the budgeting process. While the budgeting process may be similar to a Chapter 11 cash collateral process, there may be no judge to hear disputes in an ABC. Therefore, the assignee may be more accommodating to secured creditors in an ABC than a debtor might be in a Chapter 11.

Second, a buyer cannot assume any of the secured debt in an ABC sale without the consent of the secured creditor. Similarly, there is no cramdown opportunity (or forced loan extension) of secured debt in an ABC, as is possible in a confirmed plan of reorganization or liquidation in Chapter 11.

Third, with limited exceptions, there is no automatic stay in an ABC. While the ABC transfers the assets out of the assignor and therefore post-ABC judgments may have no practical value or impact, litigation can continue against the assignor, and the assignee typically has neither the funding nor the economic motivation to defend the assignor against any litigation. In addition, hostile creditors may decide to shift their focus to other stakeholders ( i.e. , board members or officers in their capacity as guarantors or fiduciaries) if they believe there will likely be no return for them from the ABC estate.

Fourth, an assignee has no rights to assign executory contracts or leases beyond those granted by the contract terms, as is possible in bankruptcy, and seeking consents of counterparties to assign contracts or leases to a buyer of assets from an ABC estate can be a laborious process. If such contracts are numerous or favorable to the assignor, the assignee may be unable to obtain the required consents. That, in turn, may reduce the purchase price or prevent a sale from closing because an ABC does not provide a mechanism to capture the above-market value of any executory contract or lease for the benefit of creditors, absent consent of the counterparties, as Chapter 11 does.

Finally, assignees in most states, including Colorado, cannot provide free-and-clear sale orders. What a buyer of assets in an ABC typically obtains, along with the sale documents, is a bill of sale from the assignee. A bill of sale, particularly from an assignee who is a well-known and well-regarded fiduciary, is a very powerful document from the perspective of creditor protection, successor liability, etc., but it does not have the same force and effect as a free-and-clear sale order from a bankruptcy court.

Assignee Responsibilities

To authorize an ABC properly, the debtor must abide by the requirements of its corporate documents (an LLC operating agreement articles of incorporation, etc.), as well as applicable state law.

Before accepting the assignment, the prospective assignee will typically review certain aspects of the debtor, including:

The accuracy and completeness of the debtor’s information to be used to document the inventory of assets and liabilities, and analysis of viability, liquidity, and prospects for recovery of value under various scenarios;

Potential environmental risks, if real estate assets are involved;

A determination of whether the assignee will need specific approvals or licenses to operate the business or liquidate its assets; and

The existence of liens and the status of their perfection. If one or more properly perfected liens on the substantial assets of the debtor are found, the prospective assignee will likely agree to become the assignee only with approval of secured creditors.

The choice of assignee is not subject to approval by creditors, but the creditors may be able to challenge the choice if the assignee fails to properly fulfill its fiduciary duties to creditors. ABCs generally commence at the time of the assignee’s acceptance of the debtor’s assignment of its distressed assets, which must be evidenced by a written agreement, typically in the form of a trust or similar arrangement.

The assignee is required to give notice of the assignment to all of the debtor-assignee’s creditors, equity holders, and other parties of interest, such as taxing authorities. The ABC trust is legally distinct from the pre-assignment debtor. Therefore, judgments or garnishments obtained or liens filed against the debtor-assignor after the assignment has occurred generally do not attach to the assets held in trust by the assignee.

To maximize the value of assets distributed to creditors, the assignee may operate the business (if it remains in business) for a period of time prior to selling the assets. Operating the business makes sense if the expected increase in recovery outweighs the additional costs of operating the business; however this option is subject to the availability of sufficient liquidity. An “operating” ABC can make sense where, for example, there is:

A need to complete work in process or confirmed customer orders;

An ability to hold going-out-of-business sales, as is often the case with retailers; or

A serious buyer looking to purchase a going concern.

When operations have ceased before the assignment is made, or they are stopped by the assignee, assets can be liquidated through various means, including an auction or a negotiated sale. If the assignee decides to hold an auction, the assignee must provide notice of the auction to creditors and other parties in interest. Potential buyers will typically buy only if they can do so “free and clear” of liens on the assets being bought. For this reason, an assignment for the benefit of creditors is often done in compliance with personal property foreclosure procedures set forth in Article 9 of the Uniform Commercial Code.

Distribution of sale proceeds and administrative duties

The goal of every ABC process is to maximize distributions to creditors. An assignee handles the administrative tasks associated with:

Noticing creditors of the commencement of the ABC and the deadline for filing claims against the ABC estate.

Distributing funds to creditors.

Winding down the assignor.

Shortly after the commencement of the ABC, the assignee sends a notice of the ABC to all creditors, shareholders, and other interested parties, accompanied by a proof of claim form that allows any person or entity to submit a claim to the assignee. The assignee is responsible for reviewing submitted claims and verifying their validity, and may also object to unsupported claims.

If funds are available for distribution to creditors, the assignee is required to distribute them in accordance with the priority schedule established under applicable state law, which is a similar concept to the creditor priorities in a bankruptcy proceeding. If disputes arise between two creditor classes or within a single creditor class, then the assignee attempts to resolve them in a manner that is cost efficient for the ABC or through a declaratory relief lawsuit in state court. Certain state laws may impact the distribution priority scheme and should be reviewed as part of the distribution process.

The assignee generally handles wind down tasks, such as retention of accountants to prepare final tax returns of the assignor, closing 401(k) plans, storage of books and records, cleanup and return of facilities to landlords, and return of leased equipment. These are tasks that the company’s officers and board are often not well-suited to handle. After payment of claims and any open issues concerning the ABC are resolved, the ABC and associated trust are terminated.

• Daniel J. Garfield
• Bankruptcy, Reorganizations, and Workouts

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Part 5. Collecting Process

Chapter 9. bankruptcy and other insolvencies, section 20. non-bankruptcy insolvencies, 5.9.20 non-bankruptcy insolvencies, manual transmittal.

December 01, 2022

(1) This transmits a new IRM 5.9.20, Bankruptcy and Other Insolvencies, Non-Bankruptcy Insolvencies.

Material Changes

(1) Editorial changes have been made throughout the IRM and citations have been updated.

(2) IRM 5.9.20.1(2): Audience section has been updated to align with names/acronyms of current business units. Clarification on employee use was also added.

(3) IRM 5.9.20.1(3)(4): Policy Owner and Program Owner were updated to align with current business unit names.

(4) IRM 5.9.20.1(5): Primary Stakeholders was updated to align with current business unit names/acronyms.

(5) IRM 5.9.20.1.3(2): Responsibilities was updated to correct IRM link reference and IRM title.

(6) IRM 5.9.20.1.4(1): Program Reports was updated to notate the Business Objects function for the required AIS reports.

(7) IRM 5.9.20.1.4(2)(a)(b): Program Effectiveness was updated to reflect new IRM link references and to change the name from Advisory to CEASO.

(8) IRM 5.9.20.1.5(1): Program Controls was updated to reflect new IRM link references.

(9) IRM 5.9.20.1.5(2): Program Controls was updated to reflect CEASO instead of Advisory. The PALS name was added to the group manager operational guide title.

(10) IRM 5.9.20.1.6(3): Terms and Acronyms updated ReferenceNet Acronym Database web link.

(11) IRM 5.9.20.1.6(4): Acronym table has been added for quick reference.

(12) IRM 5.9.20.1.7(2): Related Resources was updated to add the United States Bankruptcy Code and Rules Booklet.

(13) IRM 5.9.20.2.1(3): Assigned Offices updated to the New York Field Insolvency office for SIPA case routing.

(14) IRM 5.9.20.2.1(10): Payment Posting was updated to reflect the New York Insolvency Field office for payment routing.

(15) IRM 5.9.20.3.1(3): Notification clarified mailing instructions per the Form 56-F’s most recent instructions.

Effect on Other Documents

Effective date.

