NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
DOCKET NO. A-0
IN THE MATTER OF THE GENERAL
ASSIGNMENT FOR THE BENEFIT OF
CREDITORS OF EXPORT TRANSPORT
DAVID L. BRUCK, ESQ.,
PENSKE TRUCK LEASING CO., L.P.,
COOL TRANS NJ LIMITED LIABILITY
COMPANY and ERIC BIERMAN,
May 6, 2016
Before Judges Ostrer and Haas.
On appeal from Superior Court of New Jersey, Chancery Division, Essex County, Docket No. CP-0065-2014 and Law Division, Essex County, Docket No. L-7250-14.
Schumann Hanlon LLC, attorneys for appellant Penske Truck Leasing Co. L.P., in A-3309-14 & A-3684-14 (David K. DeLonge, on the briefs).
Greenbaum, Rowe, Smith & Davis LLP, attorneys for respondent David L. Bruck, Esq. in A-3309-14 (Jemi Goulian Lucey, on the brief).
Trenk, DiPasquale, Della Fera & Sodono, P.C., attorneys for respondents Cool Trans NJ Limited Liability Company and Eric Bierman in A-3684-14 (Joseph J. DiPasquale, of counsel; Michele M. Dudas and Jessica A. Buffman, on the brief).
In these two appeals, calendared back-to-back and consolidated for purposes of this opinion, appellant Penske Truck Leasing Co., L.P. (Penske) appeals from the February 6, 2015 Chancery Division order approving a global settlement of this assignment for the benefit of creditors (ABC) matter, and from the March 13, 2015 Law Division order dismissing Penske's complaint against Eric Bierman and Cool Trans NJ, Limited Liability Company (Cool Trans NJ). We affirm.
We derive the following facts from the record. Bierman was the principal owner, officer, and director of Export Transport Co., Inc. (Export), a New Jersey corporation that provided warehousing and refrigerated ocean container services to its clients. Penske leased vehicles to Export. After Export failed to make the required lease payments, Penske filed an action seeking to recover the amount due. On October 22, 2013, Penske obtained a $548,028.51 default judgment against Export.
Penske was not Export's only creditor. According to documents presented in the ABC matter, Export had dozens of other creditors and, as of March 3, 2014, was over $2.5 million in debt.
In November 2013, Bierman formed Cool Trans NJ, a single-member limited liability company.1 Cool Trans NJ provided trucking and warehousing services to many of Export's clients. Export discontinued its business operations in February 2014.
On March 4, 2014, Export assigned its assets to an assignee, David L. Bruck, Esq., who filed an ABC proceeding in the Chancery Division the next day. As part of that filing, Bierman prepared a "verified inventory and list of creditors[,]" which listed Penske's judgment against Export as a debt of the corporation. Bruck provided notice of the filing to Penske.
By way of background, an ABC proceeding "is a state court-administered liquidation proceeding similar to a Chapter 7 bankruptcy proceeding whereby an individual, partnership, or corporation in financial distress can liquidate its assets in an orderly fashion to equitably pay its creditors." 44 New Jersey Practice, Debtor-Creditor Law and Practice 3.1, at 109 (Michael D. Sirota & Michael S. Meisel) (2000) (citing Gilroy v. Somerville Woolen Mills, 67 N.J. Eq. 479 (Ch. 1904)). ABC proceedings in New Jersey are governed by the Assignment for Benefit of Creditors Statute (the statute), N.J.S.A. 2A:19-1 to -50. The statute's purpose is to treat all creditors equally and avoid any disproportionate payments to a favored creditor. N.J.S.A. 2A:19-2.
