“The ABC’s of Business Liquidations A Flexible Alternative to Bankruptcy”

Assignments for the Benefit of Creditors (“ABC’s” or “Assignments”) under Florida Statute 727 (“Assignment Statute”) are a flexible alternative to bankruptcy liquidations of corporate debtors.

In an Assignment, the debtor corporation (“Assignor”) assigns all of its assets to an assignee (“Assignee”) for the benefit of the Assignor’s creditors. The Assignment is implemented through the offices of an Assignee chosen because of the Assignee’s experience in business liquidations. Assignments Invariably result in a substantially greater distribution to creditors than would be expected in a Chapter 7 liquidation.

The Assignment Statute sets forth a uniform procedure for the administration of Insolvent estates under state law. In virtually all major respects, it closely mirrors the alternative liquidation provisions of Title 11 of the United States Code (“Bankruptcy Code”). As with Chapter 7 of the Bankruptcy Code, it is intended to ensure full reporting to creditors and equal distribution of assets according to priorities as established under the Assignment Statute.

I. Jurisdiction of proceedings and venue.

The assignment Instrument is filed in the office of the clerk of the court in the county of the Assignor’s chief executive office. Assignment proceedings are subject to the supervision of the circuit court for the county where the petition is filed.

II. Commencement of proceedings.

A. Assignment Instrument.

The Assignment is effected by the the Assignor’s execution of an irrevocable assignment (“Assignment Instrument”). The Assignment Instrument must substantially conform with the form set forth in the Assignment Statute. Under

the terms of the Assignment Instrument, the Assignor conveys to the Assignee all of the assets of the Assignor.

B. Power of Attorney.

The Assignment Instrument contains power of attorney which gives the Assignor full authority to do all acts which may be necessary to perform the Assignee’s duties under the Assignment Statute.

C. Schedules of Creditors and Assets.

Annexed to the Assignment Instrument are schedules which list all of the Assignor’s known creditors and all assets of the estate.

D. Assignment Petition.

While the Assignment is effected by the execution of the Assignment Instrument, the Assignment proceedings are commenced by the filing of a petition in accordance with the procedures for filing a complaint as set forth in the Florida Rules of Civil Procedure (“Assignment Petition”).

E. Assignee’s Bond.

Included in the Assignment Petition is a request that the court fix the amount of the Assignee’s bond. The bond must in an amount not less than double the liquidation value of the assets of the estate.

III. The “Automatic Stay” under the Assignment Statute.

When a debtor files a bankruptcy case, any act to enforce a pre-bankruptcy claim is stayed by virtue of the automatic stay Imposed by Bankruptcy Code § 362. When a debtor files an assignment, however, acts by creditors against the debtor are not stayed. Nevertheless, as a practical matter since the debtor has assigned all of its property to an Assignee, the debtor becomes “judgment proof” since it has no assets.

Rather than operate to protect the Debtor from creditor action, the Assignment Statute protects the Assignee and the estate assets in the hands of the Assignee. Specifically, § 727.105 provides that no proceeding may be commenced against the Assignee and no execution in respect of any judgment may be had against assets of the assignment estate. There are several important exclusions from this protection:

A. The stay only protects personal property. Thus a mortgagee may proceed with a foreclosure against real property.

B. The stay does not prohibit a proceeding by a governmental unit to enforce such governmental unit’s police or regulatory power.

C. The stay also does not protect the estate assets from a secured creditor enforcing its rights in collateral under Chapter 679, Florida Statutes.

In light of these exclusions from the protection otherwise afforded an Assignee in possession of estate assets, it is incumbent upon the debtor and the Assignee to negotiate acceptable terms under which the Assignee can liquidate the secured creditor’s assets.

Often it will be in the interest of the secured creditor to cooperate in the Assignment process. This results from the recognition of the Assignee’s superior experience level in the liquidation of collateral. This is manifested, in part, by the ability of the Assignee to complete work-in-process and collect accounts in the ordinary course of the business as the affairs of the Assignor are being wound down by the Assignee.

IV. Duties of Assignor.

Similar to the duties imposed upon a debtor under the Bankruptcy Code, the debtor, upon effecting an Assignment must:

A. Assist the Assignee in the administration of the estate and comply with all orders of the court;

B. Deliver to the Assignee all of the assets of the estate in the Assignor’ s possession or control; and

C. Submit to a deposition by the Assignee, which creditors may attend, concerning the acts and financial condition of the Assignor. This is similar to the examination conducted by a bankruptcy trustee at the meeting of creditors held pursuant to Bankruptcy Code § 341. All creditors must receive not less than 10 days’ notice by mail of an examination of the Assignor.

