Increasingly, small businesses are foundering or floundering. For many of them in New Jersey, an assignment for the benefit of creditors [“ABC”] may be a reasonable and practical alternative. Typically, the owners have put substantial money into the business and given personal guarantees or mortgages on their residences to back up bank loans. Payroll or sales tax obligations may be passed due, for which the owners will have personal responsibility. Lease obligations may be in arrears, and typically these leases are personally guaranteed by the owners.

In many of these situations, a Chapter 11 Reorganization is not a good fit. The business may not have sufficient short term and long term profitability to justify the expense and risk of a Chapter 11 case. Business owners who go into a Chapter 11, without a clear and well defined plan and a reasonable prospect of success, risk not only failure, but also loss of the substantial investment of time and money and a Chapter 7 liquidation or dismissal. Either way, the monies invested in the Chapter 11 case had been wasted. Worse, the bankruptcy filing may expose the owners of the business to recovery of preferential transfers made anytime within one year before the bankruptcy filing. A comparison of Chapter 11 and the New Jersey ABC procedure can show us some of the situations where an assignment makes more sense.

In an assignment, the corporation, partnership, or limited liability company enters into a voluntary transfer of all its assets to an assignee, who then acts as a fiduciary under supervision of the Superior Court, Chancery Division, Probate Part, in the county where the businesses’ principal assets are located. The assignee then sells or liquidates the assets and distributes the proceeds among creditors on a pro rata basis after expenses, and payment or satisfaction of secured claims.

For many small businesses, there is a need to keep the business doors open for a short period of time, either to finish up existing jobs, and realize their value, or to collect receivables, or even to negotiate a sale of the business as a going concern. An assigned can do this simply, and less expensively than an attempt to proceed in a Chapter 11 Reorganization.

While it is technically possible in a Chapter 7 case for a Trustee to operate the business, this is rarely done and most Chapter 7 Trustees will not proceed in that manner.

You get to select the person who will handle the liquidation of your business, but select carefully

A further advantage is that the business owners get to choose the assignee, whereas in a Chapter 7 Bankruptcy, the Trustee is appointed on a blind rotation basis. The assignee should be someone with experience in shutting down or liquidating companies, such as an experienced bankruptcy trustee, such as the author.

Some types of creditors get better treatment in an assignment than in bankruptcy.

Assignments for the benefit of creditors can be advantageous because different statutory priorities apply than under the Bankruptcy Code. For example, landlords enjoy a priority under N.J.S.A. 2A: 19-31 which they do not enjoy under the Federal Bankruptcy Code. This can be particularly helpful where the business owners have personally guaranteed the rent obligations.

Another significant advantage in a New Jersey-based assignment, all claims of the United States, including taxes are paid ahead of priority wage claims, state taxes, and any priority claim of a landlord. 31 U.S.C. §3713(a)(1); In re: Holly Knitwear, 140 N.J. Super. 375 (App. Div. 1976).

Different rules for recovery of “preferences”

The business owners may have repaid personal loans to the business or loans by other insiders. Other creditors may have been paid off outside the ordinary course of business. Once a bankruptcy is filed, a Trustee is entitled to pursue recovery of any such payments or transfers made to owners or insiders anytime within twelve months of the bankruptcy filing. 11 U.S.C. §547. In an assignment, the assignee must pursue these within one year of payment, as a “fraudulent transfer” and must prove that “the insider had reasonable cause to believe that the debtor was insolvent” N.J.S.A. 25: 2-27(b); N.J.S.A. 25:2-31(c). This may be harder to prove, and the assignee may be less inclined to pursue business owners. Other creditors may fare better in an assignment. In bankruptcy, any payment made within 90 days is subject to being pursued, but for businesses the total paid in that time must be more than $5340.00. 11 U.S.C. 547, 550. In an assignment, the recovery is limited to payments made in the previous four months. N.J.S.A. 2A: 19.

Any time a business client is in financial difficulty, careful consideration of all the alternatives and careful planning with the help of an experienced adviser is critical so that the efforts taken do not make a bad situation worse. Business owners are well advised to carefully consider all the alternatives, and consult with experienced counsel about the costs and benefits of each.

This article is intended to provide generalized information about New Jersey law and should not be relied upon without advice of qualified legal counsel. No attorney client relationship with the author or his law firm is intended or created by this article.

We are NJ bankruptcy attorneys. We help people obtain debt relief under the Bankruptcy Code.

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