Primer on Florida’s Assignment for Benefit of Creditors: What are they?

An assignment for the benefit of creditors is one of the vehicles utilized to liquidate a failed or no longer viable business under state law. This method of liquidating or transferring assets has long been popular in Florida. The assignment case is filed in a Florida Circuit Court where the assets of the business, assignor, are located. The proceeding is analogous to a bankruptcy liquidation of a business entity under Chapter 7 of the Bankruptcy Code.

The assignment is a contract, in which the assignor turns over all assets and liabilities to the assignee for liquidation for the benefit of creditors. The assignment is a transfer of the debtor’s legal and equitable title to property to the assignee, a fiduciary with authority to liquidate the debtor’s affairs and distribute proceeds equitably to creditors. The assignee is typically a professional liquidator.

An assignment proceeding is commenced with the execution of an irrevocable assignment in writing, in compliance with the statutory form which is provided. Once the assignment is executed, the next step is to record the original in the public records in the county where the assignor had its principal place of business and a certified copy in each county where assets of the estate are situated. In addition, the assignee for the benefit of creditors must file a petition with the clerk of the court commencing the assignment proceeding. The assignee must also file a motion asking the court to fix the appropriate amount of the assignee’s bond.

Duties of Assignee

The assignee’s duties are congruent to those of a bankruptcy trustee. These duties include the following:

• Collection of the assets of the estate and reducing them to money;

• Conducting an initial examination of the assignor under oath within 30 days;

• Giving notice to creditors;

• Conducting the business of the assignor for limited periods, if appropriate;

• Paying administrative expenses of the estate to the extent that they are reasonable and necessary;

• Keeping regular accounts and furnishing information concerning the estate to parties-in-interest;\

• Examining the validity and priority of all claims against the estate;

• Abandoning assets to perfected lien creditors where the estate has no equity;

• Accounting;

• Hiring professionals as may be necessary;

• Paying dividends as appropriate; and

• Submitting a final report.

Under the assignment statute, the term “asset” is defined as the “legal or equitable interest of the assignor in property, which includes anything that may be the subject of ownership, whether real or personal, tangible or intangible, including claims and causes of action, whether arising by contract or in tort, wherever located, and by whomever held at the date of the assignment, except property exempt by law from forced sale.” The assignee can pursue all these types of assets to liquidate them for the benefit of creditors, including commencing legal causes of action against third parties – e.g., pursuing fraudulent transfers and other kind of claims.

Significantly, one of the powers of the court is to allow the assignee to operate the business of the assignor for limited periods, if it is in the best interest of the estate to do so. This enables the assignee the opportunity to sell the business as a going concern, in order to obtain more value for the creditors, as there is generally a substantial incremental “going concern value” component to an ongoing business, even if it is insolvent.

As noted above, the assignee must file reports with the court. However, the assignee is required to file an interim report after six months. At the close of the administration, when the assignee is ready to make a final distribution, the assignee must file a final report of all receipts and disbursements and request approval from the court. Upon approval of the assignee’s final report, the court then discharges the assignee and releases the assignee’s bond and the assignment case ends.

Notice, Proof of Claims, and Priority of Claims

The assignee is required to notice of the assignment by publication in a newspaper of general circulation published in the county where the petition is filed and in any other county or counties where the assignment is required to be recorded, once a week for 4 consecutive weeks, within 10 days after filing of the petition; and by mailing notice to all known creditors within 20 days after filing of the petition.

The notice of the assignment must include the date of filing of the petition; the name of the court where the petition is filed and the case number assigned to the petition; the last day on which a proof of claim may be served upon the assignee. Proof of claims must be filed within 120 days from the date of the filing of the petition. Creditors must set out in the proof of claim the name and address of the creditor and the nature and amount of the claim. The proof of claim must be executed by the creditor or the creditor’s authorized agent or attorney.

Florida law sets out the scheme to prioritize claims in the following order by category of claim:

1. Secured Creditor Claims

2. Administrative Claims (fees and expenses incurred by the assignee and his professionals during the course of the assignment case)

3. Governmental Units Unsecured Claims

4. Wages/Compensation Claims

5. General Unsecured Creditor Claims

§ 727.114, Fla. Stat.

Section 507 of the Bankruptcy Code sets out a very similar priority scheme. However, wages, salaries, or commissions earned within 180 days before a bankruptcy case is filed or the debtor’s business ceased, whichever is earlier, are entitled to a priority unsecured claim status for up to $12,475. See 11 U.S.C. § 507(a)(4).

Stay of Certain Proceedings

Unlike bankruptcy cases, there is no general automatic stay in assignments.

Under Florida law, proceedings may not be commenced against the assignee. In Florida, all but consensual lien holders, meaning secured creditors and mortgagees, are prohibited from commencing proceedings against the assignee. Holders of nonconsensual liens, such as judgment, execution, or garnishment liens, must participate in the process.

Competing common claims against third parties are also stayed, and cannot be pursued. Only the assignee can prosecute such actions. See Moffatt & Nichol, Inc. v. B.E.A. International Corp., Inc., 2010 WL 4103149 (Fla. 3d DCA 2010) (competing fraudulent transfer claim against third party stayed because once an assignment proceeding is instituted in which all assets are assigned, only the assignee has standing to pursue fraudulent transfer claims on behalf of the estate, otherwise, it would allow one creditor to improperly 'cut in line', in contravention of the spirit of the assignment statute). Unless assignee abandons property subject to such common claims, creditors holding the competing claim must wait to receive their due at the distribution stage in the proceedings. Failure to abide by this concept may lead to the imposition of sanctions.

What to do?

Always remember that decisions regarding bankruptcy, assignment for benefit of creditors, restructuring and insolvency, trust assignment, and other possible solutions to a company’s inability to pay its debts are dependent on the specific situation and circumstances of the company. There’s a reason why businesses are given various choices when it comes to their inability to pay back debt and remain liquid.

In making a decision concerning an assignment for the benefit of creditors, you should weigh how important these factors are in your situation:

- Timing: do you want to control when things happen?

- Cost: are you interested in going a less costly route?

- Simplification: would you like less red tape?

- Stigma of Bankruptcy: are you concerned about your reputation?

- Creditor Agreement: are you looking for the creditor to agree to terms easily and quickly?

If your answers to the above questions are “yes,” then assignment for benefit of creditors may be the best path for you.

If your company is experiencing financial distress and is unable to pay its debts, then you want to seek advice from a business lawyer. Your attorney should be able to assess your present situation and review what options are available to you and which ones will be most helpful in alleviating the pressures of mounting debt.

Creditors should also be aware of the mechanics of assignment cases, and the right to active participate in the process – including the right to conduct discovery. Creditors likewise should consult with an attorney to assist in navigating the process to protect their rights and interests.

SARDI LAW can assist clients with assignments for the benefit of creditors and other insolvency proceedings. Each case is different, and the information provided here is not intended to create an attorney-client relationship. The hiring of a lawyer is an important decision that should not be based solely upon any single source of information, including advertising. You may ask us to send you additional information about us, and we urge you to review other sources of information about Sardi Law, PLLC.