how does an assignment for the benefit of creditors work

• assignments benefits creditors abcs basics california

Assignments for the Benefits of Creditors - "ABC's" - The Basics in California

An assignment for the benefit of creditors (“ABC”) is a contract by which an economically troubled entity ("Assignor") transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party ("Assignee") in trust, who is required to apply the proceeds of sale of the property to the assignor's creditors in accord with priorities established by law.

ABCs are a well-established common law tool and alternative to formal bankruptcy proceedings. The method only makes sense if there are significant assets to liquidate. ABCs are most successful when the Assignor, Assignee and creditors cooperate but can be imposed even if the creditors are not supportive.

Assignors - Rights and Duties

Generally, any debtor – an individual, partnership, corporation or LLC - may make an assignment for the benefit of creditors. Individuals seldom utilize ABCs, though, because there is no discharge of all debts as there would normally occur in a completed bankruptcy filing. Thus, the protection and benefit of the process is quite limited for any personal obligor.

ABCs can benefit individual principals who have personally guaranteed company obligations or have personal liability on tax claims. Once the Assignment Agreement has been executed, a trust is automatically put in place over the assets transferred. The Assignor can neither rescind the contract nor control the proceedings, but the Assignor may be consulted as necessary and appropriate by the Assignee during the liquidation process.

Assets to be Assigned

Assignor may assign any non-exempt real, personal, and/or general intangible property that can be sold or conveyed. Note that such assets as intellectual property, trade names, logos, etc. may be so transferred and sold. When a corporation makes an assignment, all corporate property, tangible and intangible is transferred including accounts, and rights and credits of all kinds, both in law and equity. The assets only can be sold, not the corporation or its stock. Thus the corporation remains existing, albeit without any significant assets left. It becomes, effectively, a shell.

Assets are typically sold without representations or warranties. The sale is free and clear of known liens, claims and encumbrances - with the consent or full payoff of lien holders. Generally, Assignee warrants only that Assignee has title to the assets.

Assignees - Rights and Duties

The Assignee is generally an unrelated professional liquidator selected by the Assignor. The Assignee gathers the Assignor’s assets and sells the Assignor’s right, title and interest in those assets, then distributes the proceeds to Creditors in accordance with statutory priorities.

The Assignee has a fiduciary duty to the Creditors. Assignee’s duties include protecting the assets of the estate, administering them fairly and representing the estate. Assignee is free to enter into contracts to recover assets or liquidated claims, e.g. filing suit or taking other action.

The Assignee may be removed by a court for violations of the Assignment contract or nonfeasance (failure to act appropriately). The Assignee may not give up his/her/its duties without liability or a superior court order until creditors receive distribution of the proceeds of sale of the assets transferred.

Assignee usually prepares the Assignment documents, though the attorney for the Assignor may draft them as well. Often the terms are negotiated at length.

Preferential Claims and Avoidance

Assignee has statutory avoidance powers, similar to those granted to a Chapter 7 bankruptcy trustee. [See Calif. CCP § 493.030 (termination of lien of attachment or temporary protective order), § 1800 et seq. (avoidance of preferential transfers); Calif. Civ.C. § 3439 et seq. (avoidance of fraudulent conveyances)]

Even so, courts may question this right outside a bankruptcy proceeding. There is also disagreement between the Federal Court (Ninth Circuit) and California state courts whether the Bankruptcy Code preempts the assignee's preference avoidance power under California statutory law.

Creditors - Rights and Duties

While not required to consent to an Assignment, secured creditors often must agree in advance since their cooperation frequently affects the liquidation of the assets. Secured creditors are not barred from enforcing their security by such an assignment. The acceptance of an Assignment by unsecured creditors is not necessary, since under common law the proceedings are deemed to benefit them through equality of treatment.

Note that all Creditors must file their claims within the statutory 150-180 day claim filing period.

ABCs in California do not require a public court filing, but most corporations require both board and shareholder approval. Costs and expenses, including the assignee’s fees, legal expenses and costs of administration, are paid first, just as in a Chapter 7 bankruptcy . Because an assignee’s fee is often based on a percentage value of the assigned assets, it can be difficult to procure assignees for smaller estates.

• Assignment Agreement is executed and ratified. Assignor turns over and assigns to Assignee all right, title and interest in the assets being assigned.
• Assignor gives Assignee a complete, certified list of creditors, including addresses and amounts owed.
• Assignee notifies Creditors within 30 days of execution that assignment has been made, provides an estimate of the probable distribution, and provides a claim form for each Creditor to file a claim in the Assignment estate.
• Creditors have 150-180 days from the date of written notice of the assignment to file their claims.
• After claim forms are returned and/or the Bar Date has passed, Assignee reconciles the claims and/or objects to any improper claim amounts.
• After liquidation, Assignee determines distribution amounts. Claim priority is determined first by state statute, then by Bankruptcy Code. First are secured creditors, then follow tax & wage claims.
• Assignee generally informs the IRS that assignment has been made and files notice with local Recorder.
• Assignee immediately searches for any previously undisclosed liens (UCC or real estate) to ensure complete notice to all creditors and interest holders.
• Assignee secures all assets. In limited situations where the business has enough cash, Assignee may continue to operate the business to maintain going-concern value - if no further debt will be incurred.

It normally takes about 12 months to conclude an ABC.

Effects of ABC

An ABC generally is faster and less costly than a bankruptcy proceeding. Parties can often agree and determine what is going to happen prior to execution of the assignment.

However, ABCs do not discharge individual Assignors from their debts, and do not provide for the reorganization of the business. There is no automatic stay, though in practice an ABC results in an informal and/or incomplete automatic stay if the creditors determine that the assets are beyond their reach.

Creditors are able to continue to pursue the Assignor. ABCs often block judgment creditors from attaching assets because the Assignor no longer has title to or interest in the assigned assets. Sometimes the Assignee is willing to allow the judgment if the judgment creditor submits its claim as described above. The assignee may also defend against a claim if the plaintiff is seeking a judgment which is unjustified and not fair to other creditors.

An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.

The Statutes: California Code of Civil Procedure

§§493.010-493.060 “Effect of Bankruptcy Proceedings and General Assignments for the Benefit of Creditors”

§§1800-1802 “Recovery of Preferences and Exempt Property in an Assignment for the Benefit of Creditors”

A Chapter 11 Reorganization can cost hundreds of thousands of dollars and even a business Chapter 7 Liquidation bankruptcy can easily cost tens of thousands or more. The Assignment method, which pays the Assignee normally by a percentage of the assets sold, is cost-efficient but limited in the protection it may afford the Assignor, as described above. Before this method is attempted, competent legal counsel and certified public accountants should be consulted.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

Read more about our firm

© 2024, Stimmel, Stimmel & Roeser, All rights reserved  | Terms of Use | Site by Bay Design

assignment for benefit of creditors

Primary tabs.

Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

• commercial activities
• financial services
• business law
• landlord & tenant
• property & real estate law
• trusts, inheritances & estates
• wex definitions

Assignment For The Benefit Of Creditors: An Overview

Contributor.

What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

• an ABC does not afford a debtor an automatic stay from creditor collection; and
• a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Insolvency/Bankruptcy/Re-Structuring

United states.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

  (858) 481-1300   [email protected]

• Health & Safety Receiverships
• Partition Referee Matters
• Business Dispute Receiverships
• Cannabis Receiverships
• Rents & Profits Receiverships
• Post-Judgment Receiverships
• Legal Representation of Receivers & Referees
• Property Examples
• Meet the Team
• In the News
• Career Opportunities

Assignment for the Benefit of Creditors: A Remedy to Avoid Bankruptcy

May 24, 2021

When it comes to California contract law, ABC contracts are a well-established tool that can help individuals and entities avoid a formal bankruptcy filing. “ABC” stands for “Assignment for the Benefit of Creditors,” and the term describes a contract in which an economically troubled “Assignor” transfers control of its assets and property to an independent third party. This third party is called the “Assignee,” and they liquidate and wind-up the entity. 

How Do ABCs Work?

When a business is struggling financially without much hope of recovery, bankruptcy isn’t the only option. ABC contracts can help the entity avoid traditional or formal bankruptcy proceedings. 

These contracts work when there are significant assets that are ready to be liquidated. If the entity doesn’t have valuable assets, then an ABC contract is not typically a realistic option. However, in these circumstances where there are significant assets, the Assignor transfers all custody, control, and title to a neutral third party. 

This neutral third party navigates and facilitates the liquidation of assets and transfer of funds to the assignor’s creditors. 

Benefits of Using an ABC

There are several benefits to using an ABC. 