Kareem Williams Director, Collection Policy Small Business/Self Employed

Program Scope and Objectives

Purpose . This Internal Revenue Manual (IRM) section describes the process and procedures for working non-bankruptcy insolvencies and the types of procedures followed to protect the Government's interest in these proceedings.

Audience . This IRM is designed for use by Specialty Collection Insolvency and Civil Enforcement Advice & Support Operations (CEASO) personnel. Advisors, revenue officers, and other SB/SE employees may also refer to this section. Employees in functions other than SB/SE may refer to this section when working with a taxpayer that has filed an insolvency proceeding.

Policy Owner . The Director of Collection Policy is responsible for issuing policy for the Specialty Collection Insolvency program.

Program Owner . The program owner is Collection Policy, Specialty Collection Insolvency, an organization with the Small Business Self Employed (SB/SE) division.

Primary Stakeholders . The primary stakeholders of this section are SB/SE Collection, Specialty Collection Insolvency and SB/SE Specialty Collection Offers, Liens and CEASO.

Program Goals . The goal of this IRM is to protect the government’s interest and ensure taxpayer rights are protected while processing stockbroker insolvencies, receiverships, assignment for the benefit of creditors, corporate dissolutions and bulk sales.

Internal Revenue Manual (IRM) 5.9, Bankruptcy and Other Insolvencies, contains the Service’s position, procedures, information, instructions, guidance, and references concerning bankruptcy cases, stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

This IRM specifically addresses the Service’s position, procedures, information, instructions, guidance, and references on the following non-bankruptcy insolvencies: stockbroker insolvencies, receiverships, assignments for the benefit of creditors, corporate dissolutions, and bulk sales.

11 USC 109(b) with 109(d) & (e)

Securities Investor Protection Act (SIPA) of 1970

15 USC 78aaa et seq

IRC 7403(d)

Responsibilities

The Director, Specialty Collection Insolvency and Director, Specialty Collection Offers, Liens and CEASO are responsible for program oversight.

Territory and Frontline managers are responsible for ensuring reviews are completed as required per IRM 1.4.51.17.2, Operational Review, IRM 1.4.51.16.2, EQ Consistency Reviews, IRM 1.4.51.5.2, Reviews (Overview), and IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid.

Employees are responsible for following the provided guidance to process cases.

Program Management and Review

Program Reports . Reports housed on the Business Objects Enterprise system are used to support the insolvency program. The required AIS reports are described in IRM 5.9.12 , Insolvency Automated Processes, IRM 5.9.16 , Insolvency Case Monitoring, and in IRM 1.4.51.8.3 , Case Management Tools.

Program Effectiveness .

Operational and Program reviews are conducted on a yearly basis. See IRM 1.4.51.17.2, Operational Review, and IRM 1.4.51.17.5, Program Reviews, for more information. Operational Reviews are conducted within the operation and can be obtained by contacting the Director, Specialty Collection Insolvency or Director Specialty Collection Offers, Liens and CEASO. Program Reviews are conducted within Headquarters Collection and can be obtained by contacting the Director, Collection Policy or Director, Specialty Collection Offers, Liens and CEASO.

National quality reviews conducted on a monthly basis. Consistency reviews are conducted at least annually. See IRM 1.4.51.16.1, NQRS and IRM 1.4.51.16.2, EQ Consistency Reviews, for more information.

Program Controls

Insolvency Managers are required to follow program management procedures and controls addressed in IRM 1.4.51.5.2, Reviews (Overview), IRM 1.4.51.15, Controls, and IRM 1.4.51.16, Quality.

CEASO Managers are required to follow program management procedures and controls addressed in IRM 1.4.53, Advisory and Property Appraisal and Liquidation Specialist Group Manager Operational Aid.

Terms and Acronyms

A glossary of terms used in this IRM can be found in Exhibit 5.9.1-1, Glossary of Common Insolvency Terms.

Common acronyms acceptable for use in the AIS history are listed in Exhibit 5.9.1-2, Acronyms and Abbreviations.

Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at: http://rnet.web.irs.gov/Resources/Acronymdb.aspx.

Acronyms used specifically in this IRM section are listed below:

Related Resources

Procedural guidance on insolvencies can be found throughout IRM 5.9, Bankruptcy and Other Insolvencies.

The United States Bankruptcy Code and Rules Booklet

Automated Insolvency System - User Guide, Document 13219.

http://www.fdic.gov

Stockbroker Insolvencies

Overview. Because stockbrokers are entrusted with the financial investments of their customers, special laws have been enacted to protect the assets of their investors. In conjunction with these special protections, Congress has limited the extent to which stockbrokers may seek bankruptcy protection. Specifically, stockbrokers are prohibited from being a debtor in Chapters 11 and 13 bankruptcies (11 USC 109(d) & (e)). By default the only chapter of bankruptcy for which a stockbroker may be eligible is Chapter 7. (Compare 11 USC 109(b) with 109(d) & (e).) The Field Insolvency operation is fully responsible for working stockbroker insolvencies.

Interstate Commerce. The majority of stockbrokers deal in interstate commerce and, in so doing, are required to be members of the Security Investor Protection Corporation (SIPC) by the Securities Investor Protection Act (SIPA) of 1970, 15 USC 78aaa et seq. Generally, these stockbrokers should not be filing bankruptcy. However, if a determination has been made a broker or brokerage firm's customers' investments do not need protection under SIPA, it may file a Chapter 7 bankruptcy. The discussion of SIPA cases in the subsection below explains procedures to be taken by Field Insolvency caseworkers.

Intrastate Commerce. A broker or dealer whose business is exclusively intra state and who does not use any facility of a national securities exchange may appropriately file a Chapter 7 bankruptcy. Insolvency specialists should handle these cases as they would any other Chapter 7 bankruptcy.

SIPA Actions. SIPC is a private, non-profit, non-governmental corporation to which most registered brokers are required to belong. Assessments against members are deposited into a fund designed to protect customers (i.e., investors doing business with the broker or brokerage) in the event of the financial failure of a SIPA member. If SIPC determines that a member has failed or is in danger of failing and other conditions are met, SIPC may seek liquidation of the firm.

SIPC files an application for a protective decree with the district court as a civil suit where SIPC is listed as one of the plaintiffs in the matter. If a Chapter 7 bankruptcy has been filed, the bankruptcy proceeding is stayed pending the outcome of the SIPC liquidation. See 11 USC 742.

A trustee is appointed to satisfy investors' and other creditors' claims.

Once the SIPC liquidation proceeding is completed, if the broker or brokerage had filed a Chapter 7 previously, the Chapter 7 case is dismissed. 11 USC 742.

SIPC Trustee. After the district court grants the protective decree, it appoints a trustee and the case is removed to the bankruptcy court. SIPA contains special provisions protecting investment customers, but the general provisions of the bankruptcy code also apply to SIPA liquidations. Since the case is opened in the district court and assigned a case number there, the case is not assigned a bankruptcy case number; however, the Bankruptcy Court gives it an adversary number. Insolvency will use the adversary number to load the case onto the Automated Insolvency System (AIS). The duties of the SIPC trustee are similar to those of a Chapter 7 trustee with the additional duties to:

Be responsible for all noticing issues on the case;

Hire any necessary personnel, such as an accountant, to assist in the liquidation process;

Use any member of SIPC to assist in the liquidation proceeding;

Maintain and control customer accounts;

Investigate the debtor and condition of the estate; and

Report any and all findings to the court.

These additional duties do not require approval of the bankruptcy court. (15 USC 78fff-1.)

The SIPC trustee may submit a request to the Service seeking exemption from filing the returns of a brokerage company in a SIPA proceeding, in appropriate circumstances, under the procedures discussed in IRM 5.9.6.14.1(2) , Relief from Filing Requirement.

