assignment for the benefit of creditors interior define

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Why Havenly bought Interior Define

Last year, the Sunday after Thanksgiving, Havenly founder and CEO Lee Mayer got a dramatic phone call. Interior Define, the direct-to-consumer furniture brand, was in trouble. Actually, it was worse than just trouble. Mayer was told that if she didn’t make an immediate move to acquire the brand, it would implode. “The company was not just out of cash, it was so out of cash it had pushed payables to some dramatic amount, and customer liabilities were very large,” Mayer tells host Dennis Scully on the latest episode of The Business of Home Podcast . “A week to do a deal and loan money to a company that is—if I didn’t step in—pretty much getting sucked into Chapter 7 bankruptcy, is a pretty tall task.”

That Interior Define desperately needed a bailout was not entirely a shock to Mayer. The brand’s troubles had started earlier in 2022, when, after a period of pandemic-powered expansion, sales fell off a cliff and investors got cold feet. Soon, Interior Define hit a cash crunch, and was unable to pay vendors to make and deliver its products, leaving thousands of customers in the lurch, waiting on unfulfilled orders. News of the brand’s predicament spilled out into the public, and behind the scenes, Mayer had already floated the idea of a purchase to Interior Define’s leadership, though at the time the company was holding out for a different deal—one that never materialized.

Ultimately, Interior Define and Havenly worked out a somewhat complex arrangement , in which Interior Define—the legal entity—was dissolved in a bankruptcylike process called an “Assignment for the Benefit of Creditors,” or “ABC.” Thus, Mayer and Havenly were able to buy Interior Define’s intellectual property without taking on its liabilities (which, according to documents filed with the ABC, were in the neighborhood of $96 million).

The transaction wasn’t ideal. Mayer has been paying shipping vendors out of pocket to get customers’ lost-in-limbo sofas finally delivered, but due to the complexity of the negotiations, not everyone is getting their order. Then there’s the bad will that’s built up after six months of delayed orders and negative press. Why go through the trouble of trying to put all the broken pieces back together?

For one, says Mayer, she was a fan of Interior Define—the two brands had started at roughly the same time, approaching the market in similar ways—and thought it deserved another shot. “We sort of grew up together. I know [Interior Define founder] Rob [Royer]—I’ve actually had six different Interior Define pieces over the years,” she says. “I liked it and thought there was something there, and felt like it deserved to exist.” (The prospect of a major venture-backed home industry brand going under, adds Mayer, certainly would not have been great for Havenly—also a venture-backed home industry e-comm brand—either.)

But there was a nuts-and-bolts business case behind the acquisition too. Despite the drama, people still continued to order from Interior Define in late 2022—many of them were repeat customers who just liked the product. The brand had generally earned strong reviews prior to 2022, and Mayer reasons that if she can get through the confusion of this period, there’s no reason Interior Define can’t get back to winning ways. Plugging the brand into Havenly, too, makes for good synergy—Havenly can offer design services to Interior Define customers and get a better margin when its own designers spec Interior Define product. Having a significant retail brand under its umbrella can also give Havenly a hedge against unforeseen twists and turns in the famously turbulent e-design world.

In Mayer’s telling, the acquisition could be a first step toward a version of Havenly that consolidates under one umbrella multiple brands that share the same approach—digitally native, aesthetically driven—and audience: millennials. “You have the millennial generation starting to become the majority of home furnishing spend,” she says. “When you see these generational shifts, you have a really unique opportunity to come forward with a brand and a set of services that specifically appeal to that rising consumer.”

Listen to the show below. If you like what you hear, subscribe on Apple Podcasts or Spotify . This episode was sponsored by Loloi Rugs and Daniel House Club .

Homepage image: Lee Mayer | Courtesy of Havenly

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Business | After months of delay, thousands of Interior Define customers may finally get their furniture. Thousands more probably won’t.

E. Jason Wambsgans / Chicago Tribune

Employees in the Interior Define flagship store in Chicago's Lincoln Park neighborhood on Feb. 3, 2023.

Home furnishings on display in the recently reopened Interior Define flagship store on Feb. 3, 2023.

Chris Sweda / Chicago Tribune

Thousands of frustrated customers of the Chicago-based custom furniture retailer have been waiting for overdue orders placed last year, navigating a succession of evasive company missives blaming everything from port congestion to supply chain issues.

Employees in the Interior Define flagship store in Chicago's Lincoln Park neighborhood on Feb. 3, 2023.

Choosing everything from the size and color to cushion fill, she financed the purchase and began making monthly payments, waiting for a promised November delivery. Fifteen hundred dollars, eight months and a boatload of excuses later, Church is still waiting for her couch to arrive.