In an ABC proceeding, "an individual, partnership or corporation, known as the 'assignor,' voluntarily assign[s] by transfer or conveyance all of the assets in trust to an independent third party, known as the 'assignee.'" 44 New Jersey Practice, Debtor-Creditor Law and Practice 3.1, at 110 (Michael D. Sirota & Michael S. Meisel) (2000). The assignee's powers are set forth in N.J.S.A. 2A:19-13 and N.J.S.A. 2A:19-14. The assignee has a "dual capacity." First, he or she "'stands in the shoes' of the assignor with general powers to act in his stead as his 'successor.'" In re Gen. Assignment for Benefit of Creditors of Brill's Hardware Co., 67 N.J. Super. 289, 291 (Cty. Ct. 1961). Under N.J.S.A. 2A:19-13
Every assignee shall have as full power and authority to dispose of all of the assignor's property, except as otherwise may be provided, as the assignor had at the time of the general assignment. He may sue for and recover in his own name everything belonging or appertaining to the estate. He may compromise, settle and compound all claims, disputes and litigations of the assignor, refer the same to arbitration, agree with any person concerning the same, redeem all mortgages and conditional contracts, and generally act as and do whatsoever the assignor might have lawfully done in the premises.
Second, the assignee also "represent[s] the assignor's entire creditor constituency." 44 New Jersey Practice, Debtor-Creditor Law and Practice 3.31, at 118 (Michael D. Sirota & Michael S. Meisel) (2000); see N.J.S.A. 2A:19-14. Specifically, N.J.S.A. 2A:19-14 states
The assignee, in addition to the powers which he may exercise as the successor to the assignor, shall also at all times be the representative of the creditors of the assignor, and shall have the same power to set aside conveyances, and to recover or reach assets for the benefit of the creditors as a creditor would have who was the holder of a judgment and levy against the assignor and his property at the date of the assignment. All conveyances, mortgages and transfers of property, real or personal, made by the assignor, which are void or voidable as against the creditors of the assignor, shall in like manner be void or voidable against the assignee.
Pursuant to this statutory authority, Bruck arranged for the court to appoint an accountant to review the books and records of Export, Bierman, Cool Trans NJ and Cool Trans Jax and provide him with a written report. Bruck certified that Bierman "provided complete financial disclosure regarding his assets as well as the assets and liabilities of Cool Trans NJ and Cool Trans Jax." Bruck also deposed Bierman.
As discovery was proceeding, Bruck obtained an order on May 27, 2014, permitting him to sell Export's vehicles to Bierman. Bierman paid $30,000 for the vehicles, and they remained subject to approximately $116,000 in outstanding liens. Penske and the other creditors did not oppose the sale.
During discovery, Bruck learned that, after the assignment, Cool Trans NJ began servicing some of Export's former clients. Bruck also "discovered that certain accounts receivable belonging to Export were deposited in the bank account of Cool Trans NJ." These accounts were "pledged to Investors Bank." After examining the accountant's report, Bruck "believe[d] that Bierman, Cool Trans NJ and Cool Trans Jax [were] collectively indebted to Export in an amount in excess of $700,000." Bruck certified that
[t]his amount ha[d] accrued over the past several years and [was] comprised primarily of payments made by Export's customers to Cool Trans NJ that were owed to Export, Bierman's use of Export's funds to form and operate Cool Trans NJ and/or Cool Trans Jax, a shareholder loan to Bierman that was not repaid and other distributions to Bierman and a company owned by Bierman's wife while Export was insolvent.
Nevertheless, on June 6, 2014, Bierman filed a proof of claim against Export for $117,000. Bierman claimed this figure represented funds he loaned to Export and payments he made to vendors on Export's behalf. Beginning in July 2014, Bruck engaged in negotiations with Joseph J. DiPasquale, Esq., counsel for Bierman, Cool Trans NJ and Cool Trans Jax, in an attempt to resolve the estate's claims against Bierman and the two business entities, and their claims against the estate.
As those negotiations were drawing to a close, Penske filed a complaint against Bierman and Cool Trans NJ in the Law Division. In this October 14, 2014 pleading, Penske sought to hold Bierman and Cool Trans NJ liable to it for the judgment it held against Export. Penske alleged that Bierman and Cool Trans NJ were the successors in interest to Export and, therefore, Export's corporate veil should be pierced to enable Penske to reach Bierman's and Cool Trans NJ's assets. Penske also asserted related conversion, breach of fiduciary duty, and fraudulent conveyance claims against Bierman and Cool Trans NJ.