Assigned Offices. All SIPA cases are handled by the New York Field Insolvency office. When notices pertaining to SIPA proceedings are received by any other Field Insolvency office or by the CIO, those notices must be forwarded to the New York Field Insolvency office as time sensitive mail according to procedures established in IRM 5.9.11.3(4), Specialty Mail Received by the Field.

Initial Insolvency Questions. Usually the Service will not receive any notification of a stockbroker insolvency until SIPC files an application for a protective decree and the case is transferred to the bankruptcy court as an adversarial proceeding. The caseworker must contact the trustee to obtain information such as:

The taxpayer identification number (EIN/SSN)

Other entities involved and their corresponding TINs

Date of the 341 meeting of creditors

If the IRS is named as a creditor

The last date to file a claim

How to be added to creditor matrices, if necessary

Other relevant information or special procedures required by the trustee

Adding the Case to AIS. Field Insolvency will be responsible for loading SIPA cases on to AIS. Because AIS has no database for SIPA cases, they will be added as "RC" (receivership) in the "Chapter" field of the AIS entity screen. The caseworker will use the adversary number with the letters "-AD" following the last digit of the number or following the judge's initials. The "-AD" will identify the case as a SIPA proceeding. The trustee information can be loaded to the AIS Attorney screen.

Manual Processing. The Insolvency Interface Program (IIP) will not process SIPA cases. Field Insolvency caseworkers will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420 ), taking necessary actions to avoid or correct stay violations, and inputting TC 520 cc 84 manually on all periods. If any periods are estimated, a dummy may be required.

Closing code 84 will not establish a dummy module. It may be necessary to establish a dummy mod using cc 81, and change the closing code to 84 after the dummy mod is established.

TFRP Investigation. TFRP investigations will be conducted and assertions will be made as if the case were a Chapter 7 bankruptcy.

Claims. Claims are filed with the trustee rather than with the court. The typical deadline to file a claim is six months from the date of notice. The Automated Proof of Claim (APOC) system will not process SIPA cases. The caseworker will prepare the Service's claim as if it were for a Chapter 7 bankruptcy. When a claim is printed from the AIS claim screen, it will be annotated as a "receivership." The caseworker must white out the "receivership" designation and replace it with "SIPA."

Payment Preference. Customer creditors (see Exhibit 5.9.1-1, Glossary of Common Insolvency Terms) always receive full preference in these liquidation proceedings. The IRS will never be a customer creditor. After distribution is made to customer creditors, distribution toward non-customer claims is treated as if the broker or brokerage had filed a Chapter 7 Asset case (11 USC 726; see 15 USC 78fff(e)).

Payment Posting. The SIPA trustee should be instructed to mail payments to the New York Field Insolvency office to be posted through AIS and sent to the serving Campuses. Payments received by the CIO in error will be posted to the period with the most imminent CSED by the CIO. The CIO will advise the New York Field Insolvency office of payment receipt by phone or secure e-mail. Designated payment code "03" should be used on the payment vouchers.

Stay. Upon SIPC's filing of an application for a protective decree under SIPA, all tax proceedings concerning the broker or brokerage are stayed until the application is dismissed or until the liquidation proceedings are finished. 11 USC 362(a). However, in the case of an individual broker, the stay applies to the commencement or continuation of a proceeding in United States Tax Court for a taxable period ending before the filing of an application for a protective decree under SIPA. Thus, all normal bankruptcy stay procedures must be followed. For instance, receipt of levy payments must be refunded to the SIPC trustee; Notices of Federal Tax Liens filed in violation of the stay must be withdrawn.

Case Closure. After completion of a liquidation proceeding, corporations, limited liability companies, and limited partnerships should be closed as TC 530 cc 10 upon reversal of the TC 520. Individual brokers' cases should be closed as if they were Chapter 7 discharges.

Counsel Guidance. Issues arising from SIPA proceedings that have not been covered in this IRM should be discussed with Counsel.

Receivership Proceedings

Overview . A receivership proceeding is when a state or federal court appoints a fiduciary (receiver) to take control of the assets of a business or individual debtor. A receivership may be established to:

Conserve, preserve, protect, or administer property involved in a legal action;

Prevent fraud or loss of property from fraud;

Prevent mismanagement of property; or

Replace an irresponsible or insolvent assignee where claims are jeopardized in an assignment for benefit of creditors.

Court Jurisdiction. The majority of receivership actions are brought in the state courts because the basis for jurisdiction by federal district courts is limited. The court appointing the receiver has jurisdiction over the assets of the receivership. The court handles all questions pertaining to the preservation, collection, liquidation, and distribution of the assets.

No absolute right to the appointment of a receiver exists. The decision is at the discretion of the court.

US District Courts. The US government can request a federal district court to appoint a receiver as part of a federal tax lien foreclosure action under IRC 7403(d). Such a receivership is usually sought where necessary for the collection, preservation, or orderly liquidation of property being foreclosed.

CSED. The statute for collection of taxes is suspended during the time the taxpayer's assets are in the control or custody of the court plus six months (IRC 6503(b)).

Types of Receiverships. Receiverships are generally classified as either "general" where all of the non-exempt assets of a business or individual debtor are under the court's control, or "limited" where a specific asset or group of assets are under the court's control. The following chart illustrates the difference between a general and a limited receivership.

Receiver. The receiver is considered an officer of the court with fiduciary responsibilities to the court and creditors. The receiver is usually an independent party without an interest in the case. However, a party in interest with special knowledge of the business may be appointed receiver upon agreement of the parties to the suit. The receiver is not personally liable for receivership obligations.

The receiver of a corporation in receivership may submit a request to the Service seeking exemption from filing the returns of the corporation, in appropriate circumstances, under the procedures discussed in IRM 5.9.6.14.1(2), Relief from Filing Requirement

Bankruptcy versus Receivership. The Service generally will not initiate or join in a proceeding to request an involuntary bankruptcy for a taxpayer. However, IRC 7403(d) authorizes the Service to request the appointment of a receiver. Such a receivership is usually sought where necessary for the collection, preservation, or orderly liquidation of property being foreclosed.

Adding the Case to AIS. Caseworkers must add receivership cases to AIS, inputting "RC" in the chapter field on the AIS entity screen. The court-appointed receiver's name, address, and phone number must be added to the AIS attorney table.

Manual Processing. IIP does not process receivership cases, so the caseworker must manually input TC 520 cc 84 on balance due modules. Field Insolvency caseworkers will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420), taking necessary actions to avoid or correct stay violations, and inputting TC 520 cc 84 manually on all periods. If any periods on the proof of claim are estimated, a dummy module may be required.

Closing code 84 will not establish a dummy module. It may be necessary to establish a dummy module using cc 81 and change the closing code to 84 after the dummy module is established.

TFRP Investigation. TFRP investigations will be conducted and assertions made as if the case were a Chapter 7 bankruptcy.

Unfiled Returns. Unfiled returns should be requested from the receiver. The Service should make IRC 6020(b) returns for returns not received by the deadline given to the receiver. This may require issuing a summons for the 6020(b) information.

The IRS can make immediate assessments of unassessed income, estate and gift tax deficiencies pursuant to IRC 6871; Treas. Reg. 301.6871(b)-1(c).

Bar Date. Claims must be filed by the bar date established by the court or the claim may be disallowed.

Proof of Claim. The Automated Proof of Claim (APOC) system does not process Receivership cases. The proof of claim should be filed manually on Form 4490, unless the receiver requests the claim be filed on another form or presented in letter format. Penalties and interest should be computed to the date of the court order establishing the receivership. Schedules of assets and liabilities are not provided to the court and creditors, so secured claims should be filed at full value. The claim should be filed according to the requirements of the court.

Case Files. In addition to AIS documentation, paper files should be kept for receivership cases, including notices, copies of claims, and correspondence sent to or received from the receiver.

Follow-Up Review. After filing a claim, the caseworker must input a one year follow-up on the AIS case to check for distribution. If no distribution has been received by the follow-up date, the caseworker must contact the receiver by phone or ad hoc letter asking about the progress of the distribution and the likelihood of the Service's receiving payment on its claim.

