By: Donald L Swanson
Delaware’s Court of Chancery has no subject matter jurisdiction over an assignment for benefit of creditors proceeding when the debtor/assignor is an Illinois corporation with no assets or operations in Delaware, even when its ABC assignee/trustee is from Delaware.
That’s the decision of Delaware’s Court of Chancery in In re Vernon Hills Serv. Co., 2024 Del. Ch., C.A. No. 2021-0783 (issued March 28, 2024).
Facts
Founded in 1865 under Illinois law, Vernon Hills Service Company is a hotel supplies distributor, providing janitorial and sanitation products, linens, bathroom accessories, and room amenities.
The COVID-19 pandemic hits the hotel business hard . . . including hotel suppliers like Vernon Hills.
In 2021, Vernon Hills’s major secured creditor begins a private disposition of collateral process.
At the same time, Vernon Hills’s stockholders approve an agreement for sale of substantially all Vernon Hills’s assets to a third party buyer.
Then, the Vernon Hills’s board authorizes it to enter into an assignment for the benefit of creditors (“ABC”) and then to formally dissolve. The board’s resolution also approves a selection of an Assignee.
So, Vernon Hills enters into an ABC agreement that:
- makes no mention of a choice of law or choice of forum;
- “nominates and appoints” the Assignee; and
- transfers all Vernon Hills’s assets to the Assignee.
ABC Proceeding in Delaware
Then, Assignee formalizes the ABC process for Vernon Hills by filing an ABC petition in the Delaware Court of Chancery.
As is typical in that Court, the ABC proceeding begins ex parte with the Court entering an order proposed by the Assignee:
- asserting jurisdiction over the ABC under Delaware law; and
- requiring the Assignee to provide notice to Vernon Hills’s creditors.
Assignee also files with the Court an affidavit identifying Vernon Hills’s only assets as equity interests in, (i) AHR International Hotel Supply Coöperatief U.A., a Netherlands cooperative, and (ii) International Hotel Supply (India) Private Limited.
The affidavit says the value of such entities is “TBD.”
Proposed Sale
Then, Vernon Hills’s Assignee moves the Delaware Court of Chancery for approval of a proposed sale of Vernon Hills’s assets for a price of $200,000 and entry of an order insulating the sale and the Assignee from any future challenge.
The Chancery Court holds a status conference on the proposed sale and:
- notes that Delaware’s assignment statutes do not provide for Court approval of an ABC assignee’s sale of assigned assets; and
- indicates its reluctance to, (i) approve a sale involving parties not before the court, or (ii) grant additional relief designed to insulate the transaction from future challenge.
Additionally, a creditor objects to the proposed sale, arguing that it is designed to extinguish Assignor’s debts.
Appraisers and Bond
In response, Assignee withdraws the proposed sale and, instead, asks the Court to:
- appoint appraisers; and
- set an unsecured bond of $200,000.
Since the Assignee had already obtained the proposed appraisals (which set the value of Assignor’s two equity interests at $1,511,000 and $2,880,000, respectively), the Court:
- appoints the appraisers; but
- requires a secured bond of $2,195,500.
Discharge Motion
Fast forward five months: Assignee files a motion in the Court of Chancery for final accounting and for an order closing the case, releasing the bond, and discharging the Assignee (the “Discharge Motion”).
The Delaware Court of Chancery reviews the Discharge Motion and considers whether it ever had subject matter jurisdiction over Vernon Hills’s ABC proceeding. The jurisdiction issue arises because Vernon Hills:
- is an Illinois corporation; and
- has no connection to Delaware.
Issues
After briefing and a hearing, the Delaware Court of Chancery finds as follows.
The issue of subject matter jurisdiction may be raised at any time before final judgment and by the court sua sponte, and the burden of establishing subject matter jurisdiction rests with the party seeking the Court’s intervention.
