General Assignment for the Benefit of Creditors

Some businesses cannot continue to operate and must therefore be sold or liquidated and the proceeds distributed to creditors. An Assignment for the Benefit of Creditors is a well-established common law tool that is an alternative to bankruptcy. General Assignments are structured to save time and expense in concluding the affairs of an insolvent company. Through a General Assignment, the insolvent company’s assets can be sold quickly and efficiently, and the liquidation proceeds can be distributed to creditors shortly thereafter. Secured creditors frequently find a General Assignment useful, because the secured creditor is relieved of the legal costs and risks associated with the foreclosure and sale of its collateral.

Unfortunately, many attorneys automatically put financially troubled debtors into bankruptcy under Chapter 7 of the Bankruptcy Code without exploring alternatives. A decision is best made when all possible avenues are thoroughly explored and discussed beforehand. More times that not, the expensive and time consuming bankruptcy process can be avoided by employing CMA’s expertise in liquidating over 1,000 publicly and privately held company’s over the past 75 years.

What is a General Assignment

An assignment is simply a contract whereby the troubled entity (“Assignor”) transfers legal and equitable title, as well as custody and control of its property, to a third party (“Assignee”) in trust, to apply the proceeds of sale to the assignor’s creditors in accord with priorities established by law.

History of General Assignments

The ability to utilize assignments in California can be traced to Civil Code Section 22.2, which incorporates English common law. Today, assignments in California are recognized under Section 1800 in the Code of Civil Procedure. Other statutory provisions in the California Civil Code and Code of Civil Procedure have been incorporated to assist the Assignee in administering its duties as a fiduciary for creditors.

Parties/Entities who can make an Assignment

The general rule is that any debtor may make an assignment. A debtor is an individual, partnership, corporation or limited liability company that owes anything to anyone. Any debtor owning property has the common law right to make an assignment. An assignment is not generally used for individuals because individuals do not receive discharges as they would under Chapter 7 of the Bankruptcy Code.

A partner may assign partnership property. The partner needs the expressed written consent and authorization of other partners to make an assignment, since an assignment is not within the contemplation of an ordinary partnership or the usual course of business and is therefore beyond the scope of agency arising from the partnership.

Corporations and limited liability companies (“LLC”) may make assignments unless restricted by their articles or some statutory provisions. A corporate resolution or resolution by the members of an LLC is required since the assignment is a disposition of all the debtor’s assets. In order to avoid a shareholder dispute and/or dispute among owners of an LLC, CMA generally requires that a majority (51%) of the shareholders/owners consent to the assignment.

Assignable Property

Any non-exempt property that the debtor can sell or convey may be assigned. Real, personal, and general intangible properties are assignable. When a corporation makes an assignment, all corporate property, tangible and intangible, is transferred to the assignee, including, chooses in actions, customer list, book accounts, and rights and credits of all kinds, both in law and equity. A transfer of assets to the assignee does not violate the requirements of the bulk sale transfers law, as the assignee becomes a lien creditor at the time the assignment is activated. If a secured creditor’s lien has not been perfected, the assignment cuts off all but the assignee’s interest. The assignee acquires no greater right in the property assigned than the assignor had at the time of the assignment.

Use of General Assignments to Consummate A “Quick Sale”

In Order to Preserve Value

Goodwill may be a significant asset whose value can be realized only through a “turn-key” sale to someone already interested in purchasing the assignor’s business. Where a buyer has been located who is willing to pay more than the distressed liquidation value of the debtor’s assets, and the debtor is looking for a vehicle to effect a quick sale to the buyer free and clear of liens and encumbrances, an assignment can keep the assignor’s assets in place for a period of time to consummate the sale. An assignee may also operate a business for a short period of time in hopes of locating a buyer for purposes of selling the company as a going concern, and/or conduct an orderly liquidation of the debtor’s assets that would maximize the value over a straight public auction. A Chapter 7 Trustee has no incentive to undertake this type of extra work or spend the time and money required seeking court approval to pursue this type of turnkey sale.

Consent of Creditors to the Assignment

In situations where the liquidation value of the assets exceeds the secured creditor’s lien, the assignee is not required to obtain the consent of the secured creditor prior to taking the assignment. However, since the cooperation of the secured creditor frequently affects the liquidation of assets, CMA routinely obtains the consent of the secured creditor(s) in advance of the assignment. The acceptance by unsecured creditors is not necessary since under common law the proceedings, an assignment is deemed to benefit all unsecured creditors through equality.

Assignee’s Ability to Recover Preferential Transfers

An assignee may recover transfer of property paid to creditors on account of an antecedent debt that enabled one creditor to receive more than another creditor would have received of the same class. The transfer must have been made within 90 days of the assignment, or one year if the creditor is an insider, while the assignor was insolvent.

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