By: Donald L Swanson

The common law of assignments for benefit of creditors (“ABCs”) has been around for a very long time as an out-of-court process under the law of trusts: debtor is trustor, assignee is trustee, and debtor’s creditors are beneficiaries.

And the common law of ABCs had already been well-established, when the U.S. Constitution was ratified.

Then in the mid-1800s, various of our United States began enacting statutes that changed the common law of ABCs into a court-supervised process with various bells and whistles.  And it was in the bells and whistles that controversies developed on constitutional propriety.

The pertinent provisions of the U.S. Constitution are:

1. “The Congress shall have Power . . . to establish . . . uniform Laws on the subject of Bankruptcies throughout the United States” (Art. 1, Sec. 8); and
2. “No state shall enter into any . . . Law impairing the Obligation of Contracts” (Art. 1, Sec. 10).

These two provisions work together to limit what state statutes on assignments for benefit of creditors can do.

And one of the bells and whistles a state ABC law cannot provide is this: a discharge of debtor’s debt without creditor consent.  That’s according to Boese v. King, 108 U.S. 379 (1883).

I’ll try to explain.

ABC Assignment Under a New Jersey Statute

In 1873, the Boese v. King Debtor does an ABC.  Debtor:  

• lives in New Jersey;
• transfers all Debtor’s assets to a New Jersey assignee for distribution among Debtor’s creditors; and
• does so under a New Jersey ABC statute titled “An act to secure to creditors an equal and just division of the estates of debtors who convey to assignees for the benefit of creditors.”

Then, Debtor’s ABC assignee liquidates Debtors assets and deposits the $200,000 cash proceeds therefrom into a bank located in New York. 

New York Lawsuit & Preemption Ruling

Meanwhile, a creditor sues Debtor in New York state court on a contract claim and obtains a judgment against Debtor in that lawsuit. 

Then, a receiver is appointed in that same New York lawsuit “on return of execution unsatisfied,” who then goes after the $200,000 cash proceeds from sale of Debtor’s assets on deposit in the New York bank.

The New York trial court awards the $200,000 sale proceeds to the New York receiver—leaving the New Jersey assignee with nothing.

It does so, based on a preemption theory—that:

• New Jersey’s ABC statute is, “in its nature and effect, a bankrupt law”;
• “the power conferred upon Congress to establish a uniform system of bankruptcy” was “exercised by the passage of” the Federal Bankruptcy Act of 1867;
• The Federal Bankruptcy Act’s enactment “wholly suspended the operation” of New Jersey’s ABC statute; and
• so, Debtor’s ABC assignment “was not valid for any purpose.”

That ruling is then reversed on appeal by a New York Court of Appeals on these grounds:

• while the Federal Bankrupt Act did supersede New Jersey’s ABC statute, it did so only to the extent of any inconsistencies; and
• various portions of New Jersey’s ABC statute are neither inconsistent with nor suspended by the Federal Bankruptcy Act.

Moreover, the Court of Appeals finds that New Jersey’s ABC statute did not create a new ABC right.  Instead, it found that:

• such ABC rights already existed under the common law, before enactment of the New Jersey statute;
• New Jersey’s ABC statute merely places restrictions on previously existing ABC rights and merely imposes, for the benefit of creditors, salutary safeguards around the exercise of such rights; and
• such already existing rights remain effective.

Appeal to U.S. Supreme Court

The New York case makes its way on appeal to the U.S. Supreme Court.

And the U.S. Supreme Court affirms the appellate ruling, upon identifying this question for consideration:

• whether the reversal by the New York Court of Appeals deprived the Plaintiff “of any right, title, or privilege under the Constitution or laws of the United States”?

The U.S. Supreme Court’s analysis begins with a finding that Debtor’s ABC assignment was made “in good faith” and “with the bona fide intent of making an equal distribution of the proceeds of the trust estate among creditors” under New Jersey’s ABC statute.

Then, the Supreme Court opinion adds this.  Even if New Jersey’s ABC statute is suspended by the Federal Bankrupt Act, the suspension is not for every purpose. In all events, Debtor’s assignment under New Jersey’s ABC law:

• was sufficient to pass title from Debtor to the assignee—i.e., was good as between them;
• was effective in the absence of a bankruptcy filing that impeaches it; and
• gave assignee authority to sell the assigned property and distribute the sale proceeds among all Debtor’s creditors.

However, among the constitutionally-offensive bells and whistles in New Jersey’s ABC statute is this:

• New Jersey’s ABC statute was “inoperative in so far as it provided for the discharge of the debtor from future liability to creditors.”

So, the U.S. Supreme Court simply (i) ignored the “discharge” bell and whistle in the New Jersey ABC statute as ineffective and inoperative, and (ii) allowed the ABC assignment to proceed.

Inequitable Conduct

Moreover, the U.S. Supreme Court justices, in Boese v. King, appear to be miffed at the New York Plaintiff’s conduct.  Consider the following explanations in their Boese v. King opinion.

Had the New York Lawsuit sought a distribution of the $200,000 held in the New York Bank among all Debtor’s creditors, without discrimination, a wholly different question would have been presented.

But, instead, the question has been framed upon the idea that, because of the enactment of the Federal Bankruptcy Act, Debtor’s title did not pass to Debtor’s assignee for the benefit of creditors:

• in this view “we do not concur”; 
• instead, the ABC assignment, in good faith and with no improper intent, was valid for at least the purpose of securing an equal distribution of the estate among all Debtor’s creditors; and
• the New York Plaintiff is, therefore, not entitled to jump ahead of Debtor’s other creditors.

Conclusion

Here are a few things we can learn from the U.S. Supreme Court’s Boese v. King opinion:

1. ABCs under the common law have always been valid, and ratification of the U.S. Constitution (with its bankruptcy clause and contracts clause) did not alter that reality;
2. bells and whistles added in state ABC statutes, such as a discharge of debtor’s obligations, are ineffective and inoperative; and
3. good faith efforts at complying with an ABC law for the benefit of all creditors should not be defeated by a creditor trying to gain an unfair advantage for itself.

Post Script

A Drafting Committee of the Uniform Law Commission is preparing a uniform law on assignments for benefit of creditors. 

My view is that such a law should attempt to follow, as closely as possible, and codify the common law of ABCs—for two reasons: (i) because ABCs under the common law have at least a couple centuries of effective use to commend them, and (ii) because ABCs under the common law are unquestionably proper under both the bankruptcy clause and the contracts clause of the U.S. Constitution. 

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