By: Donald L Swanson
I’m serving on a Drafting Committee of the Uniform Law Commission for a uniform law on assignment for benefit of creditors (“ABC”).  A draft of such a uniform law is coming together, with lots of input from many people and organizations. And we are always looking for more input!

At one point, I’m comparing differences between ABCs under the common law and ABCs under various state statutes. And here are the typical differences I see:

• an ABC under the common law is an out-of-court process that has been utilized successfully across centuries past in our United States and extending back to England; and 
• ABCs under state statutes have been around since Civil War days — such statutes typically require heavy court-supervision, and most of such statutes are rarely used.

And it occurs to me that an ABC under the common law is, actually, an alternative dispute resolution (“ADR”) process.

Here’s how.

ADR Defined

ADR is defined by federal statute as any process, “other than an adjudication by a presiding judge,” in which a neutral third party assists in “the resolution of issues in controversy,” through such processes as “early neutral evaluation, mediation, minitrial, and arbitration.”  28 U.S.C. § 651(a).

ABC Defined

ABC is defined as a voluntary transfer of debtor’s assets to a neutral third person in trust, who then liquidates those assets and distributes the proceeds to debtor’s creditors.

ABC is Like Arbitration

The statutory list of four ADR processes quoted above is “early neutral evaluation, mediation, minitrial, and arbitration.”

Of those four listed items, ABCs under the common law are like arbitration:             

• both arbitrations and ABCs enlist the aid of a third party neutral to resolve issues between disputing parties in an out-of-court process; and
• the essential difference is this, (i) arbitrations are a substitute for lawsuits, while (ii) ABCs are a substitute for liquidating bankruptcies.

Other points of comparison between arbitrations and ABCs include:

• an arbitrator resolves disputes by receiving evidence and issuing rulings, while an assignee resolves disputes by liquidating assets and, after a claims resolution process, distributing the proceeds;
• arbitration disputes are primarily over the validity and amount of a claim, while ABC disputes are primarily over the recoveries on a claim;
• an arbitration happens by agreement of the parties, while an ABC happens by agreement of the debtor and the assignee and often with the support of the debtor’s major creditors;
• both an arbitration and an ABC under the common law happen without court supervision, but the assistance of a court can be enlisted in both as needed (e.g., to enable discovery[fn. 1] or to resolve an ABC fee dispute[fn. 2]); and
• an arbitration is an out-of-court lawsuit, while an ABC under the common law is an out-of-court bankruptcy.

Conclusion

Assignments for benefit of creditors under the common law have been working well for centuries, as an out-of-court process.

Such process is within the alternative dispute resolution spectrum for resolving disputes out of court and with the assistance of a third party neutral.

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Footnote 1.  See, e.g., 9 U.S.C. § 7 (“upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators”).

Footnote 2.  In First Bank v. Unique Marble & Granite Corp., 938 N.E.2d 1154, 345 Ill. Dec. 233 (2010), the Appellate Court of Illinois, Second District, rules (in an assignment under the common law) that “an assignee cannot be required to forgo the payment of the reasonable fees and costs of administering the assignment until perfected security interests have been fully satisfied.”

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