Payment Application. The court determines the formula for the distribution of assets and to which creditors the assets will be distributed. Generally, the assets are paid:

First, to the receiver's administrative creditors, including the receiver.

Then, to pre-appointment creditors and other creditors.

The receiver should be instructed to mail payments to the Field Insolvency office where the case is assigned. The CIO will post payments received in error to the period with the most imminent CSED. The CIO will advise the caseworker of payment receipt by phone or secure email. Designated payment code "03" should be used on the payment vouchers.

Case Closure. Once the receivership proceeding is complete and the creditors have been paid to the extent allowed by the court distribution, the receiver is discharged and the case is closed. Unlike bankruptcy cases, receivership proceedings do not provide a discharge. The IRS may collect any tax claim that remains unpaid once the proceeding ends. IRC 6873. When a business entity has been dissolved under state receivership proceedings or other dissolution actions, and all IRS activity, including addressing any TFRP issues, has concluded the litigation freeze code must be reversed and the modules closed with a TC 530 cc10. When an individual receivership is closed in the court and all IRS activity has concluded, the litigation freeze code should be reversed.

Counsel Guidance. Issues arising from receivership proceedings that have not been covered in this IRM should be discussed with Counsel. In some instances formal intervention by Counsel may be required.

Federal Deposit Insurance Corporation (FDIC) Receivership Proceedings of Insolvent Financial Institutions

Overview. When a financial institution encounters economic distress, the financial institution can be placed into a receivership proceeding pursuant to 12 USC 1821. The receivership proceeding is much like a bankruptcy case. Prior to January 1, 1996, the Resolution Trust Corporation (RTC) was the fiduciary of the insolvent financial institutions. On January 1, 1996, the FDIC took over the responsibility of serving as the fiduciary of failing financial institutions. The FDIC also assumed the responsibility of closing the cases of financial institutions previously administered by the RTC that remained open as of close of business on December 31, 1995. The FDIC has the authority to wind up the financial institution's operations, liquidate the assets, and to pay the claims of creditors from the funds secured from the liquidation of the assets.

Court Jurisdiction. The FDIC receivership is an administrative proceeding. The financial institution's assets are not under the direct control of a court. Therefore, the CSED for the financial institution is not extended during the period that the FDIC is the receiver for the insolvent financial institution.

Notification. Form 56-F, Notice Concerning Fiduciary Relationship of Financial Institution, is the only form the IRS should accept as notice of the FDIC Receivership. In reference toIRC 6402(k) and IRC 6903 , send Form 56-F to the Internal Revenue Service Center where the financial institution for whom the fiduciary is acting files its income tax return. For purposes of IRC 6036, send Form 56-F to the Advisory Group Manager of the area office of the IRS having jurisdiction over the person for whom you are acting. Until the Form 56-F is revised, the Advisory Group Manager should forward the form to:

Internal Revenue Service

Insolvency,

MS 5024 DAL

Dallas, TX 75242

The IRS should not honor an informal notice from the FDIC, such as an email to SBSE Collection employees, as the equivalent of a Form 56-F.

Adding the case to AIS. Caseworkers must add the FDIC receivership cases to AIS, inputting "RC" in the chapter field on the Taxpayer Screen on AIS. For easy identification of the FDIC cases, the caseworker must select "FDIC" from the drop down menu in the "Classification" field on the Taxpayer Screen when adding the case to AIS. The name of the failed financial institution should be added in the "Last Name" field on the Taxpayer Screen. The" First Name" field should show c/o FDIC. The address should be the address of the FDIC location administering the case. The FDIC information may be found using cc ENMOD on IDRS or from lines 9 through 13 of the Form 56-F.

Creating a Case Number. The FDIC administers these cases by the EIN of the insolvent financial institution and does not assign a case number to the proceeding. To add a case to AIS, a case number is required and must be created. Create a case number using the year of failure, the first 5 digits of the EIN of the insolvent financial institution, and FDIC. Enter the number in the court case number field on AIS in "YY-EINEI-FDIC" format. Do not include FDIC in the AIS case number field.

Manual Processing. IIP does not process receivership FDIC cases. The caseworker will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420), and inputting the TC 520 cc 84 manually on all balance due modules or on any module with a potential balance due. If there is no liability (actual or potential), the case should be closed as NL. No TC 520 cc 84 input will be required on the cases closed as NL.

Unfiled Returns. Unfiled returns should be requested from the FDIC. The Service should make IRC 6020(b) returns for returns not received by the deadline given to the FDIC. This may require issuing a summons for the 6020(b) information.

Bar Date. The deadline for filing a proof of claim is set by the FDIC and can be found on the FDIC website, http://www.fdic.gov. Use the hyperlink of the failed financial institution to obtain the deadline information as well as a copy of the FDIC proof of claim. The claim must be filed by the established deadline or the claim may be disallowed.

Proof of Claim. The proof of claim should be filed on Form RLS7214 found on the FDIC website. APOC will not compute the proof of claim in these cases. The caseworker must manually compute the claim. Penalties and interest should be computed to the date of the failure of the financial institution. Secured claims should be filed at full value. Instructions for completing and filing the proof of claim can be found on http://www.fdic.gov.

Case Files. In addition to AIS documentation, paper files must be kept for the FDIC cases. The files should contain notices, copies of claims, correspondence sent to or received from the receiver, and any other information pertinent to the case that cannot be maintained on AIS.

Refund Determination. When a Form 56-F is filed by the FDIC, the BMF Entity Campus is responsible for the input of the TC 971 AC 076 to IDRS. This creates a Savings and Loan Modular Refund Freeze on the MFT 02. LB&I and the campus administer the refunds on these cases. If an application for tentative carryback allowance (TCA) is filed with respect to the insolvent financial institution, Accounts Management follows the procedures in IRM 21.5.9.4.2.1, Carryback Applications/Claims from Financial Institutions in Receivership - Form 56-F Filed.

Payment Application. The distribution of payments to creditors in the FDIC cases is not mandated by statute. Information about the order of distribution of the specific case can be found on the FDIC website. Claims are paid in the order of priority:

Administrative expenses of the receiver

Deposit liability claims

Other general or senior liabilities of the institution

Subordinated obligations

Shareholder claims

Payment Posting. The FDIC should be instructed to mail payments to the Field Insolvency office where the case is assigned. The CIO will post payments received in error to the period with the most imminent CSED. The CIO will advise the field caseworker of payment receipt by phone or secure email. Designated payment code "03" should be used on the payment vouchers. The payment must be posted using the "Non Plan Payment" option from the "Payment Monitoring Menu" on AIS.

Case Closure. Once any TFRP issues or other IRS activity has been completed and the proof of claim has been acknowledged by the FDIC, the caseworker should initiate closing actions on the case. Balance due modules should be closed as uncollectible using the TC 530.

If the date the financial institution failed is prior to January 1, 1996, the case was previously administered by the RTC. The modules should be closed with a TC 530 cc 15.

If the date the financial institution failed is January 1, 1996 or later, the modules should be closed with TC 530 cc 10.

Counsel Guidance. Issues arising from the FDIC receivership proceedings that are not covered in this IRM should be discussed with Counsel. This is especially important when the FDIC is administering the assets of the failed financial institutions and the parent entity or related entity has filed a Chapter 11 or Chapter 7 bankruptcy case.

Assignment for the Benefit of Creditors (ABC)

Overview. An assignment for the benefit of creditors (ABC) is a state law proceeding that is speedier and less costly than a bankruptcy. It involves a voluntary transfer by a debtor of some or all of the debtor's property to an assignee. The assignee applies the assigned property or proceeds from the sale of that property toward payment of the outstanding debts. Generally, the assignment must be in writing, usually in a document conveying title from the debtor to the assignee. Most states apply the requirements of contract law for the assignment to be valid. The Field Insolvency operation is fully responsible for working ABCs.