In a certification submitted in the ABC proceeding, Bruck fully explained why he did not pursue similar claims against Bierman and Cool Trans NJ as Export's assignee.2 Through discovery, Bruck established "that Bierman, Cool Trans NJ and Cool Trans Jax each ha[d] little or no assets; that both Cool Trans NJ and Cool Trans Jax [were] operating at a loss and that Bierman's remaining assets [were] limited to his residence, an additional house and other illiquid and encumbered assets."
Bruck "considered commencing litigation against Bierman, Cool Trans NJ, Cool Trans Jax and Bierman's wife's company[,] and . . . met with [DiPasquale] to discuss such litigation." Bruck certified that Bierman "asserted defenses to the claims[,] . . . some of which [were] meritorious and others [were] not." Bruck also considered the possibility that Bierman, Cool Trans NJ, and Cool Trans Jax could declare bankruptcy in response to such litigation, and the adverse impact that would have upon his "fiduciary obligations" to all of the creditors.
After his review, Bruck concluded that Bierman, Cool Trans NJ, and Cool Trans Jax were "nearly judgment proof and that pursuing litigation against them would necessarily push them into a bankruptcy." If that occurred, any claims by the creditors against them would "likely [be] render[ed] uncollectible[.]"
Based upon his determination that litigating claims similar to those raised in Penske's complaint would undermine the interests of all of Export's creditors, Bruck determined that the best course was to reach a global settlement of these claims. On December 10, 2014, Bruck reached an agreement with DiPasquale. Under the terms of the settlement, Bierman would pay the estate $50,000, with $5,000 due upon the execution of the agreement, and $3,000 due each month thereafter for the next fifteen months. Bierman executed a note on behalf of himself and the two business entities to secure the balance due on the settlement.
Bruck also required Bierman to enter into a consent judgment to be recorded in the event of any default by Bierman. The consent judgment provided that Bierman, Cool Trans NJ, and Cool Trans Jax were jointly and severally liable to the estate in the amount of $700,000. Approval of the settlement agreement was also expressly "conditioned upon the truthfulness of Bierman's financial disclosures."
As part of the settlement, Bierman, Cool Trans NJ, and Cool Trans Jax agreed to waive any claims against Export. On behalf of Export's creditors, Bruck agreed to release and discharge Bierman, Bierman's wife, Cool Trans NJ, and Cool Trans Jax from any and all "[c]laims and causes of actions, including but not limited to claims with respect to the alleged conversion and misappropriation of funds owed to Export by Bierman, Cool Trans NJ and/or Cool Trans Jax, jointly and severally."
In support of his decision to settle all pending claims against Bierman, Cool Trans NJ, and Cool Trans Jax, Bruck explained in the settlement agreement that
settling the claims by and between Export, Bierman, Cool Trans NJ[,] and Cool Trans Jax [was] in the best interest of the creditors, [and would] avoid lengthy and expensive litigation that would likely result in the recovery of little or no funds, especially if Bierman, Cool Trans NJ[,] or Cool Trans Jax were to file for bankruptcy protection. While the settlement sum [was] a small percentage of the potential claim which [Bruck held, he was] mindful of the expense of litigation, the defenses asserted[,] and the collectability of any judgment. Settling the claims now [would] save [Export's] estate from having to expend significant litigation costs with a very uncertain outcome and [would] maximize the return to the estate.
Bruck also certified that he had liquidated other "assets of Export for the benefit of all of the creditors" and that the "[g]lobal [s]ettlement [a]greement [was] but one of the means by which [he was] attempting to bring funds into the estate for the benefit of the creditors of Export."
