The ABC’s Of An Assignment For The Benefit Of Creditors

A Flexible Approach To Managing Debt Outside Of Court

Assignment for the Benefit of Creditors In Washington

Simply stated – an Assignment for the Benefit of Creditors assigns the assets and liabilities of the party making the assignment (the “Assignor”) to that party’s chosen representative (the “Assignee”).  The Assignee then administers those assets for the benefit of creditors as the holder of a power of attorney from the Assignor.

The Regional Background of Assignments for the Benefit of Creditors

Prior to the enactment of the Bankruptcy Code in 1978, the National Association of Credit Management (“NACM”) frequently administered Assignments for the Benefit of Creditors in Spokane, Washington. 

The Spokane Merchants Association was often the sponsor of these assignments, and enlisted the support of the distressed company with pressure from local trade creditors.

The NACM would prepare a written assignment to the management of the target company, with strong provisions for the operation of the company during the assignment.

The NACM would also form a committee of creditors to manage a plan for the repayment of creditors, while frequently obtaining a blanket lien against the assets of the company to render it “judgment-proof” from the claims of non-participating creditors.

Such an assignment effectively wrested control of a company away from its owners and managers, who often had few reasonable alternatives for continuing their business.

The dynamics of creditor intervention changed dramatically with the enactment of the Bankruptcy Code, and the provisions for restructuring business debt under Chapter 11.  With the protections of the automatic stay, and for the continuation of existing management of the Chapter 11 entity as a debtor in possession, an Assignment for the Benefit of Creditors through NACM became immediately less viable as a creditor remedy.

Although the statute was essentially dead letter law, the Washington statute governing Assignments for the Benefit of Creditors remained substantially unchanged until the enactment of the Washington Receivership Act in 2004.

The Enactment of the Washington Receivership Act

RCW 7.08, which is the statute governing Assignment for the Benefit of Creditors, was restated in 2004 to coordinate Assignment for the Benefit of Creditors with the Washington Receivership Act.

The revised statute provided for the appointment of the Assignee as a receiver following the execution of the assignment.

Under the revised statute, the Assignor may appoint an Assignee for the express purpose of having that party appointed as the receiver. 

The Assignee is best selected by the assignor based on knowledge, trust, and expertise.  The Assignee must consent to the assignment.

Individuals, acting in their personal capacity, may execute an Assignment for the Benefit of Creditors to provide for the administration of their personal assets.  For example, a divorcing couple may initiate an assignment to administer their assets and liabilities as part of a property settlement agreement. 

Individuals are entitled to exempt property in accordance with applicable law, and exclude that property from the assignment.  Otherwise, the Assignor must assign all property to the Assignee.

The assignment must be substantially in the form set forth by statute at RCW 7.08.030. The assignment must attach a schedule of all known creditors, including the creditors’ mailing addresses; the amount and nature of their claims; and whether their claims are in dispute. 

The schedule must also include a true list of all property, including the estimated liquidation value and location of that property, and legal descriptions for all real property.

These schedules of assets and liabilities, while detailed, are less comprehensive than the Official Bankruptcy Forms. It is often advisable to supplement the statutory form of schedules with a schedule of executory contracts and a schedule of co-debtors, so parties will receive a more complete presentation of financial information.

There is no disclosure of operating information or past transactions that is similar to the Statement of Financial Affairs that is required in a bankruptcy case.

What Are The Business Purposes Of An Assignment For The Benefit Of Creditors?

Most Assignors execute an Assignment for the Benefit of Creditors for one of two purposes.

First, an Assignment for the Benefit of Creditors can provide a “stand-alone” procedure for liquidating assets under the independent management of the Assignee.  Unlike a bankruptcy or a receivership case, there is no legal action required to commence an Assignment for the Benefit of Creditors, and no judge will oversee the actions taken by the assignee.

Accordingly, an Assignment for the Benefit of Creditors can be employed to test the willingness of creditors to participate in a voluntary settlement of the Assignor’s liabilities. If so, the Assignor and the creditors may avoid the time and expense of a receivership or bankruptcy proceedings.