One of the biggest factors for most entities is avoiding Chapter 11 or Chapter 7 bankruptcy. Because ABCs are governed by state law, not federal law, struggling companies can pursue an ABC contract on their own without going through the courts. 

Working with a neutral third party can take away a lot of the stress that accompanies economic difficulties. Instead of trying to liquidate assets and transfer funds to creditors, struggling companies can pass those challenges on to the Assignee. 

Lastly, Assignors get to choose their own Assignees. That means that they are not at the mercy of the court to assign a bankruptcy trustee they don’t know or trust. When a company pursues an ABC contract, they maintain more control over process and costs. 

Going through financial difficulties can lead to feelings of helplessness and a loss of control, but this is something that you continue to have control over. 

Responsibilities of an Assignee

When the Assignor assigns property to the Assignee, that can include all corporate property, both tangible and intangible, as well as accounts, rights, and credits, including law and equity credits. 

The Assignee liquidates and sells these assets. (Note that the Assignee cannot sell the corporation or the stock.) Importantly, the corporation continues to exist during this process, even though there are no assets left by the end of the process.

The Assignee typically sells all assets without any representation or warranty. An as-is sale allows things to proceed quickly; ABCs are known for being one of the fastest ways to address significant debt issues. 

Assignees protect the assets of the estate or corporation. They are required to administer those assets fairly and in the interest of the Assignor and its creditors. 

How to Choose an Assignee

Choosing an Assignee is about finding the right third party representative. We recommend that you look for the following characteristics in your chosen Assignee:

• Experience: Choose an Assignee who has significant experience with managing and liquidating assets for struggling businesses.
• Reputation: These days, reputation means everything. It’s easy to find out through some searching if a potential Assignee is qualified and reputable. 
• Knowledge: A knowledgeable Assignee will be able to answer your questions about the process and chart out likely outcomes.  

Do You Need an Assignee? 

Griswold Law regularly manages and sells business assets. We serve as court-appointed receivers as well as ABC-contracted Assignees. To learn more about ABCs and how we can help you avoid bankruptcy, reach out today .

• There are no suggestions because the search field is empty.
• Court-Appointed Receivership (64)
• Real Estate (53)
• Partition Referee (29)
• Real Estate Finance (28)
• Real Estate Transaction (28)
• Partition Action (25)
• Hoarding (23)
• Commercial Properties (21)
• Enforcing Judgments (20)
• Business Litigation (19)
• Commercial Leases (19)
• Tenants' Rights (18)
• Foreclosure Law (17)
• Business Owners (16)
• receivership (16)
• Contract Disputes (15)
• Collections Law (14)
• Construction Law (13)
• Business Formation: Asset Protection (11)
• Uncategorized (11)
• California (10)
• Receivership Remedy (9)
• health & safety (9)
• receiver (9)
• Consumer Class Action (8)
• Loan Modification (8)
• abandoned property (8)
• receiverships (8)
• Consumer Fraud (7)
• Health and Safety receivership (7)
• health and safety code (6)
• Health & Safety Code (5)
• code enforcement (5)
• fire hazard (5)
• healthy & safety receiver (5)
• Employment Law (4)
• Fraud against Senior Citizens (4)
• Landlord (4)
• Marijuana Dispensaries (4)
• San Diego (4)
• Trade Secrets (4)
• abandoned (4)
• code enforcement officers (4)
• creditor (4)
• money judgment (4)
• nuisance property (4)
• Cannabis (3)
• Employment Class Action (3)
• Employment Discrimination (3)
• Health & Safety Code Receiver (3)
• Trademark Law (3)
• business disputes (3)
• collection (3)
• court-appointed receiver (3)
• health and safety (3)
• hoarder (3)
• real estate. california (3)
• real property (3)
• rents and profits (3)
• substandard conditions (3)
• Attorneys' Fees Clauses (2)
• City of San Diego (2)
• Health and Safety Receivership Process (2)
• Post-Judgment Receiver (2)
• Unlawful Detainer (2)
• abandoned building (2)
• bankruptcy (2)
• business (2)
• complaint (2)
• debt collection (2)
• dispute (2)
• distressed properties (2)
• foreclosure (2)
• habitability (2)
• health and saftey code (2)
• hoarders (2)
• hoarding support (2)
• judgment (2)
• judgment creditor (2)
• judgment debtor (2)
• partnership agreement (2)
• property (2)
• property value (2)
• san diego county (2)
• slumlord (2)
• tenant rights (2)
• Animal Hoarding (1)
• City of Chula Vista (1)
• Distressed Business (1)
• Historic Properties (1)
• Liquor License Receiverships (1)
• Mills Act (1)
• Neighborgood Blight (1)
• Partition Remedy (1)
• Post-Judgment Receivership(s) (1)
• Reimbursement of Employee Business Expenses (Labor (1)
• The Health and Safety Receivership Process (1)
• absentee landlord (1)
• abstract of judgment (1)
• account levy (1)
• assignment for the benefit of creditors (1)
• bank garnish (1)
• bank levy (1)
• bitcoin (1)
• board of directors (1)
• business formation (1)
• business owner (1)
• california receivership laws (1)
• city attorney (1)
• collecting judgment (1)
• commercial project (1)
• company (1)
• confidential information (1)
• confidentiality agreement (1)
• court award (1)
• court order (1)
• covid-19 (1)
• cryptocurrency (1)
• deceased owner (1)
• demolition (1)
• diliberti (1)
• disposable earnings (1)
• family law (1)
• general partnership (1)
• habitability requirements (1)
• hospitality assets (1)
• human smuggling (1)
• illegal business (1)
• illegal cannabis dispensary (1)
• illegal gambling parlor (1)
• initial inspection (1)
• joseph diliberti (1)
• judgment collection (1)
• judgment lien (1)
• lease term (1)
• liquidation (1)
• litigation (1)
• lodging properties (1)
• massage parlors (1)
• misappropriation (1)
• negligent landlord (1)
• new business (1)
• occupant relocation (1)
• partnership (1)
• partnership disputes (1)
• post-judgment collection (1)
• provisional director (1)
• public safety (1)
• real property lien (1)
• real property receiver (1)
• relocation (1)
• residential zoning laws (1)
• retail center (1)
• right of possession (1)
• san diego real estate (1)
• sex trafficking (1)
• short-term rental (1)
• sober living house (1)
• struggling hotels (1)
• substandard hotel (1)
• tenancy (1)
• unlicensed in-home business (1)
• wage garnishment (1)
• warranty of habitability (1)
• weed abatement (1)
• writ of execution (1)

Recent Posts

For more information please contact Griswold Law

Phone: (858) 481-1300

Email: [email protected]

Address: 171 Saxony Road, Suite 205, Encinitas, CA 92024

No communication via email or content posted on this website creates an attorney-client privilege. The information on this website is purely hypothetical. The information on this website should not be relied upon. If you have legal questions or are seeking legal assistance, you should contact an attorney immediately.

• California Department of Real Estate
• California Secretary of State
• State of California Courts
• U.S. Department of Housing and Urban Development
• United States District Court, Southern District of California
• United States Patent and Trademark Office

In The (Red)

The Business Bankruptcy Blog

Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

• A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
• The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).    (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.    (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .

Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

• Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
• Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
• Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
• Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
• Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
• No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay  like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
• Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
• Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
• Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
• 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
• Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
• Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
• Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

• The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims  compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
• In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
• Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
• If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
• If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
• If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
• While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.

Assignments for the Benefit of Creditors – an often-overlooked state law alternative to Chapter 7 bankruptcy

For some folks the three letters ABC are a reminder of elementary school and singing a song to learn the alphabet.  For others, it is a throw back to the early 70’s when the Jackson Five and its lead singer Michael, still with his adolescent high voice, sang a catchy love song.  Then there is a select group of people in the world of corporate workouts, liquidations and bankruptcies, who know those three letters to stand for the A ssignment for the B enefit of C reditors – a voluntary state law liquidation process that may arguably offer a hospitable and friendly alternative to federal bankruptcy.  This article is a brief summary of this potentially attractive alternative to bankruptcy.

 The Assignment for the Benefit of Creditors (“ABC”), also known as a General Assignment, is a state law procedure governed by state statute or common law.  Over 30 states have codified statutes, and the remainder of states rely on common law.  See Practical Issues in Assignments for the Benefit of Creditors , by Robert Richards & Nancy Ross, ABI Law Review Vol. 17:5 (2009) at p. 6 (listing state statutes).  In some states, the statutory authority and common law can coexist.  At its most basic, the ABC process involves the transfer of all assets by a financially distressed debtor (the assignor) to an individual or entity (the assignee) with fiduciary obligations who then liquidates the assets and pays creditors.  The assignment agreement is essentially a contract involving the transfer and control of property, in trust, to a third party.  In some states that have enacted a statute, state courts may supervise the process (and at different levels of involvement depending on the statute).  The statutory scheme in other states such as California and Nevada, and in states where common law govern, do not provide for judicial oversight..  