On December 12, 2014, two days after the settlement agreement was executed, Bierman and Cool Trans NJ filed a motion to dismiss Penske's complaint in the Law Division action. On January 5, 2015, Bruck filed a motion in the Chancery Division for an order approving the global settlement agreement.4 Penske opposed the motion, arguing that Bruck lacked the statutory authority to pursue or settle a "successor liability or veil piercing liability" claim on behalf of Export against Bierman and Cool Trans NJ.
Following oral argument, Judge Walter Koprowski, Jr. granted Bruck's motion and approved the settlement agreement. In a thoughtful oral opinion, Judge Koprowski noted that, pursuant to N.J.S.A. 2A:19-13, Bruck had the "full power and authority" to "sue for and recover in his own name everything belonging or appertaining to [Export's] estate." This statute also permitted Bruck to "compromise, settle[,] and compound all claims, disputes[,] and litigations of" Export. Citing N.J.S.A. 2A:19-14, the judge also found that Bruck, as Export's assignee, represented all of the creditors, and had "the same power to set aside conveyances, and to recover or reach assets for the benefit of the credits as a creditor would have who was the holder of a judgment and levy against" Export.
Accordingly, the judge ruled that Bruck had the power on behalf of Export, and as the representative of the creditors, to bring an action against Bierman and Cool Trans NJ to pierce Export's corporate veil in order to attempt to recover any assets that may have been improperly acquired by them. At the same time, Bruck had full authority to settle those claims if he determined that a settlement would benefit the creditors.
In so ruling, Judge Koprowski cited Tsai v. Buildings by Jamie, Inc. (In re Buildings by Jamie), 230 B.R. 36, 42 (Bankr. D.N.J. 1998), which contained an extensive discussion of "veil piercing by a corporate debtor" under New Jersey law, and concluded that "New Jersey courts have permitted corporate debtors to pierce their own veils." As the judge observed, "New Jersey law holds that an alter ego action is an equitable remedy that belongs to the corporate entity and may be asserted by the corporation when it suffers harm from fraudulent acts of its principles." Id. at 43.
Having concluded that Bruck, as the assignee, had the authority to consider filing such an action on behalf of Export and the creditors, Judge Koprowski next considered whether Bruck's proposed settlement was appropriate. In finding that it was, the judge accepted Bruck's representation, after the completion of discovery, that the settlement of all claims against Bierman and Cool Trans NJ for $50,000 was "in the best interest of all creditors," and "that the settlement [was] fair and reasonable under the circumstances."
The judge found that Bruck fully explained his rationale for the settlement. Although the $50,000 was only a fraction of the possible claims against Bierman and Cool Trans, the judge noted that Bierman and his business entities had "little or no assets" and that a settlement, subject to the default provisions built into it, would "ensure that there'll be some money paid." The settlement would also save the estate the cost of litigating its possible claims and defending against Bierman's claims against the estate, thereby preserving more funds for the creditors. Finally, the judge found that the settlement would deter Bierman and the business entities from initiating a bankruptcy proceeding, which would jeopardize the ability of the creditors to recover anything from Export's estate.
Following Judge Koprowski's decision, Bierman and Cool Trans NJ renewed their motion to dismiss the Law Division action. After oral argument on March 13, 2015, Judge Michelle Hollar-Gregory found that Penske's claims were subject to, and resolved by, the global settlement. Therefore, she granted the motion and dismissed Penske's complaint. These appeals followed.
In both appeals, Penske again argues that Bruck lacked the authority under N.J.S.A. 2A:19-13 and N.J.S.A. 2A:19-14 to bring or settle piercing the corporate veil and related claims against Bierman and Cool Trans NJ. It also argues that a corporation like Export cannot bring an action to pierce its own corporate veil and, therefore, Bruck could not do so as Export's assignee. We disagree.
Penske correctly points out that neither N.J.S.A. 2A:19-13 or N.J.S.A. 2A:19-14 specifically states that an assignee may pursue corporate veil piercing or successor liability claims on behalf of an estate. In view of the broad language of these statutes, however, there was no need for the Legislature to delineate each and every legal action an assignee might take in the course of his or her work.
