New Jersey business law Article

ASSIGNMENTS FOR THE BENEFIT OF CREDITORS

ARTHUR H. MILLER, ESQ.

Miller, Miller & Tucker, P.A.

96 Paterson Street

New Brunswick, NJ 08901

(732) 828-2234

An Assignment for the Benefit of Creditors offers a state law alternative to insolvent liquidation for business entities. The assignment statute can be found at N.J.S.A. 2A: 19-1, et seq. The practice relating to Assignments for the Benefit of Creditors is required to conform as nearly as practicable to the procedure relating to insolvent corporations under N.J.S.A. 14A: 14-1.

Although an Assignment for the Benefit of Creditors can be made by an individual or partnership, it is most useful for corporations or LLC’s. An individual or partnership that makes an Assignment for the Benefit of Creditors cannot obtain a discharge of personal liability unless the creditors are paid in full, as opposed to the discharge an individual or partner debtor would receive in a federal bankruptcy.

Under an Assignment for the Benefit of Creditors, the debtor voluntarily transfers by deed of assignment all of its assets to the Assignee, who is a person selected by the Assignor. The Assignee liquidates the assets of the business enterprise under the supervision of the Superior Court, Chancery Division, Probate Part, in the county where the enterprise’s principal place of business is located. 2A:19-45. The Assignee then pays administration expenses and distributes the balance of the proceeds to the creditors on a pro rata basis with priority given to certain creditors. This procedure provides a method of liquidation of the assets without interference from creditors who have obtained judgments.

The Assignment for the Benefit of Creditors requires a unanimous resolution of the stockholders, if the enterprise is a corporation. Ely v. Credit Men’s Adjustment & Interchange Bureau, 106 N.J.Eq. 472 (Ch 1930). Presumably, this case by extension would require unanimous consent of all members of an LLC.

One advantage of an Assignment for the Benefit of Creditors over a federal bankruptcy liquidation is that the Assignee responsible for the liquidation is selected by the debtor, as opposed to a trustee selected by the bankruptcy court at random. The Assignee selected by the debtor can be a person familiar with the debtor’s business. Under certain circumstances, the Assignee may continue the business or make arrangements to sell the business on a turnkey basis as a going concern, rather than liquidating it at auction after a shutdown. 2A: 19-16. If there is a potential purchaser readily available, this would preserve the going concern value of the enterprise while cutting off creditor claims, a much quicker, simpler and less expensive process than a reorganization under Chapter 11 of the United States Bankruptcy Code.

Creditors’ claims under the Assignment for the Benefit of Creditors Act have slightly different statutory priorities than under the federal bankruptcy code. One example is a priority enjoyed by landlords under state law which does not exist under the bankruptcy code. This could be an advantage for a liquidating corporation, particularly where the principal of the corporation has personally guaranteed the rent of the enterprise. The landlord will have a priority claim against estate assets on the premises of the debtor before unsecured creditors are paid.

Initiation of the Assignment Process

The Assignment for the Benefit of Creditors is initiated by the selection of an Assignee and execution of a Deed of Assignment and inventory of assets executed by the debtor, assigning title of all of its assets to the Assignee. 2A:19-4. This deed and inventory is recorded with the clerk of the county where the property is located in the same manner as a deed of real property. 2A:19-7. A copy of the Deed of Assignment and inventory is filed with the Surrogate’s office. 2A:19-7. Once this is accomplished, the assets of the Assignor are in the custody of the court and the ability of judgment creditors to levy on the assets is stopped. 2A: 19-4, 2A: 19-1(a). The Assignee is a trustee of the assets and has a fiduciary role toward the creditors as well as toward the debtor. 2A:19-1(a); 2A:19-14. See the form of Deed of Assignment with annexed inventory of assets and list of creditors attached. The Assignee has the status of a judgment creditor who has levied as of the date of the assignment. 2A:19-14 and 12A:9-301(3).

After recording and filing the deed and furnishing a copy to the Surrogate, the Assignee should immediately meet with the debtor to obtain documents relevant to the operation of the business, determine title to and location of assets and obtain the debtor’s cooperation in liquidating the assets. The Assignee must obtain and file a bond in an amount approved by the court and mail and publish notice to creditors of the assignment within thirty days of the filing of the deed. 2A:19-10, 19-11, 19-8. The Assignee should also make arrangements to forward all mail addressed to the Assignor and should continue to monitor the mail in order to discover potential assets and creditors. The next task is to close all bank accounts and collect and marshal all assets of the Assignor, preliminarily to liquidating them. Other early tasks include changing locks and alarm codes, physically inspecting the premises and assets, termination of utilities and obtaining or continuing insurance on the assets until sale.