ABCs are promoted as less expensive and more flexible than a chapter 7 liquidation and may proceed substantially faster than bankruptcy liquidation. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 8 (citations omitted).  In addition, the ABC process may provide four other noteworthy benefits not available in a bankruptcy.  First, the liquidating company chooses the assignee, there is no appointment of a random trustee or formal election required like in a bankruptcy.  This freedom of choice allows the assignor to evaluate the reputation and experience of proposed assignees, as well as select an assignee with familiarity in the nature of the assignor’s business and/or with more expansive contacts in the industry to facilitate the sale/liquidation.  Second, the ABC process generally falls under the radar of the media (particularly in states that do not require court supervision), and the assignor may avoid publicity, often negative, that can be associated with bankruptcy proceedings.  Third, with an ABC, the assignee has the ability to sell the assets without the imposition of potentially cumbersome requirements of Section 363 of the Bankruptcy Code, and in some cases, can conduct a sale the same day as the general assignment.  Finally, the ABC process generally authorizes the sale of assets free of unsecured creditor debt.  In essence, in an ABC, a company buying assets from a distressed business does not acquire the debt of the assignor.

On the down side, ABCs do not provide the protection of the automatic stay that is triggered upon the filing of a bankruptcy petition.  In some situations, the debtor entity needs to stop the pursuit of creditors immediately, and a bankruptcy proceeding will supply this relief.  Unlike bankruptcy, the sale through an ABC: i) is not free and clear of liens; ii) unexpired leases cannot be assumed and assigned without the consent of the contract counter-party; and iii) insolvency can trigger a default under an unexpired lease or executory contract. See generally Practical Issues in Assignments for the Benefit of Creditors , ABI Law Review Vol. 17:5 (2009) at p. 20. In general, an ABC is not a good choice for debtors that have secured creditors that do not consent because there is no mechanism for using cash collateral or transferring assets free and clear of liens without the secured creditors’ consent.  In cases where junior lienholders are out of the money, there is no incentive for those creditors to voluntarily release their liens.  In addition, while unsecured creditors do not have to consent to the general assignment for it to be valid, choosing this alternative forum may cause concern for creditors (particularly those used to the transparency of a court-supervised bankruptcy or receivership proceeding) and invite the filing of an involuntary bankruptcy. Therefore, it is prudent to involve major creditors in the process, and perhaps even in the pre-assignment planning. In addition, if an involuntary petition is filed, the assignee could request that the bankruptcy court abstain in order to proceed with the ABC.

Using the ABC state process in lieu of filing for bankruptcy in federal court may result in a more streamlined, efficient liquidation process that is less expensive and likely completed quicker than a federal bankruptcy proceeding.  In some jurisdictions, such as New Jersey, workout professionals note anecdotally that corporate clients fare better under this state law alternative rather than the lengthy, more complicated federal bankruptcy proceedings.

Many bankruptcy professionals are unfamiliar with the procedures of ABC and are reluctant to recommend it as a method for liquidating assets and administering claims.  This lack of familiarity may be a disservice to potential clients.  

[ View source .]

Related Posts

• New Jersey Bankruptcy Courts Remain a Strong Option for Debtors Seeking to Obtain a Third-Party Release in a post-Purdue Pharma World Following the BowFlex Decision
• The Impact of Purdue Pharma
• New Jersey Releases New Chapter 11 Complex Procedures and Other Rule Updates
• Who’s a Party in Interest? The Supreme Court’s Ruling in Truck Insurance Exchange v. Kaiser Gypsum Co. Inc. Opens the Door for Insurers to Intervene in Certain Bankruptcy Proceedings
• The More Things Change, The More They Stay The Same? Survival Of Small Businesses Again Dependent On Action From Congress
• Mediation in Bankruptcy: A Glimpse
• In re The Hacienda Company, LLC – Round 2: Bankruptcy Courts May be Available to Non-Operating Cannabis Companies to Liquidate Assets
• PAGA Dischargeable in Bankruptcy?

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

Refine your interests »

Written by:

PUBLISH YOUR CONTENT ON JD SUPRA NOW

• Increased visibility
• Actionable analytics
• Ongoing guidance

Published In:

Fox rothschild llp on:.

"My best business intelligence, in one easy email…"

• Client Forms

(973) 763-6060

• Why Choose Us
• Representative Work
• Bart J. Klein
• Alex W. Klein, Of Counsel

Practice Areas

• Construction Lien & Bond Claims

Assignment for the Benefit of Creditors - Defenses to Preference Suit By an Assignee

At one time or another, many of our commercial litigation clients have been sued by an “assignee for the benefit of creditors.” When our clients receive a summons and complaint notifying them they are being sued by an assignee, it may be unclear to them why they are being sued. The answer is often that our client’s former customer has made an "assignment for the benefit of creditors." The former customer has authorized a person or entity, often an attorney, to collect and liquidate the customer’s assets and sue our client in an attempt to obtain payments that the former customer previously made to our client. In other words, having been paid for goods sold or services performed, our client now faces the possibility of having its money earned taken away. This post aims to explain why this is a possibility and the potential defenses to such an action.

What Is An Assignment for the Benefit of Creditors?

In layman’s terms, an “assignment for the benefit of creditors” is when a company, usually suffering from financial difficulties, can sell off its assets to pay its creditors. It functions much like a bankruptcy proceeding, except it is based upon state law. In New Jersey, assignment for the benefit of creditors proceeding are governed by the Assignment for Benefit of Creditors Statute (the statute), N.J.S.A. 2A:19-1 to 50. The statute's purpose is to treat all creditors equally and avoid disproportionately favoring any single creditor. N.J.S.A. 2A:19-2.

What is an Assignee?

An “assignee” is an independent third party to whom the business distributing its assets, known as the “assignor”, conveys or assigns, all of its assets in trust.

What can an Assignee Do?

The assignee is empowered with two roles. Subject to certain exceptions, the assignee has the power to dispose of all of the property that the assignor owned at the time of the assignment. The assignment is the document that establishes the transfer of property from assignor to assignee. Pursuant to N.J.S.A. 2A:19-13, the assignee

[M]ay sue for and recover in his own name everything belonging or appertaining to the estate. He may compromise, settle and compound all claims, disputes and litigations of the assignor, refer the same to arbitration, agree with any person concerning the same, redeem all mortgages and conditional contracts, and generally act as and do whatsoever the assignor might have lawfully done in the premises.

In short the assignee may do anything with the property of the assignor that the assignor could do. The second role of the assignee is to represent all of the assignor’s creditors.

How Can the Assignee Take Money Away From My Business?

The answer to this question lies in the second role of the assignee. Because the assignee is obligated to represent all of the assignor’s debtors equally, the assignee has a limited right to recover payments made by the assignor to third parties within 4 months of the general assignment. N.J.S.A. 2A:19-3. In short, if your former customer is the assignor, and your former customer paid you, then made a general assignment less than 4 months later, the assignee can sue you in an attempt to force you to return the money. The reasoning behind this is that in making the original payment to you prior to making the assignment, the assignor has given you preferential treatment in comparison to the other creditors. This type of payment is known as a “preference.”

How Can I Stop the Assignee from Claiming Taking My Money As a Preference?

Whether or not you can stop an assignee from taking your money boils down to the whether you received the money as a preference. The statute governing assignment for the benefit of creditors is vague and there is a limited amount of case law interpreting the statute. There is no definition of “preference” in the assignment for the benefit of creditors statute. One must look elsewhere for answers to this question.

The New Jersey statutory scheme governing corporations does define “preference.” In addition, New Jersey’s Rules of Court provide that "The practice relating to assignments for the benefit of creditors under N.J.S.A. 2A: 19-1 et seq. shall conform as nearly as practicable to the procedure relating to insolvent corporations." Thus, the definition of “preference” in the statute governing corporations is a good place to look. There, a preference is deemed to arise when:

(a) a corporation which, while insolvent, and within four months of the commencement of a receivership action by or against it, transfers any property to or for the benefit of a creditor for or on account of an antecedent debt; and

(b) the effect of such transfer will be to enable such creditor to obtain a greater percentage of his debt than some other creditor of the same class; and

(c) the creditor receiving or to be benefited by the transfer, or his agent acting with reference thereto, has, at the time when the transfer is made, reasonable cause to believe that the corporation is insolvent.