"It is well settled that the goal of statutory interpretation is to ascertain and effectuate the Legislature's intent." In re Estate of Michael D. Fisher, II, 443 N.J. Super. 180, 190 (App. Div. 2015) (quoting State v. Olivero, 221 N.J. 632, 639 (2015)). Thus, an "analysis of a statute begins with its plain language, giving the words their ordinary meaning and significance." Ibid. (citing Olivero, supra, 221 N.J. at 639). "When that language clearly reveals the meaning of the statute, the court's sole function is to enforce the statute in accordance with those terms." Ibid. (quoting Olivero, supra, 221 N.J. at 639).
Applying these principles here, we agree with Judge Koprowski that the language of N.J.S.A. 2A:19-13 and N.J.S.A. 2A:19-14 clearly empowered Bruck to institute litigation similar to that which Penske filed in the Law Division against Bierman and Cool Trans NJ and to settle that litigation in the best interests of the creditors of Export's estate. As noted above, N.J.S.A. 2A:19-13 specifically states that an assignee "may sue for and recover . . . everything belonging or appertaining to the estate" and "compromise [and] settle . . . all claims, disputes[,] and litigations of the" estate. This language could not be broader or the Legislature's intent more clear. An assignee like Bruck has the "full power and authority" to pursue litigation on behalf of the estate. Because this authority is not limited to any specific type of action, it necessarily includes the power to pursue veil piercing and successor liability claims on behalf of the estate against third parties for the benefit of all of the creditors.
This interpretation is supported by the plain language of N.J.S.A. 2A:19-14, which states that, as the representative of the creditors, an assignee has "the same power to set aside conveyances, and to recover or reach assets for the benefit of the creditors as a creditor would have who was the holder of a judgment and levy against the assignor and his property at the date of the assignment." Thus, for purposes of any veil piercing or successor liability claims against Bierman and Cool Trans NJ, Bruck stood in the shoes of Penske and all of the other creditors and had the authority to bring or settle any claims that a creditor could.
Penske next argues that a corporation cannot bring an action to pierce its own corporate veil to attempt to recover assets improperly taken by corporate officers or a successor business entity. Again, we disagree.
"New Jersey courts have permitted corporate debtors to pierce their own veils." In re Buildings by Jamie, supra, 230 B.R. at 42 (citing Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1239-40 (3d Cir. 1994) and In re Marin Motor Oil, Inc., 639 F.2d 445 (3d Cir. 1982)). As the Third Circuit observed in Phar-Mor,
It may seem strange to allow a corporation to pierce its own veil, since it cannot claim to be either a creditor that was deceived or defrauded by the corporate fiction, or an involuntary tort creditor. In some states, however, piercing the corporate veil and alter ego actions are allowed to prevent unjust or inequitable results; they are not based solely on a policy of protecting creditors. . . . New Jersey alter ego or veil piercing law is currently based on such a theory and was so based at the time [Marin, supra] was decided. See Walensky v. Jonathan Royce Int'l, 264 N.J. Super. 276[, 282 (App. Div. 1993)]; Fortugno v. Hudson Manure Co., 51 N.J. Super. 482[, 500-01 (App. Div. 1958)].
[Phar-Mor, supra, 22 F.3d at 1240 n.20.]
Penske cites no case law to the contrary. Instead, it asserts that Judge Koprowski erred by relying upon "bankruptcy law" in his decision. This argument lacks merit.
While the cases the judge cited in his thorough opinion involved bankruptcy proceedings, the court's discussion of veil piercing and successor liability principles in those cases was not based upon bankruptcy law. Instead, the court first determined whether New Jersey permitted a corporation to bring an action to pierce its own corporate veil. Concluding that it did, the court moved on to determine whether a bankruptcy trustee could pursue such an action.