“This is the biggest furniture investment I’ve ever spent,” said Church, 46, of Gilbert, Arizona. “I was really excited for this piece of furniture, and it’s just been an absolute nightmare.”

Church is not alone. Thousands of frustrated Interior Define customers have been waiting for overdue furniture orders placed last year, navigating a succession of evasive company missives blaming everything from port congestion to supply chain issues.

For some of those customers, their shipments may finally be coming in, thanks to a new owner. Others, however, are days away from becoming couchless creditors of the insolvent former owner.

Launched in 2014, Interior Define carved out a niche as a direct-to-consumer custom furniture retailer, leveraging its e-commerce site and a handful of bricks-and-mortar stores to build a loyal customer base and plenty of industry buzz. Backed by new venture capital funding, Interior Define rapidly expanded during the pandemic, growing from five to more than 20 retail stores.

Its expansion plans were derailed last year amid supply chain issues and shrinking margins. By summer, the company was unable to pay its overseas manufacturers and logistics providers, leaving its furniture orders in limbo and thousands of customers, many of whom had paid in full, waiting in vain for delivery.

The delays generated increasing backlash on social media, where Facebook groups formed to vent and compare notes on the unfulfilled furniture orders. Behind the scenes, Interior Define was in dire financial straits, desperately seeking additional funding and on the verge of Chapter 7 bankruptcy, sources familiar with the situation said.

In late December, running out of cash and owing about $26 million to secured creditors, Interior Define chose to liquidate through an assignment for the benefit of creditors — a bankruptcy alternative that bypasses the courts.

Enter Denver-based Havenly, a rival direct-to-consumer home furnishing company, which bought the Interior Define brand and some assets Dec. 29, hoping to fulfill outstanding orders before thousands of Interior Define customers became creditors.

“I don’t have a legal liability to fulfill furniture,” said Lee Mayer, 40, co-founder and CEO of Havenly. “I just feel like it’s ethical and the right thing to do for the brand. We just don’t have the ability to fulfill all those obligations.”

Havenly has since paid the freight to get more than half the overdue pieces shipped to customers in a bid to restore the luster to a tarnished brand, Mayer said. But it didn’t have the money, and was unable to find additional funding, to build and ship thousands of outstanding orders.

Time may be running short to salvage those orders.

In the coming days, accounting firm Armanino, which was appointed assignee for the defunct Interior Define company, will send notices to customers with unfulfilled orders informing them that they have a claim and providing them with a link to file it. The likelihood of recovering any money through the claims process is not promising.

“As of the date of this notice, the Assignee does not believe that any funds will be available for distribution to unsecured creditors,” according to the notice obtained by the Tribune.

Customers with unfulfilled orders may also dispute the charges and seek a refund with their credit card or finance company, an option that might prove more fruitful, sources said.

Interior Define opened its first store in Wicker Park in January 2014 but relocated its flagship to Armitage Avenue in Lincoln Park. Within five years, Interior Define had five stores in Chicago, Boston, New York, Los Angeles and Austin, 65 employees and $27 million in venture capital funding.

In 2019, Interior Define founder Rob Royer stepped down as CEO and the company named fashion executive Antonio Nieves to succeed him. Interior Define recapitalized, with Chicago-based Pritzker Group and Breakout Capital among the lead investors. The mission was to aggressively expand the retail footprint and build the online brand.

Nieves, the Pritzker Group and Breakout Capital did not respond to requests for comment. Royer declined to comment.

Backed by $57 million in debt and equity financing, Interior Define bulked up its C-suite and branched out into new markets, adding furniture lines and new stores across the country. A March 2022 news release touted a “core moment” in Interior Define’s “massive 200% retail expansion” plans to have more than 30 stores by the end of the year.

But Interior Define began experiencing “financial challenges” in early 2022, the assignee said in the notice, as the pandemic-fueled furniture boom waned, inflation rose and supply chain issues mounted. The company’s cash flow position was also weakened as key vendors required payment in advance, or put liens on inventory, according to the notice.

In December, Havenly loaned Interior Define nearly $4 million to continue operations, as well as additional funding prior to acquiring the brand for an undisclosed amount, according to the notice. The new owner is also assuming some of the leases and plans to reopen about a dozen Interior Define stores, sources said.

Retail locations will include New York, Boston, Los Angeles, Washington, D.C., San Francisco, Dallas and Chicago, which reopened after a visit from Mayer last month.

Investing millions of dollars in a brand trending on social media for all the wrong reasons may seem a risky bet, but Mayer believes Interior Define can rebuild its good name.

“Until July or August of 2022, a lot of people loved this brand, including myself,” Mayer said. “And to the extent that I can help people love this brand again, I’m going to try.”

Many customers would settle for their love seat, sofa or sectional.