N.J.S.A. 14A:14-14(1). Payments made to satisfy pre-existing debts within 4 months of an assignment would constitute preferences under this definition if the effect is to prefer the recipient of the payment to other creditors and the creditor has reasonable cause to believe the debtor is insolvent. By contrast, payments not meeting this description would not be recoverable by an assignee. This suggests that bankruptcy defenses to a preference, like a contemporaneous exchange for new value, where payment is made to the creditor not to satisfy a pre-existing debt, but to pay for newly delivered goods or services, are also valid defenses against an assignee.

Is It Worth Fighting An Assignee Trying to Recover a Preference From Me?

When the payment at issue is obviously a preference, it is likely not possible to stop the assignee from taking money that was made as part of a preferential transfer. In such situations, a careful analysis should be made as to whether or not it is more cost effective to fight a lawsuit filed by the assignee or agree to a settlement. However, where a payment is not clearly a preference, you may be able to stop the assignee from taking your money and there may be good reason to fight the assignee’s lawsuit.

New Jersey Business and Collection Lawyers

The New Jersey business lawyers at the Law Office of Bart J. Klein advise clients on issues relating to New Jersey a broad range of business disputes and commercial disputes , including breach of contract and commercial collection cases. We represent both creditors and debtors and are well versed in the law governing judgment collection. We welcome you to call us at (973) 763-6060, email [email protected] , or complete our online contact form for more information.

Disclaimer: The Law Office of Bart J. Klein maintains this website exclusively for informational purposes. It is not legal or other professional advice and does not necessarily represent the opinion of The Law Office of Bart J. Klein or its clients. Viewing this site, using information from it, or communicating with The Law Office of Bart J. Klein through this site by Internet or email does not create an attorney-client relationship between you and The Law Office of Bart J. Klein. Online readers should not act or decline to act, based on content from this site, without first consulting an attorney or other appropriate professional. Because the law changes constantly, this website's content may not indicate the current state of the law. Nothing on this site predicts or guarantees future results. The Law Office of Bart J. Klein is not liable for the use or interpretation of information contained on this site, and expressly disclaims all liability for any actions you take or do not take, based on this site's content.

Business Law Civil Litigation Commercial Litigation Construction Litigation Construction Liens Municipal Mechanics Liens Labor & Employment Law Nationwide Litigation Management

For More Information

Recent blog posts.

Aug 24 Pay When Paid v. Pay if Paid in New Jersey August 24th, 2018 The key to differentiating between the two types of payment clauses is whether or not the language in the payment provision is absolutely clear that the risk of nonpayment is being transferred downstream... Read More Jun 11 Docketing a Foreign Judgment in New Jersey June 11th, 2018 In New Jersey, the Uniform Enforcement of Foreign Judgments Act, N.J.S.A. 2A:49A-25 et seq., dictates the procedure for docketing an out of state judgment, referred to as a “foreign” judgment, in New Jersey. Read More May 25 New Jersey’s Construction Lien Law Interpreted in Recent Appellate Division Opinion May 25th, 2018 The opinion in NRG REMA, LLC, et al. v. Creative Environmental Solutions Corp., addresses two important issues relating to the Construction Lien Law. Read More

Read more from our Blog

Meet Our Attorneys

We represent clients and appear in courts throughout the State of New Jersey, including the counties of Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren.

The communications contained on this website are an effort to collect a debt. Any information obtained may be used for this purpose.

© 2024 Law Office of Bart J. Klein

View Our Disclaimer | Privacy Policy Law Firm Website Design by The Modern Firm

COVID-19 Quarantine Update

In regards to Covid-19,  We are reviewing the best guidelines for our city and state for how

we should conduct business and plan to update this message as soon as we can.

Please call our office(s) to get learn how we are engaging with current clients and new at this time.

• Legal Topics
• Research Laws
• Find a Lawyer
• Legal Forms

Assignment for the Benefit of Creditors

In lieu of filing for Chapter 7 liquidation bankruptcy, a business may wish to settle its debts by entering into an assignment for the benefit of creditors. An assignment is a streamlined liquidation procedure that allows a business to pay off its creditors while avoiding the costs, time, and stigma associated with bankruptcy.

How Does It Work?

Ask a business law question, get an answer ASAP! Thousands of highly rated, verified business lawyers. Click here to chat with a lawyer about your rights.

While almost anyone can assign assets to an assignee, most assignors are corporations or partnerships. The business transfers control and title of its assets, include its accounts receivable, to an assignee. The business cannot rescind an assignment once it has been made.

The law of trusts applies to assignments. The assignee has the same duties and responsibilities to creditors as a trustee would have to the beneficiaries of a trust. The assignee liquidates the debtor’s assets and distributes the proceeds to creditors. The creditors may require the debtor to satisfy any deficiencies, or accept the proceeds as full satisfaction of the debt, also known as a “composition with creditors.” The costs of administering the assignment are paid first from the money generated by liquidation of the estate. Any surplus funds are returned to the business. Secured and Unsecured Creditors, Consent, and Cooperation A creditor does not need to consent to assignment of the asset. However, cooperation with securred creditors is generally sought to maximize the amount recovered from the sale or disposition of the asset. Likewise, while a secured creditor may choose to take back collateral, creditors often cooperate with the assignee to maximize returns on the asset.

Advantages and Disadvantages of Assignments

While business owners may also simply walk away from a failing business, this does nothing to protect the business’s owners or investors. An assignment allows for the opportunity to pay off creditors and to obtain orderly estate administration. An assignee may often be able to sell an asset for a greater price or pursue litigation that a bankruptcy trustee is unable to pursue. Secured creditors consenting to assignment eliminate the costs and litigation associated with the foreclosure and sale of an asset. An assignment may generate less publicity than that of bankruptcy.

There is limited court oversight involved in an assignment, and the automatic stay that prevents creditors from collecting on debts during the pendency of a bankruptcy case does not apply to an assignment case. If the business is not satisfied with the assignment case, it can still file for voluntary bankruptcy. As well, creditors may seek to impose an involuntary bankruptcy under Chapter 11 if they are not satisfied with how the assignment case is proceeding.

Assignment For The Benefit Of Creditors

An Assignment for the Benefit of Creditors (“ABC”) is a legal process in which a debtor company voluntarily transfers its assets to a third-party assignee for the purpose of liquidation and distribution to creditors. This alternative to a bankruptcy provides a streamlined and cost-effective method for winding down a financially distressed business. In Florida, the ABC process is governed by state law and offers several advantages for both debtors and creditors.

To initiate a Florida ABC, the debtor company executes a formal assignment document, transferring its assets to an assignee, who then assumes responsibility for liquidating the assets and distributing the proceeds to creditors. The assignee is typically a neutral third party, often an experienced insolvency fiduciary.

The Florida ABC process follows a transparent and structured approach. The assignee conducts a thorough review of the debtor’s financial affairs, identifies and values the assets, and formulates a plan for liquidation. Creditors are then notified, and the assignee proceeds with the orderly sale of assets. The proceeds are distributed to creditors in accordance with the priority established by Florida law.

While an ABC is a powerful tool for resolving financial distress, it is crucial for both debtors and creditors to seek legal advice to navigate the intricacies of the process effectively. Understanding the specific provisions of Florida’s ABC laws is essential for all parties involved, ensuring a fair and efficient resolution to the financial challenges faced by the debtor company.

Contact Us Regarding an ABC Today

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

" * " indicates required fields

• 561-395-0500
• Furr Cohen, P.A. 2255 Glades Road, Suite 419A, Boca Raton, FL 33431

Assignments for the Benefit of Creditors in Minnesota

Understanding how an ABC works is essential to a creditor re-establishing control of the debt collection process.

In August 2012, Minnesota enacted a new, more user-friendly statute governing the once seldom-used tool of Assignments for the Benefit of Creditors (“ABC”). [Disclaimer: Jeffrey Ansel served on the committee that was tasked with re-writing Minnesota’s receivership laws]. Since then, ABC’s have become more common. Unlike receiverships, [1] ABC’s are typically initiated by debtors, giving the debtor control over when an ABC is commenced, the assets included in the ABC, and selection of the “administrator” or assignee. Creditors, including (and especially) lenders are rightly concerned about the debtor having control over these options. Understanding how an ABC works, however, is essential to a creditor re-establishing control of the debt collection process.

