ABC’s 1 A New Hampshire Perspective on Assignments for the Benefit of Creditors

The Merrimack County Superior Court recently found a Delaware assignment for the benefit of creditors unenforceable against an attaching New Hampshire creditor for noncompliance with N.H. REV. STAT. § 569:1.1

The result is at odds with the hopes of some elements of the insolvency bar which had been looking at such assignments (often referred to as “ABC’s”) as a new potential market. It is a market freighted with unseen risk.

What are ABC’s? The theory behind an ABC has a simplicity that hides risks. The theory seeks to address the problems of an insolvent
business winding up its affairs. The idea is that the business will sell its assets and distribute the resulting proceeds to its creditors in their
order of priority.

The problem is that disgruntled creditors might sue, attach and interfere with the sale. By attaching, such creditors can force payment in full as a price for their release of the attachment lien, thereby assuring that the active disgruntled creditor gets paid in full while the
passive creditors are paid only cents on the dollar.

The ABC “solution” is to transfer “title” to the business assets in an “assignee.” The assignee then sells the assets. Since the assignor no longer “owns” the assets, the attaching creditor reaches nothing. Since the assignee does not owe the debt, the attaching creditor has no
direct grounds to sue the assignee, and not having a claim against the assignee, cannot attach.

1. Red Rock Investments, LLC v. Accuworx Northeast, Inc., and DSI Assignments, LLC, Merrimack County Superior
Court No. 217-2018-CV-00793 Order dated March 13, 2019.”

2. Insolvent for these purposes means that the business’s liabilities exceed the fair value of it’s assets: equity is “out
of the money” and unsecured creditors will not be paid in full on liquidation.

3. The “order of priority” is at best ambiguous and almost undoubtedly not the same as the order under the
Bankruptcy Code. Compare, 31 U.S.C. § 3713 (requiring US Government Tax claims to be paid first), with, 11
U.S.C. § 507 (Granting tax claims an eighth priority behind administrative expenses, domestic support obligations,
wage claims, employee benefit claims, certain farmer and fisherman claims, and consumer deposit claims).

4. This Article will leave to others the theory that the transaction as a whole is avoidable under the Uniform
Fraudulent Transfer Act. See N.H. REV. STAT. ANN. § 545-A:4.

Assets in the hands of the assignee.
The ABC thus thwarts the attaching creditor and permits the sale to occur with the subsequent (claimed) equitable distribution among all creditors.

The theory of ABC’s depends on angelic actors in the roles of assignor and assignee: by hypothesis, the assignor will receive nothing from the assignment; by hypothesis, the assignee will work only for the benefit of creditors who did not participate in the assignee’s hiring. Why
would the assignor set up the transaction in the first place? Two answers appear likely: the first is the claim that ABC’s are cheaper than liquidation in the bankruptcy court;5 the second (and more likely) is that the assignor is getting something out of the process that it would not get in any alternative, including bankruptcy (its “Premium”). The most obvious Premium would be protection from inquiry by a Title 11 bankruptcy trustee, but whatever the ABC Premium is, the assignee, being hired by the assignor, will likely protect it. 6Despite its simplicity, it is not apparent that the assignment works even before one
considers the application of N.H. REV. STAT. ANN. § 569:1. An analysis of the assignment
might start with the question: for what consideration does the assignee receive title? The answer
is none and that answer results in the conclusion that the assignee holds the property in trust.7

Having found a trust, the important question is: for whom?
Is the assignor also the beneficiary of an ABC? A reasonable person may well say it is:
the assignment comes into being without participation by creditors; the assignor is benefitted

5.
See Melanie Rovner Cohen Joanna, “Assignment for Benefit of Creditors-A Contemporary Alternative for
Corporations”, 2 DePaul Bus. L.J. 269, 270 (1990) (“Assignment for the benefit of creditors, an out-of-court
remedy, has been used primarily as a more cost efficient and less public form of debtor liquidation.”
6.
A bankruptcy trustee might investigate and seek recoveries of fraudulent transfers, or preferences, or sue officers
and directors for malfeasance. An assignee will have no right to sue for fraudulent transfers or preferences and little
incentive to sue the officers or directors that hired it.
7.
See, e.g., In re Valente, 360 F.3d 256, 263 (1st Cir. 2004); Restatement (Second) of Trusts § 404 (1959); c.f., Bailey
v. Scribner, 97 N.H. 65, 68, 80 A.2d 386, 388 (1951) (“Accordingly a resulting trust may be established by parol
evidence that one person has furnished the whole or a part of the consideration for a purchase of land, the title to
which was taken in the name of another.”).

each time its creditors are paid; and the assignor, in some circumstances, may revoke the
assignment. The assignor is most likely the beneficiary.

8.
If the assignor is the beneficiary then
creditors can reach that beneficial interest and the secret trust only defeats creditor remedies by
the deception of its secrecy and not by depriving the assignor of an interest in the assets.
If the ABC works by deception, then the New Hampshire legislature’s requirement in that
the ABC be made public in N.H. REV. STAT. ANN. § 569:1 is an appropriate remedy.
Edmond J. Ford
Ford, McDonald & Borden, P.A.
10 Pleasant St.,
Suite 400
Portsmouth, NH 03801
603-373-1737
[email protected]
May 13, 2019

See, e.g., Waters v. Comly, 3 Del. 117, 129 (1840) (“If the funds were to pass into their [the assignor’s] hands
they would be the trustees of Waters & Laird [the assignee], who might revoke the authority to pay the creditors,
and recall the money.”); In re Knapp, 319 F. Supp. 1070, 1072 (S.D. Ill. 1970) (permitting assignor to revoke
assignment and then file a bankruptcy petition and claim the assigned property as exempt).