V. Duties of Assignee.

The Assignor’s duties are essentially those of a Chapter 7 trustee in the process of collecting and reducing to money the assets of the estate. These duties include:

A. Conduct of Business. Importantly, the Assignor may conduct the business of the Assignor for limited periods, if in the best interest of the estate, upon authorization of the court. Such authority is typically freely given by the circuit court as necessary to maximize the value of assets of the estate particularly inventory and work In process.

B. Retention of Professionals. In performance of these duties, the Assignee is empowered to employ at the expense of the estate one or more accountants, attorneys, or other professional persons. The court must approve the reasonableness of the fees and the reimbursement of expenses for the Assignee and all professional persons retained by the Assignee.

C. Reporting Requirements. The Assignee is required to file with the court an interim report of receipts and disbursements within 6 months after the filing date. After administering the estate, the Assignee Is required to file with the court a final report of all receipts and disbursements.

D. Abandonment of Assets. The Assignee may abandon assets to secured creditors where the Assignee determines that the estate has no equity in such assets.

E. Noticing Requirements. Other than the initial publication requirement, the noticing requirements in the Assignment Statute are similar to those set forth in the Federal Rules of Bankruptcy Procedure. These notice include:

1. The Assignee is required to give notice of the Assignment by publication for four consecutive weeks and to mail the notice to all known creditors within 20 days after filing of the Assignment Petition. The notice includes such information as the last day on which a proof of claim may be served upon the Assignee.

2. The Assignee must give the Assignor and all creditors not less than 20 days’ notice by mail of a proposed sale of assets of the estate other than in the ordinary course of business, the compromise Or- settlement of a controversy, and the payment of fees and expenses to the Assignee and to professional persons employed by the Assignee. If no objections are timely filed and served, the Assignee may take such action as described In the notice without further order of the court.

F. Interim Distributions to Creditors. Unlike Chapter 7, the Assignee may make interim distributions to creditors as often as is compatible with the best interests of the estate.

VI. “Adversary Proceedings” and “Contested Matters”.

Similar to the procedures employed in the bankruptcy courts, generally all matters requiring court authorization under the Assignment Statute are brought by motion. Very similar to the use of adversary proceedings under Part 7 of the Federal Rules of Bankruptcy Procedure, there are certain enumerated matters which must be brought In the Assignment case by way of a supplemental proceeding. These include:

A. An action by the Assignee to recover money or other assets of the estate;

B. An action by the Assignee to determine the validity, priority, or extent of a lien;

C. An action to avoid an unperfected security interest;

D. An action by the Assignee to avoid any conveyance or transfer void or voidable under a state law such as the Uniform Fraudulent Transfer Act.

A supplemental proceeding is brought under the Florida Rules of Civil Procedure. The clerk of the court dockets a supplemental proceeding under both the same case number assigned to the original Assignment Petition and a separate supplemental proceeding number, and assigns such supplemental proceeding to the same division and judge assigned to the main case. All pleadings filed in the supplemental proceeding contain a caption similar to the caption used In adversary proceedings in bankruptcy court.

VII. Claims Administration.

A. Filing Claims. Claims are filed by delivering a proof of claim to the Assignee within 120 days from the filing date. A form similar to the form used in bankruptcy court is sufficient. A proof of claim thus delivered constitutes prima fade evidence of the validity and amount of the claim.

B. Objections to claims.

The Assignee is charged with the responsibility of reviewing and, where appropriate, objecting to claims. A copy of the objection, together with notice of hearing thereon, must be mailed to the creditor at least 20 days prior to the hearing. All claims properly f lied with the Assignee and not disallowed by the court are entitled to distribution from the estate.

VIII. Distribution to Creditors.

Allowed claims receive distribution under the Assignment Statute in the following order of priority and, with the exception of claims of secured creditors, on a pro rata basis:

A. Secured Creditors. Creditors with valid liens on assets of the estate receive the proceeds from the disposition of their collateral, less the expenses of preserving or disposing of such collateral to the extent of any benefit to such creditors.

B. Administrative Expenses. Expenses incurred during the administratiOn of the estate including allowed fees and reimbursements of all expenses of the Assignee and professional persons employed by the Assignee.

C. Tax Claims. Unsecured claims of governmental units f or taxes which accrued prior to the filing date.

D. Wage Claims. Claims for wages, salaries, or commissions, including vacation, severance, and sick leave pay, or contributions to an employee benefit plan earned by the individual within 90 days of the filing date or the cessation of the Assignor’s business, whichever occurs first, but only to the extent of $2,000.

E. Deposit Claims. Allowed unsecured claims, to the extent of $900 for each individual, arising from the deposit with the Assignor before the filing date of money in connection with the purchase, lease, or rental of property or the purchase of services for personal, family, or household use by such Individuals that were not delivered or provided.

F. Unsecured Claims. Unsecured claims are paid pro rata from any remaining estate

G. Debtor. If all of the above classes have been paid in full, any residue is paid to the Assignor.