Assignment for Benefit of Creditors

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ASSIGNMENT FOR BENEFIT OF CREDITORS

The voluntary transfer of all or most of a debtor's property to another person in trust so that he or she will collect any money that is owed to the debtor, sell the debtor's property, and apply the money received to the payment of the debts, returning any surplus to the debtor.

The debtor is the assignor, the transferor; and the person who takes legal title to the property is the assignee.

Types

There are three types of assignments that are categorized according to the limitations imposed upon the arrangement. A general assignment is one involving the transfer of all the debtor's property for the benefit of all his or her creditors. A partial assignment is one in which only part of a debtor's property is transferred to benefit all the creditors. When property is assigned to benefit only designated creditors, it is a special assignment.

The assignment results in the property being beyond the control of the debtor. It is different from agency arrangements, pledges, or mortgages.

Trust Law

Unless otherwise expressly provided, trust law governs assignments for the benefit of creditors. The assignee is considered a trustee and his or her duties and responsibilities to the debtor's creditors are the same as a trustee's to the beneficiaries of a trust. The document that embodies the terms of the assignment authorizes the assignee to liquidate the debtor's property in satisfaction of the creditors' claims against the debtor as quickly as possible. Under common

law, this was the assignee's chief function. Even if the assignment instrument does not expressly empower an assignee to sell the property, the assignee still has the power to do so in order to pay the creditors.

Creation

It is not necessary for a debtor to obtain the consent of creditors before making an assignment for their benefit. An owner of property has a right to transfer legal title to it by virtue of ownership. The limitation derived from common law that is placed upon its creation is that it cannot be done to dishonestly deprive a debtor's creditors of their rights to have property sold to repay debts. When an assignment for the benefit of creditors is intended by the debtor to place his or her property beyond the legal reach of creditors, it is called a fraudulent conveyance. This type of assignment is void, or legally ineffective, under statutes that prohibit such arrangements. An assignment by which the assignor-debtor retains any interest, benefit, or advantage from the conveyance, such as keeping the right to revoke the assignment, made to defraud creditors is also a fraudulent conveyance, as is an assignment by which the assignee is required to delay liquidation of the assets.

In some jurisdictions, a partial assignment is considered a fraudulent conveyance because the creditors are hindered and delayed in receiving payment if they must seek payment from the debtor after first being referred to the assignee. Other jurisdictions treat any assignment by a solvent debtor as fraudulent on the theory that such an arrangement prevents the immediate sale of the property so that creditors are delayed and hindered.

Deficiency

A debtor is still liable to pay his or her creditors if the proceeds from the sale of personal and real property pursuant to an assignment for the benefit of creditors are not sufficient to completely repay the debts. When, however, creditors agree to accept the proceeds in satisfaction of the debtor's obligations, such an agreement is called a composition with creditors. For this reason, assignments for the benefit of creditors are used by corporate, rather than individual, debtors.

Since preferences are permissible under common law, a common-law assignment for the benefit of creditors that provides for preferential payments to designated creditors is not a fraudulent conveyance. Most courts have held that debtors cannot use preferences to obtain discharges from creditors by conditioning preferences on their release from unpaid portions of their debts. To do so is considered a fraudulent conveyance, since a creditor would have to accept virtually any condition that the debtor decided upon if the creditor were to receive any money from the assignee.

Legality of Assignments

Most states have enacted statutes that regulate assignments for the benefit of creditors. Some states require that an assignment must comply with statutory requirements or be invalid, while in others the debtor may make a common-law assignment, which is regulated by common law, or a statutory assignment, which is controlled by applicable statutes.

The state statutes require that the assignment be recorded, schedules of assets and liabilities be filed, notice be given to the creditors, the assignee be bonded, and the assignor be supervised by the court. Almost every jurisdiction prohibits the granting of a preference. All creditors except those with liens or statutorily created priorities are treated equally. Some statutes empower an assignee to set aside prior fraudulent conveyances, and others authorize the assignee to set aside preferences made before the assignment.

If a debtor has made substantial preferences, fraudulent conveyances, or allowed liens voidable in bankruptcy to attach to his or her property, then creditors might be able to force the debtor into bankruptcy if they decide that the assignment does not adequately protect their rights. An efficiently handled assignment for benefit of creditors is frequently more advantageous to creditors than bankruptcy because it usually brings about better liquidation prices and its less rigid and formal structure saves time and money.