Assignee. The assignee can be a person, persons, or an entity in trust. In general, the assignee's duties, powers and liabilities are those of a fiduciary.

Types of Assignments. The two types of ABCs are:

A general assignment of all or substantially all of the debtor's property

A partial assignment of only some of the debtor's property

State Laws. Generally, assignments are under the jurisdiction of a state court. If the court supervises the assignment, the proceeding may be handled as a receivership. (See IRM 5.9.20.3, Receivership Proceedings.) If the case is not handled as a receivership, the following applies:

"-AS" must follow the case number or judge's initials in the case number field on the AIS entity screen to identify the case as an assignment rather than a receivership

The proof of claim must state the kind of proceeding as "Assignment for the Benefit of Creditors"

The assignee may request a letter in lieu of a claim form.

Non-Judicial Assignment. The ABC may not be under court jurisdiction. If so, no stay against collection exists. When this is the case, Insolvency must immediately contact Counsel to determine if the Service will be a party to the ABC proceeding or will pursue collection administratively. Variations in state laws will affect what actions are in the best interest of the government.

Counsel Guidance. Issues arising from assignments for the benefit of creditors that have not been covered in this IRM should be discussed with Counsel.

Corporate Dissolutions

Overview. A corporation's existence is artificial and created by state law. State statutes provide for the creation of a corporation, the period of its existence, and the termination of its life. When a corporation's existence ends, the affairs of the corporation must be wound up, meaning debts must be paid and assets distributed. This process is referred to as a corporate dissolution.

Methods of Dissolution. Dissolution may be accomplished by non-judicial means, usually approved by the stockholders, or by judicial means, usually through a state court procedure. Among the ways a corporation may be dissolved are:

Expiration of the corporate charter

Voluntary surrender of the corporate charter by the stockholders

Involuntary dissolution of the corporate charter by the state, usually done to enforce a violation of state law

Corporate Dissolutions - Judicial

Judicial Dissolution. If difficulties arise during the liquidation of assets, payment of claims, or distribution of assets, or if state law requires, dissolution may be conducted in a court proceeding.

Usually the court appoints a receiver, liquidator, or other fiduciary who is charged with attending to the dissolution under orders of the state court.

The state court hears and determines all controversies arising during the course of the dissolution.

Stay from Collection. The Service cannot take collection actions against any property in the custody of the court. The CSED is suspended during the period the corporation's assets are in the control or custody of the court and for six months thereafter. IRC 6503(b).

Manual Processing. Advisors will be responsible for verifying TINs, reviewing status codes, addressing pending Exam actions (TC 420) taking necessary actions to avoid or correct stay violations, and inputting TC 520 cc 84 manually on all periods

TFRP Investigation. TFRP investigations will be conducted and assertions made as if the case were a Chapter 7 bankruptcy. (See IRM 5.9.6.15, Trust Fund Recovery Penalty.)

Unfiled Returns. Unfiled returns should be requested from the receiver or other fiduciary. The Service should make IRC 6020(b) returns for returns not received by the deadline given to the receiver. This may require issuing a summons for the 6020(b) information.

Proof of Claim. The proof of claim should be filed manually on Form 4490, unless the court or fiduciary of the court requests the claim be filed on another form or presented in letter format. APOC will not compute the proof of claim in these cases. The caseworker must manually compute the claim. Penalties and interest should be computed to the date of the court order establishing the dissolution proceeding. Schedules of assets and liabilities are not provided to the court and creditors, so secured claims should be filed at full value. The claim should be filed according to the requirements of the court or the agent of the court.

Counsel Guidance. Issues arising from corporate dissolutions that have not been covered in this IRM should be discussed with Counsel.

Corporate Dissolution - Non-Judicial

Non-Judicial Dissolution. If parties in interest can liquidate a corporation without court intervention, and if all parties and creditors feel they are being treated equitably, no need arises to conduct the dissolution under the guidance of a state court. A non-judicial liquidation is most often found where:

Sufficient money exists or can be generated to pay all corporate creditors; and

The value and disposition of the assets and the priority among claimants is not disputed.

Dissolution Conducted. The dissolution is usually conducted by the officers of the corporation who act in a fiduciary capacity.

No Stay. In a non-judicial corporate dissolution, a stay against enforced collection is not in force. However, revenue officers should consult Counsel before taking collection actions if they have questions about the Service's legal standing in doing so.

State Oversight. Most states with bulk sales laws have adopted Article 6 of the Uniform Commercial Code and require that:

The seller gives the buyer a list of creditors and the amounts owed to each of them;

The potential buyer to notify each creditor of the proposed sale; and

The notice include an inventory of sales items and the terms of the sale.

Failure to comply with the notice requirement renders the transfer ineffective as against creditors to whom no notice (or improper notice) was given.

Required Research. Revenue officers working in the Advisory function, will work all bulk sales. When the Service is advised of a bulk sale, the advisor assigned the case must research internal systems to determine if the seller owes taxes and take action as needed to ensure payment. If all pre-levy requirements have been met, the Service will issue a levy on the seller prior to sale or, if the sale is complete, the Service will levy on the proceeds.

Lien Rights. The table below explains the IRS' lien rights with respect to bulk sales:

The bulk sales law only require notice to "creditors" . If the IRS is not a creditor at the time of the transfer, the bulk sale law will not apply and the tax lien would not attach. Generally, the IRS would not be a creditor before an assessment is made.

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• REAL ESTATE

Violating Certain “Bad Boy” Guarantees Can Trigger Recourse Liabilities

• Partnership & LLC Taxation

The bad - boy guarantee is a typical arrangement in real estate loans. When a borrower takes a nonrecourse loan to purchase real estate, the lender can foreclose only on the real estate; it cannot go after the borrower. To reduce risk for the lender, these arrangements often contain a bad - boy guarantee.

The bad - boy guarantee is a promise by the borrower not to violate certain conditions, such as fraud and items related to bankruptcy. If the bad - boy guarantee is violated, the lender can go after the guarantor, meaning the loan becomes recourse. The question remains, however, whether a bad - boy guarantee changes the otherwise nonrecourse liability (shared by all partners) to a recourse liability (allocated to only the guarantor).

Sec. 752(a) provides that any increase in a partner's share of the liabilities of a partnership is considered a contribution of money by the partner to the partnership. Regs. Sec. 1. 752 - 2 provides that a partnership liability is a recourse liability to the extent that any partner bears the economic risk of loss for that liability.

Under Sec. 465(b)(6), notwithstanding any other provision of the Internal Revenue Code or regulations, a tax payer engaged in the activity of holding real property is considered at risk with respect to the taxpayer's share of any qualified nonrecourse financing that is secured by real property used in the activity. Qualified nonrecourse financing means any financing that is not convertible debt that is borrowed from a qualified person or federal, state, or local government or instrumentality, or is guaranteed by any federal, state, or local government with respect to the activity of holding real property and with respect to which no person is personally liable for repayment.

CCA 201606027

IRS Chief Counsel Advice (CCA) 201606027, released Feb. 5, 2016, concluded that a bad - boy guarantee could cause a nonrecourse real estate loan to be treated as recourse.

In the CCA, a managing member of a real estate partnership made bad - boy guarantees to a third - party lender when obtaining financing for property renovations and operations. In the CCA, the IRS determined that this guarantee was sufficient to treat the debt as a recourse liability for the managing member even though no events had occurred to trigger the guarantee. Because the debt was treated as a recourse liability of the managing member, the partnership's losses were allocated to the managing member, and none were allocated to the other partners. This allocation was contrary to the generally held interpretation of contingent guarantees, which is that the debt should not be allocated to the member until an event occurred to trigger the contingent guarantee. If the bad - boy guarantee did not result in recourse debt allocated to the managing member, the debt would have been treated as qualified nonrecourse real estate debt, and all partners would have shared in the partnership's losses.