As a non-judicial procedure, an Assignment for the Benefit of Creditors is also more private and confidential than a bankruptcy or receivership case. The owners of the assets can then devote their time and energy to other endeavors, and place some distance between themselves and the financial issues of their former business.

Second, an Assignment for the Benefit of Creditors contains the consent of the Assignor to the appointment of the Assignee as a general receiver over the Assignee’s property in accordance with chapter 7.60 RCW. This provision allows the use of an Assignment for the Benefit of Creditors as a “stepping-stone” to a general receivership, without the other procedural hurdles that are set forth in the receivership statute.

Either the Assignor, the Assignee, or any creditor of the Assignor may file a petition to appoint the Assignee as receiver of the assets of the Assignor. That petition, filed with the clerk of the superior court, must include a copy of the assignment; the schedules of assets and liabilities; and a request for the court to fix the amount of the receiver’s bond.

The amount of the bond may be low, since the Assignor selected the Assignee based on faith in the trustworthiness and integrity of the Assignee.  If circumstances change, the Court can increase the amount of the bond as appropriate.

The superior court will then appoint the Assignee as general receiver of the Assignor’s property upon the filing of the petition.

The Washington Receivership Act would govern all further proceedings involving the administration of the Assignor’s property and the claims of the Assignor’s creditors.

There is no requirement to schedule a meeting of creditors.  The court would only schedule such a meeting upon the motion of two or more creditors, if filed within thirty days following the date upon which the receiver mailed notice of the receivership to all known creditors.

At the meeting of creditors, the Court will determine whether to appoint a person other than the Assignee as the general receiver.  A creditor may not vote at any meeting of creditors until the creditor has presented a proof of claim.

The filing of a motion to elect a new Assignee suspends the authority of the Assignee to sell or dispose of any property of the Assignor, except perishable property, whether or not the court has appointed the Assignee as the general receiver.

The failure of the creditors to select a new Assignee will reinstate that authority.  Otherwise, the authority vests in the replacement Assignee, who then serves as the receiver.

More often, a party files a petition to appoint the Assignee as receiver to obtain the protections of the automatic receivership stay, and access to the court for the resolution of creditor disputes.

An Assignment for the Benefit of Creditors must be for the benefit of all creditors in proportion to the amount of their respective claims.  All creditors are entitled to receive notice of the assignment.

The Assignment for the Benefit of Creditors irrevocably appoints the Assignee as the Assignor’s attorney in fact, with full power and authority to do all things that may be necessary to fulfill the assignment. 

The Assignee can perform the same acts that the Assignor could do, including but not limited to the power to sue; the power to execute all necessary deeds, instruments, and conveyances, and the power to convey any or all of the real or personal property of the estate.

The Assignee must take possession of the assets, liquidate the assets, and collect all claims.   The Assignee must pay and discharge all reasonable expenses, costs, and disbursements in connection with administration of the assignment.

To the extent that funds are available after payment of administrative expenses, the assignee must  pay all of the Assignor’s debts and liabilities, according to their priority as established by law, on a pro rata basis within each class. 

Unlike a bankruptcy or receivership, there is no provision for the assignee to exercise the rights of a hypothetical lien creditor to file suit for the recovery of fraudulent transfers, or for the recovery of preferential payments to creditors.

Although the Assignment for the Benefit of Creditors statute does not set forth the priority of creditors’ claims, the priorities established in the Washington Receivership Act should be applicable in an Assignment for the Benefit of Creditors. 

These priorities do not elevate the claims of the federal government above the claims of state tax agencies. Nevertheless, the Internal Revenue Service may assert a first priority claim for payment under 31 U.S.C. 3713(a)(1), which provides that a claim of the United State Government shall be paid first when a person indebted to the government is insolvent, and that person makes a voluntary assignment of property.

The Assignee must return any assets that remain after the payment of all debts and liabilities to the Assignor.