1. Assignments for the Benefit of Creditors
Alternative to Formal Federal Bankruptcy Proceedings
May 30, 2013
Featuring:
David S. Kupetz, Member
SulmeyerKupetz, P.C.
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2. David S. Kupetz, a member of SulmeyerKupetz, specializes in troubled transactions, crisis avoidance
consultation, workouts, restructurings, reorganizations, bankruptcies, receiverships, assignments for the
benefit of creditors and other non-bankruptcy insolvency proceedings. He represents debtors (in
restructurings and workouts and in chapter 11 reorganization cases), secured creditors, unsecured
creditors' committees, assignees for the benefit of creditors, buyers/sellers of businesses/assets in
distressed circumstances and other entities in insolvency and bankruptcy situations.
A sampling of clients represented by Mr. Kupetz includes: Care Enterprises, Inc. (debtor in possession);
Ocean Pacific Sunwear, Ltd. (debtor in possession); County of Los Angeles (creditor); General Electric
Capital Corporation (secured lender); Litton Industries, Inc. (creditor); Boston West, LLC (Boston
Markets) (debtor in possession); ExxonMobil Corporation (creditor); Honda Trading Co. (creditor);
CKE Restaurants (creditor); San Diego Television, Inc. (debtor in possession); South Bay Pizza, Inc.
(debtor in possession); Transgo Corp. (unsecured creditors’ committees); Aura Systems, Inc. (out-of-
court unsecured creditors’ committee); Snow Valley, LLC (debtor in possession); Gardenburger, Inc.
(debtor in possession); eStyle, Inc. (debtor in possession); American Home (debtor in possession); No
Fear Retail Stores, Inc. (debtor in possession); and Ventura Port District (chapter 9 debtor).
His many articles on bankruptcy-related subjects have been published in The Business Lawyer,
Commercial Law Journal, IDEA: The Journal of Law and Technology, Journal of Bankruptcy Law and
Practice, The Annual Survey of Bankruptcy Law, The Urban Lawyer, The Banking Law Journal, Los
Angeles Lawyer, California Lawyer, Commercial Law Bulletin, Los Angeles Daily Journal, The
Secured Lender, The Journal of Private Equity, The Journal of Corporate Renewal, Public Law Journal,
Federal Lawyer and many other publications. Mr. Kupetz served as the author of Collier Commercial
Bankruptcy Forms for many years and currently is the author of the Collier Handbook for Creditors'
Committees.
Mr. Kupetz is a frequent lecturer on reorganization and other insolvency topics.
Mr. Kupetz was admitted to the California bar in 1986. He obtained his legal education at the
University of California, Hastings College of the Law (J.D., 1986).
333 South Hope Street
35th Floor
Los Angeles CA 90071
(213) 617-5274
dkupetz@sulmeyerlaw.com
www.sulmeyerlaw.com
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3. What is an ABC?
• Business liquidation / transaction device
• Available to insolvent or illiquid entity
• Alternative to Federal bankruptcy case
• Voluntary transfer of all assets to an assignee in trust
for purpose of liquidating (this may take the form of a
going concern sale) for the benefit of all creditors
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4. Use of an ABC
• An ABC can serve as a useful and efficient means of:
– Facilitating a buyer’s acquisition of a troubled
business or assets from an entity burdened with
unsecured debt (and, with the cooperation of secured
creditors, secured debt)
– Accomplishing the wind down and the liquidation or
going concern sale of a distressed business unable to
reorganize on its own
– Maximizing a secured creditor’s recovery from the
assets of a distressed debtor
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5. Distressed Transaction Scenario
• Company is burdened with debt that makes a merger or
acquisition infeasible
• A quick sale or infusion of capital is needed or lender wants
out
• There is inadequate funding or desire for chapter 11
reorganization
• Time is limited for a transaction to be completed
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6. Alternative Distressed Transaction Structures
• ABCs
• Out-of-court workouts / debt restructurings
• Receiverships
• Foreclosure / peaceful transfer of possession
• Bankruptcy (chapter 7 or 11)
• Acquisition of secured debt to be followed by foreclosure or
one of the other distressed transaction structures
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7. Apparel Company Case Study
• $60 million in sales
• $30 million in secured debt
• Operations in California and Mexico, with over 300
employees
• Company marketed extensively for capital infusion,
refinancing, or sale
• Bank refuses to make further advance to company
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8. Apparel Company Case Study (cont.)