AM 2016-001

Legal advice issued by IRS Associate Chief Counsel, Advice Memorandum (AM) 2016 - 001 , released on April 15, 2016, concluded that a partner's guarantee of a partnership's nonrecourse obligation that is conditioned on the occurrence of certain carve - out events will not cause the debt to fail to qualify as nonrecourse liability of the partnership (unless and until the event occurs and the guarantor becomes personally liable for the partnership debt).

The following bad - boy guarantees, also known as carve - outs , listed in AM 2016 - 001 , will not cause an otherwise nonrecourse liability to be treated as recourse for purposes of Sec. 752 until the contingency occurs:

• The borrower fails to obtain the lender's consent before obtaining subordinate financing or transfer of the secured property;
• The borrower files a voluntary bankruptcy petition;
• Any person in control of the borrower files an involuntary bankruptcy petition against the borrower;
• Any person in control of the borrower solicits other creditors of the borrower to file an involuntary bankruptcy petition against the borrower;
• The borrower consents to or otherwise acquiesces or joins in an involuntary bankruptcy or insolvency proceeding;
• Any person in control of the borrower consents to the appointment of a receiver or custodian of assets; or
• The borrower makes an assignment for the benefit of creditors or admits in writing or in any legal proceeding that it is insolvent or unable to pay its debts as they come due.

Conditions other than those listed must be analyzed on a case - by - case basis. AM 2016 - 001 states:

The "nonrecourse carve - out " provisions should be interpreted consistent with that purpose and intent in mind. Consequently, because it is not in the economic interest of the borrower or the guarantor to commit the bad acts described in the typical "nonrecourse carve - out " provisions, it is unlikely that the contingency (the bad act) will occur and the contingent payment obligation should be disregarded under [Regs. Sec. ] 1. 752 - 2 (b)(4).

Regs. Sec. 1. 752 - 2 (b)(4) provides that a payment obligation is disregarded if, after taking into account all the facts and circumstances, the obligation is subject to contingencies that make it unlikely that the obligations will ever be discharged. If a payment obligation would arise after the occurrence of an event that is not determinable with reasonable certainty, the obligation is ignored until the event occurs.

Under AM 2016 - 001 , the existence of a bad - boy guarantee should not cause nonrecourse or qualified nonrecourse liabilities to be treated as recourse to the guarantor until the identified event occurs to trigger the guarantee. Although CCA 201606027 was not withdrawn, the IRS appears to have corrected its decision in AM 2016 - 001 . Partnerships will need to analyze bad - boy guarantees not listed in AM 2016 - 001 to determine how the liabilities should be allocated on the partnership return.

Editor Notes

Howard Wagner is a director with Crowe Horwath LLP in Louisville, Ky.

For additional information about these items, contact Mr. Wagner at 502-420-4567 or [email protected] .

Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.

Recent developments in Sec. 355 spinoffs

The research credit: documenting qualified services, income tax treatment of loyalty point programs, tax court rules cancellation of debt is part of gain realization, listing of reportable transactions under the apa.

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

PRACTICE MANAGEMENT

CPAs assess how their return preparation products performed.

assignment for benefit of creditors

Primary tabs.

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 transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

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Receiverships, ABCs and Bankruptcy: A Comparison

Introduction

For the past several decades, when commercial borrowers, their partners and creditors have faced a deadlock or a default, they have preferred resolution of disputes in the Bankruptcy Courts. The Bankruptcy System has provided extraordinary remedies, specialized commercial judges, and an expedient, cost-effective forum for relief.

However, the Bankruptcy System has become expensive, with Bankruptcy attorneys charging hourly rates near the upper end of all lawyers’ fees. The system has become bureaucratized; the advent of the United States Trustee’s system has increased the number and cost of required filings, meetings, and court hearings. The bankruptcy statute, with its unique remedies, has been expanded with special interest sections and marginalized by a hostile Congress. Relief for debtors — consumers, individuals beset by commercial problems, single asset real estate entities, and small businesses — no longer seems to be the focus of a system more intent on procedure and suspicion.

A review of the recent case law reveals an institution, refocused by the Executive Branch, Congress, and the Supreme Court. The Court and its trustees seem to no longer be able to serve their traditional responsibility of providing a “fresh start.” Instead, as the credit industry has convinced Congress, the Bankruptcy System is left to raise the bar, and the cost, for relief, while a populace of financially troubled consumers and businesses look elsewhere.

This outline examines two debtor-creditor procedures: receiverships and assignments for the benefit of creditors .

The laws are less comprehensive and local in nature; they are however cheaper, often working with alternative dispute resolution procedures, and are largely administered by the parties and their attorneys with the imprimatur of a laissez-faire judicial system. Bankruptcy remedies are, in certain situations, still unique and this article details situations where the Bankruptcy Court is still preferable to other remedies.

Receiverships

Receiverships are most common in real property foreclosure situations. Pending trustee’s sales or judicial foreclosures, mortgage lenders may at times desire their collateral be placed in the hands of independent caretakers. Provisions for receivers are routinely included in trust deeds and mortgages. Some states’ laws now make clear that the remedy of receivership can be the subject of a court complaint, without the plaintiff needing to include substantive counts for judicial relief. This permits the appointment of a receiver, while a party seeks non-judicial relief, e.g., a non-judicial foreclosure like a trustee or UCC sale.

Receivers can also play a valuable role in deadlocked or dissolving business entities. Complaints seeking dissolution or division of assets often include a second count praying for the appointment of a receiver to hold the assets being liquidated or divided or to even accomplish the monetization and distribution of assets.

Private, as well as public parties, may use receiverships where there are allegations of fraud, breach of fiduciary duties, or Ponzi schemes. Receiverships can assist victims in preserving assets while criminal or civil fact-finding is on-going.

Receiverships have been used increasingly in the recent downturn in the economy, both in real estate and business cases. Lenders are allowing borrowers additional time to raise capital or sell assets, so long as the collateral is being overseen by a fiduciary. Defaulting borrowers and their lenders are agreeing to receiverships so that feasibility studies and appraisals can be accomplished by industry experts, feasibility consultants, brokers and valuation experts. Equipped with independent analysis, the parties can proceed cooperatively or adversely as they choose.

Receiverships are not bound by the timelines imposed by the bankruptcy laws or judges. Cases may remain pending while the parties evaluate a turbulent market, allow the market to steady, or while the parties search for a business solution. Bankruptcy relief remains an option should the parties’ interests diverge precipitating foreclosure, litigation, or funding termination.

Assignment for the Benefit of Creditors (ABC)

An assignment for the benefit of creditors (ABC) is a voluntary transfer by a debtor of all of the debtor’s non-exempt property to an assignee in trust to apply the property for, or (more usually) to liquidate the property and pay its proceeds to, the debtor’s creditors. The assignment procedure is treated much like a probate/receivership, and the assignee has the same relationship with the court as a court-appointed receiver. The assignee may bring actions on behalf of the assignor and creditors for fraudulent conveyances, and can have the status of a lien creditor, generally entitling the assignee to avoid unperfected security interests in the debtor’s property .

An ABC provides that an insolvent debtor may assign all of his assets to a third party designated as an ‘assignee’ for the benefit of his creditors. Any attempted preference, in the assignment, of one creditor or creditors of the assignor, is fraudulent and without effect. Any creditor who consents to the assignment is entitled to share in the assets so assigned, and by so consenting agrees to take his proportional share of the assets and thereby discharge the debtor from all further liability.

However, only consenting creditors are allowed to share in the assets and non-consenting creditors retain their cause of action for their total indebtedness against the debtor but are not allowed to share in the distribution of assets. An assignment for the benefit of creditors may be effective only to a portion of the debtor’s creditors, or to all. The benefits of the assignment flow only to those creditors who consent to the arrangement, and they must release their claims when paid their proportionate share of the estate. Where a debtor executes an assignment for the benefit of creditors, creditors retain the right to file an involuntary bankruptcy petition after the assignee was appointed or took possession.

