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Probate & Property

May/June 2025

Uniform Laws Update - The Assignment for the Benefit of Creditors Act Plans to Bring Consistency to State Law

Jane E Sternecky

Summary

  • An assignment for the benefit of creditors (ABC) is a voluntary, debtor-initiated alternative to bankruptcy, state receivership, or voluntary workout.
  • The current draft of the Assignment for the Benefit of Creditors Act is intended to codify and clarify the common-law concept of ABCs as an out-of-court complement to judicial processes such as receiverships and bankruptcy.
Uniform Laws Update - The Assignment for the Benefit of Creditors Act Plans to Bring Consistency to State Law
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The Assignment for the Benefit of Creditors Act Plans to Bring Consistency to State Law

In 2022, the Uniform Law Commission (ULC) began studying the feasibility of a uniform act establishing guidelines for assignments for the benefit of creditors. An assignment for the benefit of creditors (ABC) is a voluntary, debtor-initiated alternative to bankruptcy, state receivership, or voluntary workout. Unlike a receivership or bankruptcy, an ABC is conducted without court supervision and is designed to maximize the value of the assignor’s assets. ABCs serve as an inexpensive, straightforward alternative or supplement to other forms of liquidation and are a valuable tool for attorneys dealing with distressed commercial real estate.

ABCs have been used for centuries under common law as an efficient, out-of-court tool for liquidating the assets of a failed business. The ULC recognized that existing black-letter law, customs, and practices for ABCs vary significantly among the states. This patchwork results in the underappreciation and underutilization of ABCs in most states.

In the fall of 2023, the ULC’s project progressed into a drafting committee, which has worked to prepare a uniform act that it aims to present for approval at the ULC’s annual meeting in July 2025. The drafting committee is comprised of Uniform Law Commissioners, an ABA advisor, and observers from the banking, bankruptcy, legal, receivership, and title insurance industries.

The current draft of the Assignment for the Benefit of Creditors Act (the draft Act) is intended to codify and clarify the common-law concept of ABCs as an out-of-court complement to judicial processes such as receiverships and bankruptcy. The draft Act authorizes the assignee to administer and pay claims associated with the assignor’s real and personal property.

First, the draft Act establishes which entities and individuals are eligible to be assignors and assignees. It limits assignees to those who are not a creditor, affiliate, or insider of an assignor and who otherwise do not have (1) a material financial interest in the outcome of the assignment, (2) a claim against the assets of the assignor, or (3) an equity interest in the assignor (other than a noncontrolling interest in a publicly traded company).

Next, the draft Act gives the assignee all rights, title, and interests of the assignor, which are called the “assignment estate.” The assignee holds the assignment estate in trust for the assignor’s creditors. The draft Act requires assignees to record the assignment of real property following existing state law and comply with title transfer laws. Under the draft Act, the assignee has default authority to exercise a right of redemption with regard to real or personal property to redeem an asset of the assignment estate that is subject to a mortgage or other encumbrance.

Other default powers of assignees under the draft Act include operating an existing business using assigned assets, incurring secured or unsecured debt, and engaging professionals (including professionals previously engaged by the assignor) to provide legal services. The assignment agreement may modify the default powers and other provisions in the draft Act. Additionally, under the draft Act, assignors are obligated to turn over assigned assets and generally facilitate and cooperate with the assignee’s discharge of duties.

Under the draft Act, a creditor must file a valid proof of claim to be paid from the assignment estate. The proof of claim must include the name and address of the creditor, the amount and nature of the claim, an identification of any assets of the assignment estate securing the claim, an assignment of rights to the assignee, a signature, and a copy of the record on which the claim is based.

To resolve claims, the draft Act creates a procedure for the assignee to object, in writing, to a claim before final distribution and allows the creditor to file a judicial action to determine the claim. Additionally, the draft Act permits assignees to send a request to a creditor requesting additional information about a claim. It permits the claim to be disallowed if the information is not provided. Once the assignee has received all claims and the required and requested information to substantiate them, the assignee will create a list detailing the amount of each creditor’s claim, whether it is secured or unsecured, and a description of the collateral. The draft Act requires the assignee to provide notice for creditors who will not receive distributions.

Additionally, the draft Act establishes the rights of transferees and the priority of claims and sets distribution procedures. Under the draft Act, neither assignors nor assignees are personally liable for acts or omissions by the other. However, the draft Act holds assignees personally liable for their breach of fiduciary duty, failure to materially comply with the Act, or causing individualized harm to a creditor. For harms shared by all creditors, the draft Act holds the assignee liable to the assignment estate. Finally, the draft Act creates a procedure for the assignor to request that a court remove the assignee for cause.

The final text of the Assignment for the Benefit of Creditors Act will be available on the ULC’s website once it is approved in July 2025. This Act will improve the utility of ABCs and provide real property attorneys with flexibility and certainty when their clients are involved in ABCs. It will also provide opportunities for impartial attorneys to serve as assignees when appropriate. This Act should be considered for enactment in all states and US territories.

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