Assignments for the Benefit of Creditors (“ABCs”) are state law alternatives to bankruptcy that trace their roots back to English common law. ABCs are used frequently in some states, such as California, Florida, and Illinois, and infrequently or rarely in other states, including Virginia. While similar to Chapter 7 bankruptcy proceedings, ABCs must be approached with care due to the lack of formality that governs the administration of the assignor’s assets.

What is an ABC?

In concept, a corporate ABC is relatively straightforward. A distressed entity – the assignor – enters into an agreement with an assignee. The assignee, usually a professional fiduciary charging a fee for their services, agrees by contract to take possession and control of all of the assignor’s assets. Where such a transaction would normally include both the assignor’s assets and liabilities, in an ABC the assignee is shielded from creditor’s claims by operation of either common law or, in most states (including Virginia), statute. The assignee is then free to liquidate the assignor’s assets and distribute them to creditors.

Virginia’s ABC statutes are divided into two articles. Article 1, titled "Assignment of Property," addresses the assignment of general property of an assignor that is a corporate entity (Va. Code Ann. §§ 8.01-525.1 to 8.01-525.5). Article 2, titled "Assignment of Salary, Wages, or Income," addresses an ABC in the context of the salary, wages, or income of an individual (Va. Code Ann. §§ 8.01-525.6 to 8.01-525.12). This article focuses on Article 1.

How is an ABC administered?

In Virginia, a corporate ABC starts when a deed of assignment is filed and recorded with the clerk of court in the county or city where the assignor’s property is located. There are no official forms for ABCs, nor are there any specific rules regarding how to arrange the attached schedules.

After the assignment is filed, the assignee may sell the assigned assets at either a private or public auction after giving notice to creditors. The Virginia ABC Statute specifically requires the assignee to provide notice at least ten days before the sale to each of the creditors named in the deed by certified mail. The assignee has broad powers to administer the liquidation of the assignee’s assets and can hire professionals, such as auctioneers and appraisers, to assist this effort.

Claims are paid under a loose priority scheme. Creditors with liens or preferences created by law are favored, and consensually secured creditors are entitled to be paid the value of their liens (if sufficient assets exist). Under-secured creditors and unsecured creditors receive a pro-rata distribution of any remaining proceeds.

Finally, the assignment concludes as informally as it started – the assignee simply needs to comply with the relevant portions of the assignment deed, while the assignor dissolves as usual under Virginia law.

What Do Creditors Need to Know?

Creditors that receive notice of an ABC must act to protect their interests. The informality that comes with an assignment presents unique challenges for creditors.

One issue on which creditors should focus is the choice of assignee. In bankruptcy court, a court vetted trustee may administer a business’ reorganization or liquidation. Assignees are under no such scrutiny, nor are they required by statute to report settlement or asset distribution requirements in a uniform way. One option for creditors that are unhappy with the assignee is to utilize a statutory mechanism for removing that assignee. In Virginia, a majority of creditors in number and amount may petition the circuit court in the county where the deed of assignment was recorded to appoint a substitute assignee. Importantly, this provision can be used to ensure that the assignee is paid no more than the “reasonable” fee to which they are entitled, and to keep tabs on the fees paid to the professionals the assignee chooses to assist their administration.

Additionally, assignees are not provided with the avoidance powers that are conferred upon a bankruptcy trustee. The onus is therefore on creditors to pursue possible fraudulent transfers made by the assignor prior to the assignment. Secured creditors must also take action, informal or otherwise, to ensure that their collateral is preserved if possible.

Finally, creditors are not guaranteed notice of the ABC by statute, though in practice such notice is generally sent by the assignee. While a creditor can challenge the claims of other creditors, such a challenge must be made within 30 days after the deed is recorded. It is therefore incredibly important for creditors and potential creditors to periodically check in on their debtors, and to enforce notice provisions of any contract.

Conclusion

ABCs are a somewhat obscure and opaque state law creation that allow for businesses to discharge debts quickly and informally. While their efficiency and cost effectiveness cannot be disputed, in Virginia, the general lack of statutory guidance and court oversight can create headaches for creditors. If you need assistance dealing with these challenges, please contact Anthony Tamburro (atamburro@setlifflaw.com) at 804-377-1268 or Steve Setliff (ssetliff@setlifflaw.com) at 804-377-1261.