It is usual for the Assignee to obtain counsel to represent him or her as well as an accountant, if necessary, to prepare final tax returns for the enterprise. This requires a motion for the appointment of counsel and accountant. See form attached.

The Assignee should also obtain a lien and judgment search, secure copies of all books and records and analyze all transfers to principals in order to determine the existence of any preferential or improper transfers.

Assignee’s Duties

Pursuant to 2A: 19-13, the Assignee has the authority to dispose of the Assignor’s property, sue on behalf of the estate, settle and compromise claims and take any and all other actions necessary to accomplish the liquidation of the estate. Title to the Assignor’s property vests in the Assignee, subject to liens and mortgages that cannot be avoided. If there are secured creditors, the Assignee may sell assets free and clear of their liens, provided lien holders are paid in full from the proceeds.

The Assignee may sell assets at a public sale, utilizing a court-appointed auctioneer, or seek court approval for a private sale of the assets. All sales should be made on notice to creditors and are subject to court confirmation. 2A:19-19. Prior to initiating either type of sale, the Assignee should obtain a court order for the services of an experienced appraiser to appraise the assets so that any proposed sale will be for a fair and reasonable price. This appraisal can serve as the separate inventory which the Assignee is required to file with the clerk of the court. 2A:19-9. The statute requires that creditors must receive notice of the sale by motion with the opportunity to object and, in the event of a private sale, with an opportunity to make higher or better offers. In the case of a private sale, the court will usually require the Assignee to inform it as to what efforts the Assignee made to procure higher offers.

The Assignee has the authority to collect accounts receivable and can compromise and settle claims. 2A: 19-13. It is good practice, in the event of the compromise or settlement of a claim in a significant amount, to obtain court approval of the settlement.

Pursuant to 2A: 19-14, the Assignee, as a representative of the creditors, can pursue fraudulent conveyances. Any conveyance, which is void against creditors, is avoidable as against the Assignee. The Assignee can conduct one or more hearings to assist in discovering facts necessary to carry out his/her duties. 2A:19-15.

Treatment of Claims in an Assignment for the Benefit of Creditors

Creditors must file claims within three months of the date of the assignment. 2A:19-8, 19-23. The Assignee has the authority to accept, compromise or object to claims of any creditor. In the event of an objection, a court hearing may be required to resolve the issue.

The landlord has a lien for up to one year’s unpaid rent against goods and chattels that were on the premises, which must be paid out of the sale of the goods. 2A: 19-31. There is a $300.00 priority for wage claims. 2A: 19-30. The priority of claims is set forth in the case of In re Holly Knitwear, 115 NJ Super. 572 (1971), modified on other grounds, 140 NJ Super. 375 (App. Div. 1976). The priority of asset distribution and payment of claims is as follows:

Administration expenses and commissions.
Secured claims.
Federal government claims.
Wages ($300 each).
Landlord’s liens on chattels (1 years rent).
Municipal personal property taxes.
Corporate taxes.
State and municipal taxes.
Unsecured claims (pro rata).

Procedure for Closing the Estate

In order to close the estate and settle his or her account, the Assignee must proceed in accordance with Rules 4:87-1 and 2. The Assignee files a complaint together with an Affidavit of Claims and final accounting, a petition for allowances together with an Order to Show Cause, which is sent to all creditors and other parties in interest. The Assignee may receive commissions of up to 20% of all sums received by the Assignee subject to approval by the court. In the event that the Assignee retained a law firm as counsel or an outside firm as special counsel or an accountant, their fees will also be paid after court approval, pursuant to the final accounting. 2A: 19-41, and 43.

Relation to Receivership Statute

It should be noted that Rule 4:54, which relates to the administration of Assignments for the Benefit of Creditors refers to the receivership statute, N.J.S.A. 14A:14-1, et seq. The rules and statute should then be read with this in mind. For example, 14A:14-7 permits receivers to sell property of the debtor free of encumbrances, provided the lien holders are paid in full, with interest, from the proceeds. The Assignment for the Benefit of Creditors statute, at 2A:19-13, does not expressly state this power to sell encumbered assets.

The information expressed above should not be construed as legal advice but merely information on the law that may be of interest to you. Remember, individual legal problems require individual solutions. Please contact Miller, Miller & Tucker, P.A. if we can help.