GENERAL PURPOSE OF AN ABC

An ABC is commenced by the filing of a written assignment agreement in a form substantially similar to the form included in the statute. Minn. Stat. §577.12 and .13. The Assignment must be filed with the court administrator of the district court in the county where the assignor, or any of them if there is more than one, resides or has its principal of business. Minn. Stat. §577.12.  An ABC provides a debtor with an opportunity to use neutral party and a court‑supervised process to liquidate some or all of its assets in an orderly fashion to satisfy creditor claims. This process can insulate the debtor from having to deal directly with creditors and avoid any claims that the debtor preferred one creditor over another. As a court-supervised process, an ABC can help to narrow disputes and give all parties closure.

CAST OF CHARACTERS IN AN ABC

The cast of characters in an ABC includes the assignor, the assignee, the creditors of the assignor, the Court, and potentially holders of equity interests in the assignor. [2] Unlike a receivership, where a party, typically a creditor or shareholder, recommends and the Court selects and appoints a receiver, in an ABC the assignor is authorized to select the assignee. However, the assignee must be eligible to serve as receiver and therefore must meet the same criteria required of a receiver. See Minn. Stat. §577.12 [3]   To determine whether a proposed assignee is eligible to serve, the Court will evaluate the proposed assignee’s qualifications and independence. See Minn. Stat. §576.26. [4] The assignor may assign assets to one or more assignees. Minn. Stat. §577.12.  For example, an assignor can assign real property to an assignee with particular experience in liquidating real estate while assigning other assets to a different assignee.

The assignee takes possession and control of the assigned assets (the “Assignment Property”); gives notice to those statutorily entitled to the same pursuant to Minn. Stat. § 576.34,   and liquidates the Assignment Property for purposes of paying the assignor’s creditors. The assignee serves the same purpose as a general receiver under Minnesota’s receivership laws, Minn. Stat. § 576. [5]

Creditors of the assignor, both secured and unsecured, may receive distributions from the liquidation process. Creditors may be required to file claims forms detailing what is owed to them and why. See Minn. Stat. §576.49 and .50. Certain creditors are stayed from pursuing certain claims against the assignor, the assignee, or the Assignment Property outside of the ABC process. See, Minn. Stat. §576.45.

The Court in which the ABC is filed has jurisdiction over the Assignment Property, the assignee, and the ABC proceedings.

THE ASSIGNMENT PROPERTY

The language of the assignment form as set forth in Minn. Stat. §577.13, [6] and the statute provides that the assignor can assign all or some of its assets to the assignee. [7] The assets so assigned are the Assignment Property pursuant to Minn. Stat. §577.11(c).  The Court then has jurisdiction over the Assignment Property, and the assignee is given control over the assets, but not the entity which owns the assets (i.e., the assignor).

INITIAL ORDER

The Assignment agreement does not contain all of the usual terms and provisions of a typical receivership order. Accordingly, best practice suggests that the assignee upon appointment, or as soon thereafter as practical, should seek a court order approving and validating the assignment and otherwise delineating the powers, duties, and process for the ABC.  This order could also include the provisions typical in a receivership appointment order (e.g., duties of and restrictions on the other parties involved in the ABC, a periodic reporting protocol for the assignee with an objection process and statement that failure to timely object is a waiver of the objection as to matters described in the report, as set forth in Minn. Stat. §576.36, lay out the claims process, including claim form exemplars, claim administration, objections to allowance of claims, extend the limited stay if appropriate, and other matters relevant to the case), as well as other provisions specific to the particular situation.

SALES OF ASSIGNMENT PROPERTY

Typically the assignee is required to sell real and personal property as part of the ABC process. If the sale of such property is in the ordinary course of the assignor’s business, the assignee can sell such property without Court authorization. Minn. Stat. § 576.29, Subd. 1(b)(4). If, however, the sale of such property is not in the ordinary course of business (such as an auction, for example), the assignee is required to obtain prior Court approval. Minn. Stat. § 576.29, Subd. 1(b)(5). Depending on the nature and value of the property, the assignee may want to seek such approval before having a buyer identified or may want to wait until it has received a purchase offer.

The assignee may sell Assignment Property [8] subject to liens or free and clear of liens, except liens for unpaid real estate taxes or assessments or liens airing under federal law. Minn. Stat. § 576.46, Subd. 1. Any owner of property or lien holder may object to a proposed sale. If the Court determines that the amount likely to be realized from the sale is less than the objecting party would realize in the absence of the sale, the Court will not permit the sale to go forward. Upon the sale of property free and clear of liens, all liens encumbering the property shall transfer and attach to the proceeds of the sale, less reasonable expenses incurred in the disposition of the property. Minn. Stat. § 576.46, Subd. 1(c). The Court may then authorize the assignee to pay secured creditors out of the sale proceeds.

The Court may not authorize the sale free and clear of a co‑owner’s interest in property. Minn. Stat. § 576.46, Subd. 2. Rather, the assignee shall have the assignor’s rights and powers afforded by state and federal law, including any rights of partition.

A secured creditor may credit bid at a sale provided that the creditor tenders cash sufficient to pay the reasonable expenses incurred in the disposition of the property and all senior liens. Minn. Stat. § 576.46, Subd. 3.

CLAIM PROCESS

Not surprisingly, the claims process is usually the most time-consuming portion of the ABC. Unlike the more formal claims process in federal bankruptcy proceedings, the ABC/receiver statute provides the assignee and the Court with a great deal of latitude with respect to the claims process. Minn. Stat. § 576.49. The assignee is to “submit to the Court a recommendation concerning a claims process appropriate to the particular” ABC proceeding. The Court is then required to establish a claims process addressing specific topics in the statute. [9]

In some ABC proceedings, it makes sense for the assignee to immediately submit a claims process recommendation to the Court. Sometimes, however, it makes more sense for the assignee to wait until the assignee has a better understanding of the value of the Assigned Property and the claims the assignee anticipates will be filed. For example, if the value of the Assigned Property is unlikely to result in a distribution to general unsecured creditors, it does not make sense to immediately recommend a claims process that requires unsecured creditors to file claims and requires the assignee to evaluate, and potentially object to, those claims. See Minn. Stat. § 576.51 (establishing a priority schedule for allowed claims to receive distributions). Rather in such a circumstance, it might make sense to require secured creditors to file claims immediately and wait to determine whether to require unsecured creditors to file claims until more is known about whether a distribution to unsecured creditors is likely.

Likewise, in some proceedings it may make sense to have creditors file claims with the Court, whereas in other proceedings it may make sense to have creditors file claims with the assignee or claims processing agent retained by the assignee, depending on: (1) the anticipated number of claims; (2) the sophistication of the creditor, will creditors have the ability to electronically file claims with the Court; and (3) whether sensitive or confidential information is likely to be included along with claim forms.

The assignee should also evaluate the information it received from the assignor to determine whether claims should be allowed without requiring the specific creditor to file a proof of claim. For example, the assignor may have kept detailed books and records that show the assignor owed specific creditors specific amounts. The assignee should determine whether it is necessary for those creditors to file a proof of claim.

Once claims have been filed, the assignee and “any party in interest” may object to specific claims. Minn. Stat. § 576.50. The objection must state the grounds for the objection and comply with any other Court imposed requirements. Generally, objections must be filed with the Court and served on certain identified parties at least 30 days before a hearing on the objection. The Court is allowed to estimate claims if fixing or liquidating such claims would unduly delay the administration of the ABC process. Minn. Stat. § 576.50, Subd. 3.

Finally, unlike the claims process in bankruptcy proceedings, the ABC claims process does not include a cap on landlord claims associated with commercial leases. In bankruptcy proceedings, a debtor can reject a lease and a landlord’s resulting bankruptcy claim is capped by 11 U.S.C. § 502(b)(6) up to the rent reserved by the lease for the greater of one year or 15%, not to exceed three years, of the remaining term. In certain circumstances, the difference between lease rejection claims under the bankruptcy code and the Minnesota ABC process may be of sufficient size that it impacts the decision of whether to file bankruptcy or an ABC proceeding.

DISTRIBUTION

The ABC/Receiver statute provides the assignee and the Court with a great deal of flexibility in  the distribution to creditors of Assignment Property. Minn. Stat. §576.53. The assignee is permitted to make interim and final distributions after filing a proposed distribution schedule. The assignee is required to give notice of filing the proposed distribution schedule on all persons on the master service list and all persons that filed proofs of claims. Provided that no objections to the proposed distribution schedule are filed within 21 days of notices, the Court may enter an order authorizing the proposed distribution. If there are objections to the proposed distribution schedule, the Court will rule on those objections and then a distribution can be made.