Because Export could have filed veil piercing and successor liability claims on its own, and Bruck had the full statutory authority to pursue and settle "all claims, disputes[,] and litigations of" Export under N.J.S.A. 2A:19-13, Bruck obviously had the power to enter the global settlement. Under these circumstances, we discern no basis for disturbing Judge Koprowski's approval of the settlement. There is ample support in the record for the judge's determination that, in light of the fact that the potential defendants in any veil piercing or successor liability action were effectively judgment proof, the settlement was "fair and reasonable" and "in the best interest of all creditors[.]"
Finally, Judge Hollar-Gregory properly dismissed Penske's Law Division complaint against Bierman and Cool Trans NJ. The global settlement disposed of all of the creditors' claims against Bierman and Cool Trans NJ and, therefore, Penske's complaint did not state a claim upon which relief could be granted. R. 4:6-2(e).
1 Earlier, in June 2010, Bierman formed Cool Transport, LLC (Cool Trans Jax), a limited liability company operating in Jacksonville, Florida.
2 Bruck certified, and Penske conceded, that neither Penske "nor any other creditor of Export . . . made any demand on [him] to pursue a particular claim against or on behalf of Export."
3 The term "[c]laim" was defined in the settlement agreement as including any claim for "breach of fiduciary duty, fraudulent or preferential transfers, conversion, or veil piercing."
4 The Law Division held the motion to dismiss in abeyance pending the Chancery Division's disposition of Bruck's motion to approve the global settlement.
(ABC) Viewed as an Effective and Less Costly Alternative to Bankruptcy for the Liquidation of a Business.
It was reported on February 12, 2007 in the National Post (Canada) by Columbia Professor Edward Morrison, that using state insolvency systems is faster and less expensive in most cases. Professor Morrison said, "It's a much less public event than a federal bankruptcy filing, and thought to be very quick and relatively cheap."
In a study of failed Dot Com Companies, Professor Ronald J. Mann argued that "states can improve the efficacy with which the assets of failed firms are redirected to profitable uses by adopting procedures that are more hospitable to ABCs. These procedures, the data suggest, should redirect a substantial number of failed firms from expensive and protracted bankruptcy proceedings to more expeditious proceedings conducted under the protection of state court 1.
What is an ABC (Assignment for the Benefit of Creditors)?
Black's law dictionary, Fourth Edition, defines a general assignment for the benefit of creditors as "...a transfer of legal and equitable title of all debtor's property to a trustee with authority to liquidate the debtor's affairs and distribute proceeds equitably to creditors."
The Assignment for the Benefit of Creditors Is Similar to a Chapter 7 Bankruptcy
The assignment process is the same as a liquidation under Chapter 7 of the United States Bankruptcy Code, however, as the above studies suggest, it is significantly less expensive than a Chapter 7. Each state has its own statutes pertaining to the making and governance of general assignments. This process works as a liquidation of all of the assets of an Assignor (Company in financial difficulty). The transfer, in theory, benefits all creditors by placing the property out of the reach of the assignor's creditors and prevents direct enforcement remedies. The disadvantages are that there is no discharge and no ability to re-organize; it does, however, result in more being left for the unsecured creditors.
The assignees are usually individuals experienced in the process of liquidating that specific type of business, are familiar with the industry, and usually have contacts in the industry which are able to find potential buyers who will maximize the price for either the business as an on-going concern, or for the assets alone. It is not unusual that a prospective purchaser has been found before the assignment is made. The compensation to the assignee is a maximum fixed percentage, and there are not generally any surprises in the fees. In New Jersey, as an example, the percentage is twenty percent. This gives the assignee plenty of incentive to find the best price. This also takes the amount of the assignee's fees out of the court's discretion, even in the states where there is a great deal of court involvement.
In many instances, the assignment process is not one to which creditors are required to consent, but are instead required to file a claim with the assignee in order to share in the proceeds generated from the liquidation of the debtor's assets.