Church, a piano accompanist for a high school choir, finalized her purchase at a newly opened pop-up Interior Define store in Scottsdale in May. She paid about $1,500 through monthly installments before stopping the process in December and disputing the charges with Affirm, the finance company used by Interior Define.

On Dec. 27, she received an email from then-CEO Nieves, who apologized for the delays and said the couch would be delivered in early January.

“We’ve broken your trust, and for that I am truly sorry,” Nieves said in the email. “Our delays and lack of visibility into your order status are not up to our standards, and it pains me that we’re causing you stress on something that should be a positive and exciting experience.”

Two days later, Havenly bought the brand and on Dec. 31, Nieves stepped down as CEO and the predecessor Interior Define company began its liquidation process.

On Jan. 20, Church received an email from new owner Mayer, saying the Havenly team had secured her order, which was being held at port awaiting payments to suppliers and logistics providers.

“We are working to complete those payments with key partners to get your item released and it should be on its way to your home in the coming weeks,” Mayer said in the email.

While emailed promises from Interior Define no longer “seem to land” with customers after so many months of excuses and delays, firm delivery dates are beginning to quell some of the noise, Mayer said.

A few days ago, Church finally got the call.

“My couch is supposed to be coming on Monday,” Church said. “I just found out it’s going to be delivered. We shall see.”

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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 ]

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Assignment For The Benefit Of Creditors: An Overview

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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

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What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.

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Assignment for the Benefit of Creditors: General Overview

If you are considering bankruptcy for your insolvent business, an Assignment for the Benefit of Creditors (“ABC”) might be your answer.  An ABC is a less expensive, quicker, quieter, and simpler alternative to traditional bankruptcy.  An ABC is a state law procedure utilized to liquidate a failed, insolvent, or no longer viable business.   Fla. Stat. § 727.101 .   An ABC is normally much simpler and usually less expensive than a comparable bankruptcy proceeding.  This savings means larger payouts to both unsecured and secured creditors.  This blawg provides a general overview of the ABC process, and highlights a few benefits of ABC as compared to a Chapter 7 bankruptcy.

An ABC is a conveyance by an assignor of substantially all of the assignor’s property to an assignee for the purpose of applying the property or its proceeds to the payment of the assignor’s debts and returning any surplus to the assignor after administration.  ABCs share some similarities with federal bankruptcy: ABCs ensure full reporting to creditors, and require equal distribution of an assignor’s assets.  However, there are several clear differences between the two, and each has its own advantages and disadvantages.

One of the biggest advantages of an ABC in comparison to traditional bankruptcy is that the assignor chooses the assignee.   Fla. Stat. § 727.104 ;  11 U.S.C. § 702 .  This is significant for a few reasons.  Two problems with Chapter 7 bankruptcies, as compared to ABCs, are (1) many bankruptcy trustees appointed by the court are lawyers or accountants who operate independently, they are assigned cases in large numbers, and do not maintain staffs of people experienced in operating a business; and (2) when the trustee takes over, the debtor will be foreclosed from participating in the liquidation process.  In an ABC, a professional assignee, chosen by the assignor, is not only an expert in liquidating assets, but is also best suited to operate a business as long as need be to maximize return by realizing some form of going-concern value.  Another major advantage of an ABC over Chapter 7 bankruptcy is that the assignor can decide largely what is going to happen before and during the ABC.

The ABC proceeding is commenced with the execution of an irrevocable assignment in writing.  Upon execution of this assignment, the legal estate in the assigned property passes to the assignee, and the assignor loses all power over the property.  Then, the assignee records the original assignment in the public records and files a petition with the clerk of the court commencing the assignment proceeding.

Most of the powers of the assignee parallel those of the bankruptcy trustee.  The assignee has many duties, including, but not limited to, collection of the assets and reducing them to money, giving notice to creditors, conducting the business of the assignor for limited periods, if appropriate, hiring professionals as may be necessary, and submitting a final report.  The assignee is required to provide notice of the assignment by publication in a newspaper of general circulation published in the county where the petition is filed, once a week for four consecutive weeks, within ten days of filing of the petition, and by mailing notice to all known creditors within twenty days after filing of the petition.   Fla. Stat. § 727.107 .  The assignee may reject leases of both real and personal property under which the assignor is the lessee.  If the rejection creates a claim for damages, the lessor may claim the back rent plus future rent not to exceed the greater of one year’s rent or fifteen percent of the rent remaining term, plus attorney’s fees and costs.   Fla. Stat. § 727.112 .  The assignee may collect any asset by suit in any court of competent jurisdiction.  The assignee has the power to enforce tort claims regardless of any generally applicable law concerning the non-assignability of tort claims.  The assignee may assign causes of action to a second party pursuant to the assignee’s business judgment and subject to notice.   Fla. Stat. 727.111 .