A debtor’s petition for Assignment for Benefit of Creditors is sometimes filed with the Court of the county where the debtor’s principal place of business is conducted and the Court has the same jurisdiction over the insolvent estate and the assignee as that of a receiver appointed by the court. Following the filing of Creditor’s Consent and Claims, the assignee is empowered to reduce the debtor’s assets to cash, pay the consenting creditors’ proven claims proportionately, receive discharges from these creditors and terminate the assignment ABC’s have application in small business settings when the creditor body is generally aware of the debtor, its assets, and the reason for failure.

The stigma of bankruptcy can be avoided; the parties can pick their own “Assignee”, eliminating the involvement of a trustee or bankruptcy judge. Disclosure of assets and creditors is necessary and specifically required, but the other documentation and requirements of a bankruptcy petition are avoided. The expense of an Assignee can exceed the cost of a bankruptcy filing, though the tradition of appointing an “industry elder” as the assignee can mitigate this administrative cost and maximize return to creditors in an insolvency.

While some state statutes specifically provide that actions taken pursuant to common law Assignments are void, they are still available to a debtor and a body of creditors who participate and where creditors accept “payment in full” upon distribution of proceeds.

Most debtors seeking bankruptcy relief have “corporate creditors” who are unlikely to participate in an ABC. Situations may arise in the construction industry or similar fields where familiarity between the Assignor and the creditors would allow an ABC, and permit a debtor to avoid the “means-testing” and other hurdles of a bankruptcy discharge.

Unique Bankruptcy Remedies

Automatic stay.

A bankruptcy filing results in the issuance of the automatic stay. This terminates all collection proceedings, all collection attempts and all litigation. When you absolutely, positively have to put a stop to litigation, a foreclosure or garnishment, there is nothing as effective as the automatic stay in bankruptcy.

Sales Free and Clear of Liens, Claims and Encumbrances

The Bankruptcy Code uniquely allows a bankruptcy court to sell a property, passing clean title with all liens, claims and encumbrances attaching to the proceeds. Again, where there is a sale of troubled property involved in litigation or property subject to title disputes, the Bankruptcy Court can order and approve the property’s sale with liens and claims against the property transferred to the proceeds of the sale. 

Rejection of Leases or Burdensome Contracts

When a business is subjected to a burdensome lease or an executory contract that is interfering with its continued operation or its reorganization, the Bankruptcy Code uniquely allows such a lease/contract to be rejected. The non-debtor party is given a “pre-petition” claim against the business and the debtor is excused from performance on the lease or contract.

Plans of Repayment

The Bankruptcy Code permits reorganization plans that can restructure payment terms, interest rates and other loan provisions. A plan of reorganization is comprehensive, in that it can propose changes in repayment terms for one or all of the debtor’s obligations. The repayment terms must be voted on by the creditors, but can be approved by the court over the rejection of certain creditors, so long as the repayment plan is fair and equitable and does not discriminate unfairly against a particular creditor or creditors.

Debtor-in-Possession Financing

When a troubled business or project needs new financing, the provisions of the Bankruptcy Code permit this to be done in such a manner that provides comfort to “DIP Lenders.” The ability of the bankruptcy court to approve such loans and the security for such loans, including priming liens, even over creditor dissent, is a unique bankruptcy remedy. 

Dealing with the Dishonest or Unscrupulous Debtor

Creditors or business partners dealing with an unscrupulous or dishonest individual often have greater comfort when operations are placed under the protection of the bankruptcy laws. The specter of federal, criminal prosecution and the oversight provided by the United States Trustee and bankruptcy judges can often normalize operations. Many lenders finding their borrowers in a default situation are more comfortable when their borrower is required to account to the bankruptcy court and obtain court authorization for all extraordinary actions.

Familiarity

To some extent, people, parties and businesses know what to expect from bankruptcy. Commercial entities generally have procedures and protocols to deal with bankruptcies. Workouts, receiverships, or assignments for benefit of creditors are often perceived as secretive, foreign proceedings. When dealing with large numbers of creditors, bankruptcy and its familiar procedures are also at times more manageable than other remedies.

Bankruptcy laws continue to provide certain remedies and procedures that cannot be found anywhere else. That being said, business parties may not always be willing to turn over their financial fates to a bankruptcy judge. A less intrusive receivership proceeding may, in certain instances, be more desirable. When a developer finds himself upside down in a project and a handful of creditors are owed money and can look to the build-out of the project, an assignment for the benefit of creditors may be a quicker, less expensive and more appropriate workout tool, than a bankruptcy case.

An informed and trusted commercial real estate broker can often serve as a receiver or as an Assignee in an assignment for benefit of creditors. Such state court remedies avail themselves of the expertise and local knowledge that a broker may have about a particular situation. In other instances though, a bankruptcy proceeding actively overseen by an independent judge may be preferable. This information is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney .

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United States: ABC: Assignments For The Benefit Of Creditors

What's an ABC?  If you ask ChatGPT, “ABC” is an acronym that can have multiple meanings, depending on the context—for example, referring to the alphabet. 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. Although the ABC process has existed for more than a century, it now has increased interest in certain market environments due to its speed, flexibility, and comparatively lower expense than a bankruptcy proceeding.

When Does an ABC Make Sense?  As a potential buyer, you want to assess potential legal risks if a target's liabilities exceed (or are reasonably expected to exceed) its assets. In such a situation, third parties may later seek to assert that the purchase price you paid for the assets of the target was below fair value and to unwind the transaction or impose continuing liability under successor liability and fraudulent conveyance theories, among others. Unlike a direct asset purchase in such circumstances, in an ABC it's less likely that individual creditors will bring claims against you on fraudulent transfer, successor liability, or other theories because the assets are purchased from an independent fiduciary through a legally recognized wind-down process rather than directly from the distressed company. As a company in distress, you may want to avoid the length and expense of the federal bankruptcy process.

The Basics.  The specifics of the ABC process vary by state, but it generally involves four main steps, as follows:

• A company authorizes (through board and any necessary shareholder consent) the shutdown of its operations and assignment of all of its assets to a third-party assignee for the benefit of the company's creditors. The assignee, who is functionally similar to a bankruptcy trustee, is an independent fiduciary selected by the company and typically has experience in insolvency matters, the relevant industry, or both. In many states, such as California, Texas, and Illinois, the ABC process ordinarily is initiated and undertaken with little or no court involvement. Other states, such as Delaware and New York, provide for varying levels of court involvement with the ABC process, though generally substantially less than a bankruptcy proceeding. Once the ABC commences (which includes the appointment of the independent fiduciary), the company's board has no further role in the ABC process.
• The assignee provides notice of the assignment to creditors and other parties in interest and requests submission of claims within a certain time. The time period in which notice must be given and claims must be filed varies by state and is based on specific statutory requirements (such as in California) or, in the absence of specific statutory requirements, may be based on local practice or custom (such as in Delaware and Illinois). 
• The assignee liquidates the assets, seeking to maximize the value it obtains. In some cases, the assets are sold as a going concern shortly following commencement of the ABC, pursuant to definitive documentation that has been negotiated with the proposed buyer prior to commencement of the ABC. The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods. 
• The assignee distributes the net proceeds of sale to the company's creditors in accordance with priorities under applicable law.

The Buyer's Perspective.  As a potential buyer, you may already be in discussions with the target company prior to the ABC process or you may become involved through the assignee. Although there are some similarities with a Section 363 sale (like a shorter period for due diligence and the potential to lose key personnel through the process), the ABC process differs in several notable respects from a bankruptcy proceeding: 

• The commencement of an ABC does  not  (i) give rise to an automatic stay of collection or enforcement actions against the company or its property, (ii) prevent creditors from attempting to commence an involuntary bankruptcy case against the company, or (iii) invalidate contractual provisions allowing for counterparties to terminate or modify a contract. 
• Unlike a sale conducted under Section 363 of the Bankruptcy Code, the assignee generally cannot sell assets “free and clear” of liens and security interests—if you are buying assets subject to a security interest, the secured party will need to be paid in full or agree to release its lien. Some states that provide for judicial approval of a sale, such as Florida and Minnesota, may provide some ability for an assignee to obtain relief similar to a “free and clear” sale order in an ABC process. 
• Anti-assignment provisions in leases or contracts cannot be overridden. So, any consents required under contracts that the buyer wants to assume will need to be obtained. 