The assignee’s proposed distribution schedule must comport with the statutory order of priority: (1) secured claims, subject to reimbursing the assignee for the reasonable and necessary expenses of preserving, protecting or disposing of the collateral, including allowed fees and expenses of the assignee and its professionals; (2) other expenses incurred during the ABC process; (3) wages incurred within 90 days of the filing of the ABC, capped at $13,650 (see 11 U.S.C. § 507(a)(4)); (4) security deposits for the purchase, lease or rental of non‑commercial property, capped at $3,025 (see 11 U.S.C. § 507(a)(7)); (5) past due domestic support obligations; (6) unsecured claims of governmental units for taxes that accrued before the commencement of the ABC; (7) all other unsecured claims; and (8) interest on unsecured claims. Minn. Stat. § 576.51.

Notwithstanding this priority schedule, the United States government claims the right to be paid first. See 31 U.S.C. § 3713. This can include tax claims, contract claims, and even claims where the United States is recovering funds on behalf of others. Moreover, the United States claims the right to recover, personally, from any party that makes distributions to others, including paying ABC expenses (including the assignee’s fee) before paying the United States.

Since the ABC/receivership statute was re‑written in 2012, there have not been any reported decisions in Minnesota addressing the conflict between these two statutes. Assignees as well as recipients of distributions should be careful and proactive in evaluating United States government claims before making or taking any distributions. Under the correct circumstances, the United States government may chose not to demand payment first. The United States government may permit secured creditors and/or the assignee to be paid before the United States government. It may also permit certain other creditor classes to be paid.

EFFECT OF AN ABC PROCEEDING-STAYS, PREFERENCES, AND DISCHARGE

The filing of the ABC triggers two separate stays. The first stay acts as a stay against acts to obtain possession of or exercise control over Assignment Property or to create or perfect a lien against Assignment Property. Minn. Stat. § 576.42, Subd. 3. This first stay is permanent. The second stay acts as a stay of commencement or continuation of legal actions against the assignor or the receiver/assignee that were or could have been commenced before the ABC filing and commencement or continuation of a legal action to enforce a lien having priority over the assignee. Minn. Stat. §576.42, Subd. 4. This second stay expires 30 days after the filing unless extended by the Court. In order to extend the stay, the assignee or other party in interest must file a motion seeking extension of the stay within the initial 30 day period. The filing of such a motion extends the stay for an additional 30 days. In order to extend the stay, the Court must do so within 60 days of the filing of the ABC proceeding. [10]

Unlike bankruptcy proceedings, the commencement of an ABC proceeding does not give the assignee the right to recover “preference payments” ‑ payments made within 90 days of the filing to satisfy a pre‑existing debt. Depending on the circumstances, the assignor and other parties in interest will want to evaluate whether the pursuit of preference claims will benefit the process.

Significantly, an ABC proceeding does not conclude with the assignor receiving a discharge from its obligations (as a debtor can obtain by filing for bankruptcy). Rather, creditors continue to have claims against the assignor to the extent such clams are not paid through the distribution process. This may not be a particularly relevant concern for an entity filing an ABC proceeding as part of a liquidation of all its assets, but is certainly relevant for an individual or an entity that hopes to continue operating.

TERMINATION AND REMOVAL OF THE ASSIGNEE

At the conclusion of the ABC, the assignee will file a final report and seek approval of the final report and a discharge. Minn. Stat. § 576.38. The final report shall include a description of the activities of the assignee, a schedule of all Assignment Property as of the commencement of the ABC proceeding, a list of expenditures, a list of unpaid expenses incurred during the ABC proceeding, a list of all dispositions of Assignment Property, a list of all distributions, and, if not done separately, a request for payment of fees and expenses of the assignee. Minn. Stat. § 576.38, Subd. 3. The final report may incorporate the prior interim reports by reference. A discharge of the assignee excuses the assignee from further performance of any duties and discharges any lis pendens recorded by the assignee.

An assignee can also be removed if: the assignee fails to execute and file the bond required by the Court; the assignee resigns, refuses or fails to serve for any reason; or for other good cause. Minn. Stat. § 576.37. Upon removing the assignee, the Court shall determine whether a successor assignee should be appointed. A removed assignee is required to file a final report within 14 days of removal for matters up to the date of the removal.

Since the ABC statute was amended in 2012, there has been a significant increase in the number of ABC proceedings in Minnesota. In the right circumstances, ABC proceedings can be more advantageous than a bankruptcy or a lender exercising its rights under its loan documents. There are, however, limitations and disadvantages that all parties should be aware of prior to proceeding with an ABC. As a relatively new method of handling the assets of an insolvent entity, there is much uncertainty about the advantages and disadvantages of these proceedings. The authors hope that this article has helped clarify those considerations.

[1] ABC’s are governed by Minnesota Statute § 577.11‑.18 and once commenced are conducted similar to general receiverships as described in Minnesota Statute §576.21‑.53.

[2] Some of these terms are defined in Minn. Stat. §577.11, which provides as follows: (a) The definitions in this section and in section 576.21 apply throughout this chapter unless the context requires otherwise. (b) “Assignee” means the person to whom the assignment property is assigned. (c) “Assignment property” means the property assigned pursuant to the provisions of this chapter. (d) “Assignor” means the person who assigns the assignment property. (e) “Time of assignment” means the date and time endorsed by the court administrator pursuant to section 577.14

[3] See Minn. Stat. §577.12 [3] (“Every assignment for the benefit of creditors subject to this chapter made by an assignor of the whole or any part of the assignor’s property, real or personal, for the benefit of creditors, shall be: (1) to a person eligible to be a receiver under section 576.26, . . .).

[4] The Court will consider, among other things, whether the proposed assignee has: sufficient knowledge and experience; the financial ability to post the necessary bond; been previously disqualified from serving as a receiver or assignee; been convicted of a felony or other crime involving moral turpitude; and been found liable in civil court for fraud, breach of fiduciary duty, civil theft or similar conduct. In evaluating the proposed assignee’s independence, the Court will consider, among other things: the relationship the proposed assignee has to the parties and the property proposed in the ABC; whether the proposed assignee has a material financial interest in the outcome of the underlying dispute; and whether the proposed assignee is a creditor or holder of any equity interest in any of the parties to the ABC.

[5] Minn. Stat. §577.18 provides: “Except as otherwise provided in this chapter, an assignee shall be treated as a general receiver, the assignment property shall be treated as receivership property, and all proceedings following the filing of the assignment shall be governed by sections 576.21 to 576.53 .”

[6] The statute says in pertinent part:: “. . . the assignor, . . . hereby assigns to the assignee, . . . the assignor’s property, . . . which property is set forth on Schedule A attached hereto

[7] Minn. Stat. §577.12 states that the assignor can assign “the whole or any part of the assignor’s property, real or personal, for the benefit of creditors,. . .”

[8] The receivership statute provides that a receiver cannot sell agricultural land or homesteaded property unless the owner of the property has consented to the sale following the time of appointment. Minn. Stat. § 576.46, Subd. 1. Because an ABC proceeding is commenced by the assignor transferring to the assignee title to the Assignment Property, this provision should not prevent the sale of such property. That said, some title companies have been reluctant to insure title to real property being sold out of an ABC proceeding without having the assignor consent to the specific sale at issue.

[9]  The statutory requirements to be included in the claims process are: (1) whether proofs of claims must be submitted; (2) the deadline or deadlines for submitting proofs of claims; (3) where the claims are filed ‑ with the Court or the assignee; (4) whether to permit claims based on the amounts established in the books and records of the assignor without requiring the filing of formal claims; and (5) other matters bearing on the claims process.

[10] The Court is empowered to modify both stays upon the motion of a party in interest. Minn. Stat. §576.42, Subd. 5. Moreover, the stay is inapplicable to certain types of proceedings, including, criminal proceedings against the assignor, actions by a governmental unit to enforce its police or regulatory power or to establish tax liability, actions related to establishing paternity, actions to establish or modify an order for alimony, maintenance or support, setoff, acts to maintain or continue the perfection of a lien, or commencement of bankruptcy case. Minn. Stat. § 576.42, Subd. 6.

September 25, 2020

Jeffrey R. Ansel

Creditors’ Remedies, Bankruptcy & Work-Out

Search Results for:

No search results were found for:, oops, something went wrong, attorneys matching, professionals matching, practice areas matching, bold perspectives matching, news matching, other matches for, arrow left all results, some suggestions:.

• Make sure all words are spelled correctly
• Try entering different keywords
• Try using more general keywords

Please try again

Subscribe to our newsletter.