Assets are Typically Sold with Less Administrative Costs than a Bankruptcy
It is generally recognized that the assets can be sold quickly and to one purchaser, and in certain circumstances, the business can even be run for a short period of time. This is all done without direct court supervision, without a trustee and without a host of different expensive professionals. There is no oversight with the U.S. Trustee's office and there are no complicated expensive ) reporting requirements. Care, however, should be taken to determine all the implications of any such decision before making it.
Of course, creditors can challenge the validity of an assignment, and may even seek the removal to Bankruptcy Court by filing an Involuntary Petition with the Court in the district. The creditors doing this have to be quite careful about whether or not filing an involuntary petition is being done in good faith. If the creditors pursuing this remedy are also intending to become competitors in the future, this could appear to a bankruptcy court to be "bad faith", which could expose the creditor or creditors to punitive damages.
The assignee , in the early stages, marshals inventory and gains control of all of the debtor's assets. He or she also gains control of the books and records, and interviews the president of the company. The assignee will ascertain the existence and value of the assets. The assignee, in selling the assets, will either do it by public sale or possibly negotiate the sale to a ready buyer. The assignee early on has had to make sure that there are no perfected liens on those assets. After the sale, the assignee waits for the claims to be filed and, shortly after the expiration of the time period to file claims, makes the distribution and closes the case.
Examples of Assignment for the Benefit of Creditors Handled by Our Law Firm in New Jersey
I was recently involved in an assignment that was 'text-book perfect". The assignor had $50,000 in the bank account, $100,000 in collectible receivables, and an inventory that was saleable. The sale of the inventory generated $85,000 at a public auction. The outstanding unsecured creditors amounted to a total of $350,000. By New Jersey Statute, the maximum amount to the assignee was $47,000 (20%), and there were other professional fees under $10,000 consisting of an Auctioneer, Accountant and Appraiser. This case paid a dividend to the unsecured creditors of over 50%.
Another case concerned a foreign Parent company with subsidiaries operating in the USA which were no longer profitable due to the downturn in the economy. After careful consideration, management decided to file an assignment for the main operating company; the assignee liquidated the assets and realized a net estate of $180,000. It is anticipated that there could be a dividend of twenty percent because there were no secured creditors.
In an assignment, a good lawyer can achieve many legal benefits for his or her client by negotiation with the creditors in advance. I was named the assignee in a case in which the business was profitable and the principal of the company had guaranteed the secured loan on all the assets of the company. The business was negatively affected when the cost of the major component of what the business manufactured doubled. The attorney for the assignor found a buyer for the assets at a certain price, and then approached the bank. Because the bank knew the value of the assets on the auction block, it accepted an amount that was fifty percent of the loan balance. This amount left enough to cover not only my fee, but also left a sum totaling $50,000 for other creditors. As part of the agreement, the bank agreed to release the guarantor from the loan. This was a great outcome for all concerned.
Conclusion as to Advantages of Assignments For the Benefit of Creditors
In summary, several potential advantages to the use of an assignment for the benefit of creditors rather than a bankruptcy filing for the business entity with financial problems are as follows:
- The assignor's ability to select the assignee rather than a randomly appointed trustee;
- The added value that an assignee with experience brings to the proceeding when selling the assignor's assets, or possibly selling the entity as a going concern;
- There is very little oversight by the court; this gives the assignee broad discretion and flexibility in making decisions regarding the sale of assets or running the business for a short period of time to sell it as a going concern, thus maximizing its value;
- Sales can be made quickly to independent third parties or to a new business entity that is owned by the existing shareholders. The interested parties maintain a good comfort level due to the fact that the assignee is generally compensated at a fixed percentage amount, which provides incentive for the assignee to try to maximize the price.
In my experience, this process is completed in less than nine months, which results in significantly lower legal and other expenses than in a comparable sale through bankruptcy.
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1 "Empirical Investigation of Liquidation Choices of Failed High Tech Firms", 82 Wash. U.L.Rev.1375 Winter 2004.