By: Donald L Swanson
Here’s a hypothetical.
Banker is trying to manage credit problems with debtor’s failing business.
Debtor’s attorney offers banker a choice among these alternatives:
- Debtor could give the keys of the business to bank—to liquidate as bank sees fit;
- Bank could foreclose its liens;
- Bank could initiate a receivership to manage debtor’s business while bank’s liens are being foreclosed;
- Debtor could file Chapter 11—either a regular one or under Subchapter V, if eligibility exists—and liquidate within that process (under § 363 or through a confirmed plan); or
- Debtor could assign its assets for benefit of creditors (an “ABC”) for liquidation by the ABC assignee and distribution of funds to debtor’s creditors.
Faced with these alternatives, banker will choose the ABC—and it’s not even a close call.[Fn. 1] Here’s why.
Common Law
We’re talking about an ABC of the type that’s been around for centuries—under the common law of trusts:
- the one where debtor’s assets are assigned to an assignee, who has the fiduciary duties of a trustee to maximize value for the benefit of debtor’s creditors.
We’re NOT talking about all those state ABC statutes out there, with impractical bells and whistles and court supervision requirements—you know, the ones that never get used.
Faster, Cheaper, Better
An ABC process is faster, cheaper and better than any of the alternatives mentioned above for liquidating debtor’s assets. That’s because ABCs achieve top dollar for debtor’s assets efficiently and effectively.[Fn. 2]
Receiverships, bankruptcies and other court-supervised processes, are lawyer-heavy (translation: expensive) and time consuming.
Lien foreclosure processes commonly result in the secured creditor prevailing at the sale on its credit bid—with the liquidation process beginning anew and managed, again, by the secured creditor.
As for accepting the keys to the business from debtor’s owner: “Oh, my! Never, never!!”
Control
An under-secured creditor has significant control in an ABC:
- an ABC assignee will need the secured creditor’s consent for any sale that won’t pay the lien in full;
- an ABC assignee will need the secured creditor’s consent to a budget for pre-sale expenses and the assignee’s fee;
- the secured creditor can credit bid in any ABC sale to assure that its collateral is not sold at an unacceptable price; and
- if all liquidation efforts in the ABC fail, secured creditor can still foreclose its liens.
Realities
Actual-and-practical realities, for ABCs under the common law, include:
- secured creditors are eager to have their collateral liquidated quickly, cheaply and effectively—so their cooperation is, typically, forthcoming; and
- because of the effectiveness of the ABC process, secured creditors rarely credit bid in an ABC sale and almost never foreclose their liens on assigned assets.
Opening Bid
Oftentimes, a debtor’s offer to proceed with an ABC comes hand-in-hand with an opening bid—which bid may be from an insider or a group of insiders. When that happens, the secured creditor will know, from the beginning, whether the opening bid is attractive . . . or not.
Assuming the opening bid is acceptable to the secured creditor, the ABC assignee’s duty is to shop the opening bid around and see if a higher bid might be obtained . . . with the hope of creating a bidding process between competitive bidders.
During such shopping process, the secured creditor will know whether it is on board with the proposed sale . . . or whether a credit bid might be needed to assure an acceptable price.
Conclusion
Of all the constituencies in an ABC under the common law, secured creditors are the ones who have the most to gain from the efficiencies and effectiveness of the ABC process.
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Footnote 1. Information in this article on what a banker might think is based on my personal experience over four decades of representing banks and other secured creditors in many hundreds of distressed-credit cases.
Footnote 2. Information in this article on the practicalities of ABC cases under the common law is based on my communications with Robert Handler of Commercial Recovery Associates, LLC, an ABC assignee in many cases over many years under the common law of ABCs in Illinois. Here is Robert’s LinkedIn profile.
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