By: Donald L Swanson
The common law of assignments for benefit of creditors (“ABC”) has been around for centuries.
ABC is a business debtor’s voluntary liquidation tool—typically utilized in cooperation with a major secured creditor.
Historically, ABCs are attractive to debtors and creditors alike as an efficient, mostly out-of-court tool for maximizing the liquidation value of a business—for the benefit of creditors.
Over the past century, however, ABC statutes in many states have converted ABCs into a court-supervised process with a variety of poison-pill provisions that debtors and their creditors do not want to use.
So, a drafting committee of the Uniform Law Commission is working on a proposed uniform law on assignments for benefit of creditors. The bond issue discussed below is one of the many issues under consideration.
Bond Requirement–A Poison Pill
One of those poison-pill provisions is the statutory requirement of an assignee’s bond. Notably, the cost of the bond:
- can be very high;
- is paid from the debtor’s assets; and
- comes directly out of the pool of funds that goes to creditors.
The Trust Model for ABC Bonds
ABCs arise out of—and are part of—the law of trusts:
- Debtor is the trustor;
- Assignee is the trustee; and
- Debtor’s creditors are the trust beneficiaries.
ABCs are often described, wrongly, as bankruptcy-lite. Instead, ABCs are (or should be) trust-heavy.
Under the common law of trusts, a trustee cannot be compelled to give a bond, unless (i) a party in interests asks a court to require a trustee bond, and (ii) the court finds that the safety of trust assets is at risk.[Fn. 1]
Similarly, § 702(a) of today’s Uniform Trust Code requires a bond only if:
- a court finds that “a bond is needed to protect the interests of the beneficiaries”; or
- the terms of the trust require a bond, and the court “has not dispensed with” that requirement.[Fn. 2]
Accordingly, this trust bond model is what ABC laws should follow: i.e., no assignee bond, unless trust assets are at risk.
Put another way: Why should funds available to creditors be diminished by the expense of a bond when ABC assets are not at risk?!
Two Poison-Pill Bond Examples
–Double the Value of Assets
One common poison-pill requirement in today’s ABC statutes is this: the assignee must post a bond in an amount that doubles the value of debtor’s assets.
Iowa’s ABC statute, for example, requires the assignee to value debtors assets and “then enter into bonds . . . in double the amount of the . . . valuation . . . for the faithful performance of said trust.”[Fn. 3]
This double-the-value bond requirement is out of place in an ABC process. Here’s why:
- double-the-value bond requirements are from the replevin context;
- in a replevin, a creditor is required to post a double-the-value bond to protect the debtor; and
- that’s part of the due process requirement for a creditor taking possession of debtor’s property without debtor’s consent (see Fuentes v. Shevin, 407 U.S. 67 (1972)).
In an ABC, by contrast, the debtor is making a voluntary conveyance of debtor’s assets to an assignee/trustee for benefit of creditors. There is no due process issue.
Accordingly, the replevin requirement for a double-the-value bond has no application in an ABC context. And it’s presence in an ABC statute creates a cost that can be prohibitive.
–Court Approval of Bond Amount
Delaware’s ABC statutes require an assignee’s bond “in an amount fixed by the Court, being not less than the total amount of inventory and appraisement of the estate.”[Fn. 4]
This “fixed by the court” bond requirement destroys, from the very beginning, ABC’s character as an efficient and inexpensive process.
That’s because courts, when required to “fix” an amount based on asset values, will want evidence to do that fixing. This requires a evidentiary process akin to first-day motions in bankruptcy with first-day declarations and asset appraisals—all of which add significant cost, expense and delay to the ABC process.
The result is that ABCs are not an efficient and inexpensive process in Delaware. Instead, the Delaware process is bankruptcy lite (i.e., inefficient and expensive), not trust heavy.
Conclusion
Among the poison-pill defects of many state ABC statutes is the requirement of an assignee’s bond in a substantial amount:
- regardless of whether the ABC assets are at risk or not; and
- especially when a court is required to set the amount of the bond based on asset values.
Such poison-pill defects unnecessarily destroy, from the very beginning, the efficiencies and low-cost characteristics that make an ABC process attractive to a debtor and its creditors.
And such bond defects need to be removed from state ABC statutes.
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Footnote 1. See 90 Corpus Juris Secundum, Trusts § 302, at 428-29 (2002)
Footnote 2. Sec. 702 of the Uniform Trust Code (proffered by the Uniform Law Commission) says: “TRUSTEE’S BOND. (a) A trustee shall give bond to secure performance of the trustee’s duties only if the court finds that a bond is needed to protect the interests of the beneficiaries or is required by the terms of the trust and the court has not dispensed with the requirement. (b) The court may specify the amount of a bond, its liabilities, and whether sureties are necessary. The court may modify or terminate a bond at any time.”
Footnote 3. Iowa Code § 681.7 says: “Inventory and appraisement — bond. The assignee shall forthwith file with the clerk of the district court where such assignor resides a true and full inventory and valuation of said estate under oath, so far as the same has come to the assignee’s knowledge, and shall then enter into bonds to said clerk, for the use of the creditors, in double the amount of the inventory and valuation, with one or more sureties to be approved by said clerk, for the faithful performance of said trust, and the assignee may thereupon proceed to perform any duty necessary to carry into effect the purpose of said assignment.”
Footnote 4. Delaware’s Title 10, § 7383(a) says: “Assignee’s bond. (a) The assignee shall, as soon as the inventory and appraisement required by § 7382 of this title have been filed, give bond with sufficient surety, to be approved by the Court of Chancery in an amount fixed by the Court, being not less than the total amount of inventory and appraisement of the estate so assigned.
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