• Liquidity/cash crisis
• Insufficient funding for chapter 11
• Immediate action needed to preserve rapidly decreasing value
• Based on extensive marketing, it is clear that business/assets
(both on a going concern and liquidation basis) is worth
considerably less than amount owing to bank
• Bank consents to implementation of transaction through an ABC
• Assignee selected
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9. Apparel Company Case Study (Cont.)
• Last remaining potential buyer standing negotiates APA with
assignee
• Bank consents to discounted payoff
• General assignment document and APA entered
contemporaneously
• Company sold on a turnkey basis, loss of jobs minimized,
value preserved under urgent/dire circumstances, and bank
paid off at discount
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10. Commencement of an ABC
• General assignment agreement
• Board of directors and shareholder authorization (or equivalent
for LLC or other non-corp. entity)
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11. Governing Law
• ABCs originated at common law
• Now governed by statutes in some states
• Other state ABC laws are permissive, allowing common law
assignments to continue
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12. California ABC Law
• Governed by common law, subject to various specific
statutory provisions
• Non-judicial
• California became the capital of ABCs during the dot-com /
technology meltdown
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13. Potential Benefits of an ABC
• Quick action – transaction may be completed in weeks
• Enterprise value may be preserved and piecemeal liquidation
avoided
• Cost, delay, complications, and uncertainty of a court
proceeding can be avoided
– Generally quicker and less expensive than section 363
sale
– In bankruptcy, judicial process is invoked and brings with
it additional uncertainty and complications, including
players whose identity is unknown at the time the
bankruptcy case is filed
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14. Potential Benefits of an ABC (cont.)
• Transaction can be prepackaged
– In prepackaged ABCs, where an immediate going
concern sale is to be implemented, the assignee will be
involved prior to the ABC going effective
– In contrast, in a chapter 7 liquidation, an unknown trustee
will be appointed
• Management and directors’ liability may be minimized since
an independent, third party fiduciary (the assignee) is
responsible for entering the sale transaction
• Publicity can be avoided / minimized since an ABC is not a
public process like a bankruptcy case
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15. Potential Benefits of an ABC (cont.)
• In an ABC where a going concern sale is not going to be
done, management and directors can transfer the burden and
responsibility for wind down and liquidation to the assignee
• With secured creditor consent, sale of assets can be free and
clear of liens
• In some instances, secured creditor will consent to roll-over
of liens to buyer
• Exposure on personal guarantees may be minimized or
eliminated
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16. Disadvantages of an ABC
• No court order approving sale transaction
• An independent, third party fiduciary (the assignee) must
agree to the transaction and is responsible for the ABC
process (this should also be viewed as a benefit /
advantage)
• Contracts and leases cannot be assigned with the consent
of the other party to the contract (there is no state law
equivalent of Bankruptcy Code section 365)
• Secured creditor consent is generally required
– There is no ability to sell free and clear of liens without
secured creditor consent (not an issue if secured
creditor will be paid in full from proceeds)
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17. Disadvantages of an ABC (cont.)
– No automatic stay to prevent secured creditors from
foreclosing on collateral (this is generally not an issue
with respect to unsecured creditors since assets have
been transferred to assignee and unsecured creditor
claims are against assignor)
• Involuntary bankruptcy
– Experience has shown this risk to be relatively small
– When involuntary petition is filed, it is generally
dismissed by bankruptcy court because an alternative
insolvency process is already underway
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18. Specific California Law Provisions
• Notice requirement
• Termination of attachment and TPO liens obtained within
90 days
• Assignee right to occupy business premises for 90 days
• Assignee is a “lien creditor”
• Assignee right to bring fraudulent transfer and preference
actions (although Sherwood v. Lycos regarding
preference actions in Federal courts in 9th Cir.)
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19. Limitations of Bankruptcy Preemption
• State laws may not provide for the discharge of debt or
condition a creditor’s participation in distribution on granting a
discharge
– no discharge in chapter 7 for legal entities or in most
chapter 11 liquidations in any event
• State law discharge provisions are preempted by federal
government’s exercise of its power to enact uniform
bankruptcy law
• In a decision that has been rejected by other courts (including
CA courts of appeal), the 9th Circuit, in Sherwood v. Lycos,
held that the preference avoidance provision under California
law was preempted /unconstitutional
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