How We Can Help.  We have successfully navigated the ABC process for our clients in a variety of states and industries, including technology, finance, chemicals, and manufacturing and maximized the advantages that acquiring assets through an ABC can provide to buyers. Although sales are usually done on an “as-is, where-is” basis, with limited ability to obtain operational or asset-level representations and warranties and without any indemnity rights in favor of the buyer, we have advised buyers in transactions where additional rights have been obtained (without the use of representation and warranty insurance).

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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• Pursuing Assignments for the Benefit of Creditors
• Pursuing Assignments for the Benefit of Creditors Overview
• Bankruptcy and Restructuring
• Security Agreements and UCC Filings in Bankruptcy
• Acquiring Assets from Bankruptcy Estates and Distressed Borrowers
• Workout, Refinancing, and Restructuring Opportunities Outside of Bankruptcy
• Representing Creditors in Bankruptcy Court and Pre-Petition Negotiations
• Debtor-in-Possession Financing and Cash Collateral
• Preventing Debtor Bankruptcy Through Liquidation, Restructuring, and Reorganization
• Proofs of Claim
• Estate Disputes Over the Treatment of Differing Creditor Claims, Transfer Avoidance, Breach of Fiduciary Duty, and Alter Ego Liability
• Reconciling Creditors Committee Interests to Avoid Litigation and Expedite Recovery
• Litigating Parasitic State Court Claims on Behalf of the Estate
• Adversary Proceedings to Set Aside Preference Payments and Fraudulent Transfers
• Creditors’ Committees and Trustees
• Defending Against Involuntary Bankruptcy Petitions
• Advising Insolvent Companies on Fiduciary Duties and Winding Down
• Establishing a Restructuring Agenda
• Recovering from Non-Debtor Entities
• Filing Involuntary Bankruptcy Petitions
• Foreclosure or Repossession During Bankruptcy
• The Impact of Commercial Reorganization on Creditors
• Assigning Bankruptcy Claims to Claims Traders
• Trade Supplier Relations with Financially Distressed Customers
• Creditor’s Committees and Trustees
• Adversary Proceedings in Bankruptcy
• Relief from the Automatic Stay
• Bankruptcy Defense: Fraudulent Transfers and Preferential Payments

What are assignments for the benefit of creditors?

Assignments for the benefit of creditors (ABCs) are an alternative to formal bankruptcy proceedings. Under Florida law, an ABC is a voluntary, out-of-court process where a debtor transfers their assets to an assignee, who then liquidates these assets and distributes the proceeds to the debtor’s creditors.

For example, a struggling business in Florida may pursue an ABC instead of filing for bankruptcy. This choice can be advantageous because it is often faster, less expensive, and less public than a formal bankruptcy filing. The business would transfer its assets to an assignee responsible for selling these assets and distributing the proceeds to the creditors following the priorities established by Florida law.

Need a bankruptcy law advocate? Schedule your consultation today with a top bankruptcy and restructuring attorney.

Which Florida laws and regulations apply to assignments for the benefit of creditors?

The primary source of law governing ABCs in Florida is Chapter 727 of the Florida Statutes . This chapter outlines the process for initiating an ABC, the assignee’s role, and the creditors’ rights. Additionally, the Florida Rules of Civil Procedure may apply to certain aspects of an ABC, such as serving notice to creditors and managing creditor claims.

Federal laws, such as the Bankruptcy Code , generally do not apply to ABCs because they are state law alternatives to bankruptcy. However, it is essential to note that federal laws may still impact an ABC in certain situations, such as when a debtor’s assets are subject to federal tax liens or other federal claims. In these cases, debtors must consult a knowledgeable attorney to navigate the interplay between state and federal laws.

How do assignments for the benefit of creditors connect to the bankruptcy process?

The connection between pursuing an ABC and bankruptcy legal services for debtors lies in their shared goal of providing relief to financially distressed individuals or businesses. Both processes involve the liquidation of assets and the distribution of proceeds to creditors. However, ABCs are generally less formal, less expensive, and more private than bankruptcy filings, making them an attractive option for debtors seeking to avoid the stigma and complexities associated with bankruptcy.

In an ABC, a debtor voluntarily transfers their assets to an assignee who liquidates them and distributes the proceeds to creditors. This process differs from a bankruptcy proceeding, where a court-appointed trustee oversees the operation. Furthermore, while strict federal rules and procedures bind bankruptcy cases, ABCs offer more flexibility, allowing parties to tailor the process to their needs.

When a set of facts is appropriate for bankruptcy services, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized bankruptcy advocacy, please contact our office to set up your initial consultation.

What are the prerequisites for debtors to pursue assignments for the benefit of creditors?

Consider the following:

• Voluntary action: The debtor must willingly initiate an ABC, as this process is a voluntary alternative to bankruptcy.
• Valid assignment: The debtor must properly execute and deliver the assignment to a qualified assignee, who is often an attorney, accountant, or insolvency professional.
• Recording the assignment: The assignee must record the assignment in the county’s public records containing the debtor’s principal place of business.
• Filing notice: The assignee must file a notice of the assignment with the circuit court clerk in the county where the debtor recorded the assignment.
• Notifying creditors: The assignee must provide written notice to all known creditors of the debtor within 20 days of the assignment, informing them about the ABC process and their rights.

By satisfying these requirements, the debtor can effectively pursue an ABC in Florida, which allows for a more personal and flexible approach to resolving financial difficulties compared to bankruptcy.

Please contact our office to set up your initial consultation to see what forms of legal protection and advocacy may be available for your unique situation.

Frequently Asked Questions

• Can a debtor choose any person as an assignee for an ABC?

No, not just anyone can be an assignee. The assignee must be a disinterested person who is not an insider of the debtor and is qualified to manage the debtor’s assets and affairs. Assignees are typically professionals, such as attorneys, accountants, or insolvency experts.

• Does an ABC in Florida prevent creditors from pursuing legal action against the debtor?

Unlike bankruptcy, an ABC does not automatically halt legal actions by creditors. However, creditors may agree to a standstill or moratorium on legal actions while the ABC process is ongoing. This outcome may depend on the specific circumstances and the willingness of the creditors to cooperate.

• How does an ABC affect the debtor’s credit rating?

Although an ABC may be less public and stigmatizing than bankruptcy, it can still harm the debtor’s credit rating. Credit reporting agencies may treat an ABC as a similar event to a default, which can lower the debtor’s credit score and make it more difficult for them to obtain future credit or loans. However, the impact on the credit rating may vary depending on the specific circumstances of the case and the debtor’s credit history before the ABC. Therefore, debtors must work closely with financial advisors and credit counselors to rebuild their credit after an ABC process.

Have more questions about how bankruptcy services could positively impact your business operations and relationships?

Crucially, this overview of assignments for the benefit of creditors does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation .

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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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10  Receiverships and Assignments for the Benefits of Creditors

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• Published: March 2007
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This chapter discusses the avenues for liquidating a failed business outside of bankruptcy. While liquidations involving companies of any significant size are typically accomplished through bankruptcy, state, and federal equity receiverships and assignments for the benefit of creditors provide alternatives for smaller more localized liquidations. These approaches are more informal and less restrictive than bankruptcy. The roles of the assignor and receiver as liquidator, including duties, costs, powers, and compensation are reviewed. The right of the assignor or receiver to pursue actions under the applicable state Uniform Fraudulent Transfer Act is also discussed.

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