The Delaware Court of Chancery has limited jurisdiction, and its jurisdiction over Delaware ABCs is delegated by statute. The subject matter jurisdiction question is this:
- “whether the Assignor, as an Illinois corporation with no substantial contacts with Delaware, may pursue an ABC proceeding under Delaware statutes.”
ABC Laws in Illinois and Delaware
In Illinois, where Assignor is incorporated and conducted its operations, ABCs are governed by common law and do not involve judicial oversight.
By contrast, ABCs in Delaware are governed by statute and involve oversight by the Court of Chancery. However, Delaware’s ABC statute, (i) is facially limited to debtors with assets in Delaware, and (ii) has also been applied to assignors that are incorporated in Delaware.
Assignee’s Arguments
Even though Vernon Hills is incorporated in Illinois, has no assets or operations in Delaware and has no other Delaware connection, Assignee argues that Delaware law governs the assignment and that the Court of Chancery has subject matter jurisdiction solely because the Assignee is a Delaware entity.
According to Assignee:
- Assignor’s assets are located in Delaware because they were transferred by agreement to the Assignee—a Delaware limited liability company; and
- because the Assignee is a Delaware entity with legal authority over the Assignor’s assets, those assets are deemed to be located in Delaware.
Assignor also argues that jurisdiction exists in Delaware because the assignment agreement provides, (i) that it is governed by Delaware law, and (ii) gives to the Assignee sole discretion to proceed under Delaware law in Delaware’s Court of Chancery.
Court Rulings
The Delaware Court of Chancery declares that Assignee cites no persuasive authority for any of its propositions.
–ABC Agreement
The Court also declares that Vernon Hills’s ABC agreement cannot create jurisdiction under Delaware’s ABC statute “for at least two reasons”:
- parties cannot confer subject matter jurisdiction on the Delaware Court of Chancery by contract; and
- Vernon Hills’s ABC agreement fails to expressly provide for either, (i) the application of Delaware law, or (ii) venue in the Delaware Court of Chancery.
What the Vernon Hills’s ABC agreement actually provides is that the assignment will proceed without judicial supervision unless otherwise required by law. So, here’s the reality:
- Vernon Hills is an Illinois corporation and is headquartered in Illinois so that Illinois law would apply to its ABC assignment, and jurisdiction would be proper in Illinois—Assignee acknowledges that it could have pursued Vernon Hills’s ABC under Illinois law; and
- Assignee’s filing of the ABC in the Delaware Court of Chancery and invocation of the Delaware ABC statute is contrary to the parties’ express agreement that the ABC “shall be administered out of court.”
–Restatement (Second) of Conflict of Laws
Moreover, the Restatement (Second) of Conflict of Laws identifies the following factors applicable to the issue before the Court of Chancery:
- the effectiveness of a general assignment for benefit of creditors is usually governed by the local law of the state of the assignor’s domicil or incorporation or principal place of business;
- it is important that such assignments should be governed by the local law of a single state; and
- considerations of fairness to creditors dictate that the state should be one that is closely connected with the debtor and where the debtor could readily have been subjected to suit.
–Delaware Precedents
Assignee also cites a handful of uncontested ex parte orders entered by the Delaware Court of Chancery in ABCs involving non-Delaware parties. Such cited cases can be broken into three categories:
- cases where the assignor is a Delaware entity, but the assignee is a foreign entity;
- cases where some, but not all, assignors are Delaware entities; and
- cases with exclusively out-of-state assignors, each of which is wholly owned by a Delaware entity.
The Vernon Hills ABC proceeding is not analogous to any of those.
Accordingly, the Delaware Court of Chancery rules that:
- it lacks subject matter jurisdiction over Vernon Hills’s ABC;
- Vernon Hills’s ABC petition is dismissed; and
- the bond is released.
Conclusion
Here is a lesson from the In re Vernon Hills opinion described above:
- don’t attempt an ABC in a state with which the debtor/assignor has no connection.
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