Communications sent to Winthrop & Weinstine via e-mail may not be secure, do not create an attorney/client relationship, are not and should not be considered to be confidential and may not be protected by attorney/client privilege. We will not take any action in response to your e-mail unless and until we have expressly agreed to be engaged by you, which is typically done in writing. If you are looking for legal representation, you should contact us by phone. If you understand and agree with these terms, please click on the "I Agree" button to send us an email. Otherwise, please click "Cancel."

I Agree Cancel

• Assignment for the Benefit of Creditors

Helping Florida business owners exit gracefully and move on with less time and hassle than bankruptcy

An assignment for the benefit of creditors (ABC) is one way for an insolvent company to wind down its operations in an orderly fashion. Like a Chapter 7 business bankruptcy, an ABC involves selling the company’s assets and using the proceeds to pay off creditors, but without the stigma of a bankruptcy on their credit report or the mind of the public.

The business attorneys at Edelboim Lieberman have successfully helped many South Florida companies with an assignment for the benefit of creditors. Learn more about ABCs below, and call Edelboim Lieberman in Miami or Fort Lauderdale to find out if an ABC is right for you.

How does an ABC work?

The owner of the company (the assignor) makes an assignment, or transfer, of company assets and debts to another company or law firm (the assignee). The assignee is then responsible to sell the assets and use the proceeds to pay off the creditors. By using an ABC, the assignor gets to move on quickly from the insolvent company without having to personally go through the process of liquidating assets and paying creditors or going through the Chapter 7 bankruptcy process.

ABCs Under Florida Law

Unlike a Chapter 7 bankruptcy, which takes place in federal bankruptcy court and is supervised by a federal bankruptcy trustee, ABCs are filed in and supervised by the Florida state courts. Florida Statutes Chapter 727 governs an assignment for the benefit of creditors.

Following are some important points about the way ABCs operate in Florida:

• ABCs must be in writing. Florida statutes provide a sample form of assignment; the ABC should be in substantially the same form.
• An ABC represents an irrevocable assignment.
• The assignee files the assignment with the court, publishes a notice of the assignment as required by law and also notifies creditors of the assignment.
• In certain situations, the assignee can carry on the business for a period to maximize return.
• The assignee can reject an unexpired lease.
• The assignee can hire professionals as needed, such as accountants, appraisers, auctioneers, and attorneys, to assist in the liquidation of assets.
• The assignee can examine the validity and priority of claims and litigate disputed claims.
• The assignee can sue to enforce claims the assignee may have by virtue of the assignment or assign a cause of action to another party.
• The assignee must file interim and final reports with the court.
• Any monies left over after creditors are paid goes back to the assignor.

Is an ABC better than bankruptcy?

An ABC liquidates assets and winds down business operations similar to a Chapter 7 bankruptcy, and an ABC is conducted under court supervision like Chapter 7. However, an ABC can offer advantages over Chapter 7 in many instances. Importantly, an assignee typically gets a greater return when selling assets since the assignee is frequently knowledgeable about the industry and is often a skilled and experienced negotiator. Additionally, an assignee can continue to run the business as a going concern for a while and even sell it as such, which a bankruptcy trustee won’t do.

ABCs also offer more privacy to the assignor, as opposed to going through the public court filings of a bankruptcy. And the ABC is faster for the assignor. The assignor makes the assignment and is done, rather than going through bankruptcy which can take months or years depending on the assets to be liquidated.

On the other hand, an assignor does not get the benefit of the automatic stay afforded by bankruptcy, which might encourage a company to file for bankruptcy instead. Yet one could argue there is no reason a creditor would go after an assignor after the ABC has been executed, knowing the assignor no longer has assets. Generally speaking, ABCs are usually a less litigious process than Chapter 7 for businesses.

Is an ABC right for me?

If you have racked up a large amount of debt with a lot of different creditors and you see that your business is not going to make it, an assignment for the benefit of creditors might be the smart move. Especially if you have a large number of assets, liquidating the business to pay off your creditors can take months or even years. An ABC lets you transfer all your assets and debts at once, allowing you to move on immediately while the assignee takes on the burden of handling the liquidation and paying off creditors.

Since there are pros and cons to both Chapter 7 bankruptcy and ABCs, and there may be other unexplored alternatives as well, the best thing to do is sit down with an experienced business bankruptcy attorney to analyze your situation and look at all your options, so you can choose the best path forward that makes sense for you.

Get Help Today With an Assignment for the Benefit of Creditors in Miami and South Florida

For help with an Assignment for the Benefit of Creditors or other aspects of business bankruptcy in South Florida, contact Edelboim Lieberman at their offices in Miami and Fort Lauderdale by calling 305-768-9909 for a no-cost, confidential consultation.

Practice Areas

• Business Bankruptcy
• Commercial Litigation
• Real Estate
• Adversary Proceedings
• Creditor Rights and Representation
• Morgan B. Edelboim
• Brett D. Lieberman
• Edan Weiner
• Rebecca Waldman de la Zerda

I used this law firm to evict my tenant on Hollywood beach. They were running an daycare business out of the apartment we rented and they were subletting. I found this law firm locally on ... read more

One of my colleagues called this firm for information on doing a residential eviction for a single family home she rented in Hollywood FL. The eviction lawyers were very professional and extremely knowledgeable. Call them ... read more

Great and fast services. Like to work with professionals who value your time and budget.

I used this law firm to advise me on commercial closings and landlord-tenant law. These attorneys are knowledgeable and efficient. Highly recommend.

Back to all insights

Is an assignment for the benefit of creditors (abc) better than bankruptcy.

When a company has exhausted all available remedies to turn itself around and wishes to wind down its business in an orderly manner, an Assignment for the Benefit of Creditors [1] (“ABC”) can be a cost-effective and relatively quick way to sell the assets and distribute the proceeds to creditors. Assignments are creations of state law, so unlike bankruptcy, which is governed by a uniform federal code, the laws governing assignments will vary across each state.

Here’s how an ABC proceeding compares with bankruptcy [2] :

Who can file an assignment for the benefit of creditors.

Nearly any insolvent business can avail itself of an ABC. The company must obtain shareholder approval which may make it impractical for a public company to avail itself of an ABC. A board resolution is also required authorizing the assignment.

How does an assignment start?

An assignment begins with the company (the “assignor”) reaching an agreement with the firm or individual (the “assignee”) who will act as a fiduciary on behalf of the assignor’s creditors. The agreement will transfer all rights, title and interest to the assignee who then liquidates the assets and distributes proceeds to the creditors.

What are positive attributes of an assignment?

• The sale of assets under an assignment are completed faster than a 363 sale in bankruptcy because assignments do not require a court process. There are no pleadings, bid procedures, and sales motions to file.
• Management and the assignee work collaboratively on preparing communications about the assignment. This alleviates negative publicity of the winddown whereas a bankruptcy liquidation is a very public process.
• Management controls the selection of the assignee. In bankruptcy, there are many parties with a voice in the process, such as the court, the Office of the United States Trustee and the unsecured creditors committee. And, in a Chapter 7 bankruptcy, a trustee will be appointed to sell the assets.
• An assignment does not cost nearly as much as a 363 sale in bankruptcy. The assignor only has to pay the assignee’s fees and costs. In a bankruptcy, the debtor not only has to pay for its professionals, but also the unsecured committee’s professionals. Furthermore, since the bankruptcy process is so much longer than the assignment, the debtor has to pay for both sets of professionals over a longer period of time.
• An assignment provides a way to shield the officers, directors and the buyer from litigation of a fraudulent transfer of the assets to the buyer.
• The ability to complete the sale quickly by the assignee reduces the disruption caused by a bankruptcy filing and helps to maintain continuity of the business thus saving jobs.

What are the limitations of an assignment?

• An assignment does not provide an automatic stay which means creditors can continue to pursue actions against the assignor. However, since the secured lender is a cooperating party in an assignment, the risk of the secured lender foreclosing on its collateral is unlikely.
• An assignee cannot assign executory contracts to the buyer. The assignee must get the contract counterparts, such as a landlord, to agree to accept the buyer as the new obligor.
• An assignee cannot sell assets “free and clear” of liens or “cram down” the secured lender as in bankruptcy. Thus, the secured lender must agree to the sale if the secured lender isn’t going to be paid in full with the sales proceeds.

What does the assignee do during the pre-assignment period?

From the commencement of the assignment until the date the assets are transferred to the assignee, the assignee will be working with management in conducting its due diligence on the background of the company, the liabilities, any litigation, reviewing debt agreements and collateral positions, and ascertaining the highest and best offer for the assets (reviewing the company’s marketing efforts as well as performing its own marketing efforts, if necessary). It is during this period that most of the cost of the assignee will be incurred.

