Assignments For The Benefit Of Creditors
Introduction and General Comments
An assignment for the benefit of creditors is a state court-administered proceeding somewhat similar to a Chapter 7 bankruptcy proceeding whereby an individual, a partnership, or a corporation in financial difficulty is able to liquidate its assets in an orderly manner and pay its creditors a pro-rata share of their individual claims. However there are significant differences between an assignment for the benefit of creditors, a state court receivership or a bankruptcy proceeding, that must be taken into account when an attorney is advising a client in financial distress. These differences will be highlighted in this presentation.
An Assignment is voluntary and is commenced by the “assignor” executing a formal “Deed of Assignment” in favor of an “assignee”. In substance it is similar to a deed of real estate and must be recorded in the county clerk’s office of the county of the assignor or the clerk of the Superior Court. The contents of the Deed of Assignment should confirm to N.J.S.A. 2A:19-4, and contain an inventory of assets. (See 44 New Jersey Practice Series Form 3.111) The deed effectively transfers all the assets of the assignor to the assignee who is empowered to liquidate the assets after receiving court approval, for the best prices available, at auction, or otherwise, in the assignee’s discretion, all, however for the benefit of the creditors of the assignor who will receive their pro-rata dividend depending on the amount of their claim, after payment of administration expenses.
History of Assignment for the Benefit of Creditors.
Assignments have an interesting history. They originated in the Middle Ages and were utilized by merchants who belonged to Guilds. When a merchant found himself in financial trouble he would voluntarily turn over all his assets to a member of the Guild who would make arrangements for sale and disposition of the property and pay the debtor’s creditors a fair share of the proceeds. The concept then was that members of Guild were the most knowledgeable people in the industry and could produce the most at a sale. For example, if the debtor was a jeweler, a furrier, or a cabinet maker, the Guild members who knew the market for the products would be able to get the best prices. The assignee would be a member of the Guild and the members would have confidence in that person to fairly and effectively liquidate the debtor’s assets.
The concept of a voluntary assignment was retained through the ages and ultimately was codified by statute. In New Jersey assignments are governed by N.J.S.A. 2A:19-1 et seq. The interesting thing about the codification of the common law is that the law retained the provision that the assignor can select his own assignee. In a state court receivership or a bankruptcy preceding the person designed to liquidate the assets is a “Receiver” or “Trustee”, and in each of these cases the debtor has no say in who is to be designated to liquidate the assets. The court makes the decision. This is an important concept to take into account when an attorney is considering what avenue to recommend when advising his/her client who is in financial difficulty.
Some General Observations
An assignment is rarely appropriate for an individual because, unlike a bankruptcy proceeding, the assignor does not receive a discharge. Accordingly, unless the attorney for the debtor was able to negotiate a release of the creditor’s claims in advance, and an agreement to the assignment, this avenue would not be appropriate. However, it should be mentioned that since Assignments generally proceed much quicker, more efficiently, and often produce better results and a higher dividend for creditors, in a given case, especially where the debtor has had a good relationship with his creditors the attorney should consider seeking the approval of the creditor body for the assignment and obtain agreement in writing from each of the creditors to accept the dividend in full satisfaction of their claim.
When the attorney for the debtor decides to take the assignment route he should select an attorney as assignee who is familiar with liquidation proceedings, knows how to protect the assets pending their disposition by sale or otherwise, and knows experienced appraisers and auctioneers who are familiar with the markets, who will properly appraise the assets and advertise the assets in a manner designed to command the best prices.
Assignee’s Powers and Duties & Administration of the Estate
Execution of the deed vests in the assignee legal title to all the assignor’s real and personal property, including property located outside of New Jersey. In effect, the assignee stands in the shoes of the assignor and has the right to commence actions on behalf of the estate, settle claims and take any other action relative to the handling of the assets that the assignor could have done had he/she not make the assignment. The assignee will immediately inspect the premises of the debtor, obtain insurance if necessary to protected the assets, change locks at the debtor’s place of business, deal with the utilities, the landlord, arrange with the postmaster for forwarding mail to the assignee, and in general do all that is necessary to protect the assets, just as the assignor would have done. All these steps are taken on an emergent basis, another reason why the debtor’s attorney should select an experienced attorney knowledgeable about the process of dealing with insolvent estates, someone who deals with locksmiths, landlords, impatient creditors, taxing authorities, lien holders, all clamoring for payment of their overdue bills. When necessary the assignee will seek court approval for retention of experts, such as accountants, appraisers, and auctioneers, and any other experts the assignee deems necessary for the proper administration of the estate.
The assignee will give proper notice to the creditors of the estate and advise them that their claims must be filed by a certain date or be barred from participation in any dividend.
The assignee with meet with the assignor for the purpose of familiarizing himself with the nature of the business, determining what causes of action should be investigated, as well as the validity of claims filed by creditors.
In unusual circumstances it might be advisable to continue the assignee’s business for a limited period of time either to wind down certain operations, collect receivables, or some other valid reason. The assignee must receive formal approval from the court in order to take this step.
After taking possession of the debtor’s property and making a determination of the extent of the assets of the debtor’s estate, the assignee, before disposing of the debtor’s property by private or public sale, must immediately conduct proper searches to learn whether there are any valid liens on the property. This search includes a title search if real estate is involved, a Uniform Commercial Code search to see if there are any encumbrances on inventory or accounts receivable. Tax searches and a judgment search must be made to see if there are any private or governmental liens on the debtor’s property. Having conducted all the proper searches the assignee should promptly proceed to liquidate the assignor’s property and convert it to cash, terminate any leases and surrender the property to the landlord.
It is common to liquidate the assets of the estate at a public auction, and the assignee will take steps to select an appraiser, and auctioneer that he is familiar with, and advertise the date of the public sale of assets and give notice to the creditors. On occasion a private sale might be appropriate, but in this instance court approval should be obtained and notice should be given to creditors. These are all steps which are, subject to court sanction, within the powers of the assignee.
Other powers of the assignee are recovery of fraudulent transfers and preferential transfers. There are significant differences in the time periods involved here that are different from the bankruptcy statutes and must be taken into account by the assignor’s attorney when deciding if an assignment is appropriate for the client. For example, the preference period under the assignment statute is 120 days, one month longer than that provided for in the Bankruptcy Code. Another important difference between an Assignment and a Bankruptcy proceeding is the limit of the recovery of former employees for unpaid wage, benefit, or vacation time. Under the Bankruptcy Code an employee may recover up to $11,725.00 for any unpaid wage claim; the limit under the Assignment Act is $400.00 These two factors alone might be important consideration in deciding which proceeding to employ.
Assignee’s Final Account and Procedure
Once all assets have been liquidated, all claims examined and approved, the assignee makes a final accounting with the court, on notice to creditors and the procedure is not essentially different from that in a state court receivership or a bankrupcty court, except the forms and the time periods are different. If the court approves the accounts, formal papers are filed to complete the case and creditors are given their dividends. The Surrogate of the county examines and approves the final accounting of the assignee.The judge assigned to the case awards fees to the assignee from the proceeds of the sale of assets. After payment of dividends to the creditors this concludes the case.
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