Revisiting Assignments for the Benefit of Creditors

For my regular readers - the loyal handful of you - you may see a decrease in my output here. About a year ago, I submitted an article on assignments for benefit of creditors to the Indiana Bar Association magazine. The articles committee returned it with suggestions but I have not had time to write a second draft. Between this blog and my Indiana Family and Divorce Blog, and with trying to get my practice running again, time has been scare. I figure something has to give if I really want to get it done and so it must be the blogs.

You can find a small part of the article by reading my prior post on Assignments by clicking here.

Before I start revising, I decided to see what was new online. Google had little new information. (As an aside, I ought to mention that one commentary on my article was why I used Google instead of Westlaw or Lexis for a survey of--
articles dealing with this subject. I remain undecided if I am the one myopic or it is my reviewer. If I had been interested merely in articles on Assignments published by law journals, I think the sealed universe of the big legal databases might be more useful and certainly more costly. Considering Google's breadth of information and my interest being in current news about Assignments, I think Westlaw and Lexis too costly to justify their use.)

As for news, Assignments appear in Wired Magazine's PR Firm Sues Star Trek Online Developers about a California company.

The PR firm also alleges that Perpetual sold devalued company assets -- including the Star Trek Online license -- to a satellite company known as P2 Entertainment before filing for a "Assignment for the Benefit of Creditors", a Californian bankruptcy alternative that allows corporations to avoid lengthy court cases and great costs to themselves.

By shifting these assets to P2, Perpetual maintained peripheral control of them but could claim that since they no longer technically owned the assets, they could not be subject to any court rulings.

This particular case caught a lot of attention that turned up on Bloglines:PR Firm Sues Star Trek Online Developers, Star Trek Online Devs Sued by PR Firm,Perpetual Litigation, Perpetual Entertainment: Former PR guys sue Perpetual, In Space, wishes may come true, and Kohnke v. Perpetual - The Opening Round.

Bloglines also caught news about a Canadian Assignments case, GCO Declares Bankruptcy.

I also learned through The End Of Bolt.com that Bolt.com filed for an Assignment in California. (If you read this article note the melding of Assignments with bankruptcy is not quite right. Two different sorts of law but for the general public, bankrupt is a synonym for insolvent.)

California retains the appearance of being the leading state for Assignments. Certainly Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) brought wider attention to California's law on Assignments. I was aware of this case when I did my original research but you can find articles here and here and here (these last two being articles I missed the first time). Bottom line: the Assignments statute cannot give the Assignments trustee the power to set aside a preferential transfer equivalent to a bankruptcy trustee's powers.

I wonder if California has its thriving high tech industry more for its Assignments statute than for its anemic enforcement of non-compete agreements (see my post on that subject here). Or a combination of the two. I do know I do not have the time or resources to do much but speculate.

My view that Assignments provide an alternative for business bankruptcies gets support in the following paragraph from As BAPCPA Enters Its "Terrible Two's," BAPCPA Guru Catherine Vance Surveys Its Unruly Landscape published by The Bankruptcy Litigation Blog (and I added the emphasis):

The most disfavored business amendment was the time limit on rejection or assumption of unexpired leases, which garnered 40 percent of the votes. Seventeen percent selected the new administrative expense for pre-petition trade debt and 14 percent voted to repeal the fast-tracking of small business debtors. On this last issue, another question suggested that attorneys are advising small business clients to avoid bankruptcy; 23 percent of respondents said they had recommended a non-bankruptcy alternative, such as an assignment for the benefit of creditors, because of the fast-track amendments.

Another lawyerly article not found earlier was Bankruptcy Alternatives in the Face of Recent Bankruptcy Abuse Prevention and Consumer Protection Act from the Utah State Bar. The description given of Utah's Assignments statute corresponds to Indiana's procedure. I am also inclined to agree with this as applying to Indiana but not the point of endorsing the view:

An assignment usually is not feasible if there is substantial secured debt. There are several other potential drawbacks. In bankruptcy, a trustee may exercise statutory avoiding powers to recover pre-bankruptcy preferences and fraudulent transfers and thereby increase the "pot" for distribution to creditor. An assignee does not have that power, although individual creditors do have standing to pursue fraudulent conveyance suits but for their own and not general creditor benefit. Also, Utah statutes do not provide the detailed framework for resolution of disputed claims that is available in a chapter 7 bankruptcy.

Follow this link here to see another good reason to use Google. It has nothing to do with Assignments for the Benefit of Creditors but it shows how non-lawyers are using the web. Nothing prevents a non-lawyer from publishing a form for an Assignment to the web and its use by another non-lawyer. We of the Bar need to remember our competition is not only one another but civilians and not even necessarily civilians residing in the United Staes. My article takes the general position of a debtor, but the law most often is a two-edge sword - increased use by debtors means more employment by creditor's attorneys.

Remember while Assignments presents a possible alternative to bankruptcy, the United States Bankruptcy Code looms over Assignments. In the Sherwood Partners, Inc case, the Bankruptcy Code trumped the Assignment but not quite so in Involuntary Bankruptcy Is Even Riskier Than You Thought.

I might as well mention a book being sold by the American Bankrutpcy Institute, General Assignments for the Benefit of Creditors, 2nd Edition: The ABCs of ABCs. Which can be found here and be had for $15.00.

This blog post has news about Georgia's Assignment's statute: AppForge sells assets; firm owes $1.8 million. Again, a high tech company uses an Assignment statute. Following up on this story, I found Hays published some of the Assignment documents online. There are found here.

Speaking of Georgia, The Georgia Bankruptcy Blog published Is Assignment For The Benefit Of Creditors A Viable Alternative To Bankruptcy In Georgia?. I got to like any article justifying my own theory about Assignments:

With the increases in Bankruptcy filings over the past 20+ years, state law alternatives are used far less often. Many lawyers are not even aware of how some of these alternatives work. One example is the state law created, and infrequently used, Assignment for the Benefit of Creditors ("ABC"). Both individuals and other entities may make use of an ABC.

Between this post and the post about Appforge, I would guess that Assignments are viable in Georgia.

That wraps all the new stuff I found and have read on Assignments. With any luck I can get my article on Indiana's Assignments for Benefit of Creditors back to Res Gestae this weekend.