What does the assignee do during the assignment?

Upon the effective date of the assignment, the assignor transfers its assets to the assignee. The assignee often then immediately sells the assets. The assignee will contact the unsecured creditors and notify them of the assignment and the bar date which is the deadline for the creditors to file their claims. The assignee will distribute proceeds from the sale, if any [3] , to the unsecured creditors.

Companies in distress should consider an Assignment for the Benefit of Creditors vs. bankruptcy to more more quickly satisfy creditors, conserve any remaining capital, avoid negative publicity and benefit from a more timely dissolution.

EMAGroup advises companies in transition, focusing on Special Situations, Capital Solutions, Enterprise Performance Improvement, and Insolvency Strategies to create value-driven solutions. For more information, visit: https://www.ema-group.com .

[1] An ABC is a state law creation, so rules and regulations vary by state. It is important to retain counsel familiar with the assignment laws applicable to your state.

[2] In California

[3] As is often the case, the sale proceeds are not sufficient to pay the secured lender’s claims in full which means there are not distributions to the unsecured creditors.

More To Explore

Building a Path Forward: How to Successfully Refinance a Turnaround

Refinancing a successful turnaround is a multi-step process. Often, management teams overlook some of the critical elements needed for the development of a turnaround plan.

A Road to Recovery: Using Benchmarking to Restore Value in a Distressed Company

After 30-plus years of experience restructuring companies large and small, I have found benchmarking to be a simple and common technique that is often overlooked.

Driving Value in a Distressed Transaction

Given Covid-19, investing in and disposing of under-performing companies/distressed companies is increasing in interest. Here are key considerations in creating and obtaining “value” when selling a business.

Watch CBS News

How does the Electoral College work? A simple explanation for the 2024 presidential election

By Mary Cunningham

Updated on: November 5, 2024 / 9:38 PM EST / CBS News

Since its founding, the United States has used the Electoral College to elect the nation's president . A candidate needs 270 electoral votes to win the White House. 

Five presidents in the history of the nation won the presidency without winning the popular vote — most recently, Donald Trump in 2016. His opponent that year, Hillary Clinton, won over 2.8 million more votes than Trump nationwide, but she lost enough key states to be defeated in the Electoral College, 306 to 232. 

In 2020, Trump lost both the popular vote and the Electoral College to Joe Biden. The electoral vote was 306 to 232 , but in the Democrat's favor. 

Trump is again the GOP nominee in the 2024 election  in what has shaped up to be a tight race against Vice President Kamala Harris — with over  82 million  ballots cast in early voting.

Here's how the Electoral College works, as well as details on its history and what role individual voters play in the outcome of the presidential election.

What is the Electoral College and how does it work?

The Electoral College is the process by which Americans elect their president and vice president indirectly through their state's electors. Candidates must secure 270 electoral votes, a majority of the 538 at stake, to win the White House. 

Before the general election, states select slates of electors. After voters cast their ballots in November, the candidate who wins the popular vote determines which slate of electors — Republican, Democrat or a third party — will cast electoral votes in the Electoral College for the president. 

In most states, it's winner-take-all — whoever gets the most votes in the state wins all of its electoral votes . 

In Maine and Nebraska, the rules are slightly different. They have a proportional representation system in which the winner of each congressional district is awarded one electoral vote, and the winner of the statewide vote is awarded each state's remaining two electoral votes. Some Republicans were hoping to change Nebraska's rules to a winner-take-all model, since one of its electoral votes often goes to the Democrat, but the effort fell short . 

Electors meet in their respective states in mid-December to cast their votes for the president. The meeting takes place the first Tuesday after the second Wednesday in December, which falls on Dec. 17 this year. 

There is no Constitutional provision or federal law that requires electors to vote for the candidate to whom they are pledged, though they almost always do. "Faithless electors" are rare, since the electors are selected by the parties.

How many electors are in the Electoral College?

There are 538 electors in total across the 50 states and Washington, D.C. 

What determines how many electoral votes a state gets?

Each state is allocated electors based on the size of its congressional delegation. Several states with the smallest populations — Alaska, Delaware, North Dakota, South Dakota, Vermont and Wyoming — have three electors each, since they have one representative in the House and two senators, while California, the largest, has 54 electoral votes.  Washington, D.C., is also allocated three electors.

States may gain or lose electors as the population shifts, and there have been a number of changes since the 2020 presidential election.

In the redistricting that followed the 2020 Census, Texas gained two electoral votes and five states gained one each, while seven states lost one electoral vote.

Who chooses the electors?

The electors are chosen before the general election by their respective political party. Their sole purpose is to meet in their state following the November election and cast two votes — one for the president and one for the vice president.

Who are the electors?

Each party's slate of electors may include state and local elected officials, party leaders, community activists and others affiliated with the party. They are typically chosen "to recognize their service and dedication to that political party," the National Archives  explains.

There are no major qualifications, but members of Congress and certain other office-holders are barred from participating, along with anyone who has  engaged in insurrection or rebellion .

What happens if there's a tie in the Electoral College?

In the rare event that there's a tie in the Electoral College — which in the modern era would mean each candidate wins 269 electoral votes — members of the newly elected House of Representatives would decide the outcome of the presidential election, while the Senate would select the vice president.

This type of contingent election would also take place if neither candidate wins a majority. This could occur if a third-party candidate wins some of the electoral votes or if there are a number of "faithless electors"  who break their pledge and vote for a candidate other than the one who won the state's popular vote.

If it went to the House, each state would get a single vote, regardless of the size of its congressional delegation, and the 50 House delegations (the District of Columbia would not participate) would select one of the top three presidential candidates.

The vice president would be selected by a simple majority in the Senate, and all senators would have a vote. As a result, it's possible that the president and vice president could be from different parties.

Since the 12th Amendment was ratified in 1804, there have been contingent elections twice.

In 1824, four presidential candidates split the vote, and no candidate won an electoral majority. John Quincy Adams won the election in the House, even though Andrew Jackson had won a plurality of the popular and electoral votes.

And in 1837, Martin Van Buren won a majority of electoral votes, but Virginia's 23 electors refused to support his vice presidential candidate, Richard Johnson, and became faithless electors. That left Johnson one vote short, leading to a contingent election in the Senate, which he won easily.

Why do we vote if the Electoral College picks the president?

Five presidents in U.S. history have lost the popular vote and still managed to win the election, leading some to wonder why the nation continues to keep the Electoral College in place. The Electoral College was established in Article II of the Constitution and could be repealed by constitutional amendment. But that's a difficult road. Amendments require a two-thirds majority vote in both houses of Congress and ratification by three-fourths of the states, or 38 of the current 50.

In a 2023 Pew Research poll , 65% of Americans said the president should be elected through the popular vote, not the Electoral College. Hundreds of proposals have been introduced in Congress to change the process over the years. There's also a multi-state effort called the National Popular Vote Interstate Compact , which has been adopted by 17 states and Washington, D,C. That proposal would ensure that the winner of the popular vote gets all of the electoral votes in the states that signed the compact — but it would only go into effect if enough states agree.

So why keep the Electoral College in place if there's so much frustration from Americans? According to the National Archives , the Founding Fathers saw the Electoral College as a middle ground between giving the decision to Congress or to a direct vote by citizens. Proponents say it keeps  less populous states  from being underrepresented by discouraging candidates from campaigning disproportionately in urban centers that are more heavily populated. 

What's the history of the Electoral College?

The Founding Fathers established the Electoral College in the Constitution in 1787. The term "Electoral College" does not appear in the nation's historic document, but the word "electors" does,  the National Archives  noted.

The ratification of the 12th Amendment in 1804 changed some of the rules for the Electoral College. For example, it required separate electoral votes be cast for the president and vice president. With the ratification of  the 23rd Amendment  in 1961, the District of Columbia received three electors.

• United States Electoral College
• Voter Turnout
• Biden Administration
• Kamala Harris
• Donald Trump
• Voting Rights
• 2024 Elections
• Mail In Voting

Mary Cunningham is a news associate at CBS News, based in New York. She has worked on both the broadcast side, with CBS News 24/7 streaming, and the digital side, writing stories for CBSNews.com. Her next assignment is working with the "60 Minutes" team.

More from CBS News

Why do we have the Electoral College?

Key moments of the 2024 campaign in photos

The battleground states that decided the 2024 election

See which states Trump won in the 2024 election that he didn't win in 2020