The ability to operate the business is one of the most important of the assignee’s powers.  Assets sold off piece by piece normally bring far lower return.  The assignee may conduct the assignor’s business, without court approval for a limited period not to exceed 45 days.  If no timely objection is filed with the court after seeking court approval, the assignee may continue to operate the assignor’s business for an additional 90 days.  The court may even extend the 90-day period if it finds an extension to be in the best interest of the estate.   Fla. Stat. § 727.108 .

The assignee is empowered to maintain an action to avoid any conveyance or transfer void or voidable by law.  Fla. Stat. § 727.110 .  This clearly contemplates avoidance of transfers under Florida’s Uniform Fraudulent Transfer Act.   Fla. Stat. Ch. 726 .  Importantly, it has been held that only an assignee has standing to pursue fraudulent transfers, preferential transfers, or other derivative claims.   Moffat & Nichol v. B.E.A ., 48 So.3d 896 (Fla. 3d DCA 2010) .

ABCs do not impose an automatic stay in favor of assignors, do not grant an assignee authority to avoid preferential transfers, and do not provide a discharge of any debt.  This last reason is why many individuals and partnerships do not elect ABCs.  However, this presents minimal disadvantage to a corporation or limited liability company, as Chapter 7 bankruptcy does not offer discharge to corporations or limited liability companies.  While there is no automatic stay in an ABC, for practical reasons the ABC filing has the effect of an automatic stay—actions to reach the assets are stopped while the assignee acts to liquidate the assets.  The assignor no longer has any assets to pursue.

In an ABC, unsecured creditors must file a proof of claim and are prohibited from commencing proceedings against the assignee.  However, consensual lienholders may pursue collection by levy, execution, attachment or foreclosure of its collateral.   Fla. Stat. § 727.105 .  This means that if substantial assets are subject to a consensual lien, and if continued use is important to the estate, as where the assignee intends to continue operating the business for a limited time, the lack of an automatic stay could be a severe disadvantage to creditors.  Here, it is important that the assignee work with the secured creditor, persuading it to trust that continued operation of the business will result in a greater return to that creditor.  It is common for the assignor and assignee to arrive at an agreement with dominant secured creditors before or concurrently with executing the assignment, agreeing that secured creditors will be patient and comply with the ABC.

Last, but certainly not least, any Florida corporation considering “closing its doors” should examine ABC as a cost-effective, clean and simple part of the wind-down process.  Closing a business can lead to personal liability for the owner.  The ABC process can be used to take the weight off of the business owner and minimize an owner’s liability potential.  ABC gives your business a proper burial, tight and neat.

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Assignments for the Benefit of Creditors

This practice note discusses assignments for the benefit of creditors (also known as a general assignment or ABC). An assignment for the benefit of creditors involves the assignment of all of a company's assets to a third-party assignee.

Assignment for the Benefit of Creditors Definition | Becker

Accounting dictionary, assignment for the benefit of creditors.

A transfer of some or all of a debtor's property to a trustee, who disposes of the property and uses the proceeds to satisfy the debtor's obligations.

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ABC: Assignments for the Benefit of Creditors

• Nina L. Flax ,
• Paul C. de Bernier ,
• Tyler R. Ferguson ,
• Sean T. Scott

What’s an ABC? If you ask ChatGPT, “ABC” is an acronym that can have multiple meanings, depending on the context—for example, referring to the alphabet. But here we are talking about a type of business liquidation process in the United States known as an Assignment for the Benefit of Creditors (“ABC”). An ABC is governed by state law and has long been viewed as an alternative to a liquidation under Chapter 7 of the US Bankruptcy Code. Although the ABC process has existed for more than a century, it now has increased interest in certain market environments due to its speed, flexibility, and comparatively lower expense than a bankruptcy proceeding.

When Does an ABC Make Sense? As a potential buyer, you want to assess potential legal risks if a target’s liabilities exceed (or are reasonably expected to exceed) its assets. In such a situation, third parties may later seek to assert that the purchase price you paid for the assets of the target was below fair value and to unwind the transaction or impose continuing liability under successor liability and fraudulent conveyance theories, among others. Unlike a direct asset purchase in such circumstances, in an ABC it’s less likely that individual creditors will bring claims against you on fraudulent transfer, successor liability, or other theories because the assets are purchased from an independent fiduciary through a legally recognized wind-down process rather than directly from the distressed company. As a company in distress, you may want to avoid the length and expense of the federal bankruptcy process.

The Basics. The specifics of the ABC process vary by state, but it generally involves four main steps, as follows:

• A company authorizes (through board and any necessary shareholder consent) the shutdown of its operations and assignment of all of its assets to a third-party assignee for the benefit of the company’s creditors. The assignee, who is functionally similar to a bankruptcy trustee, is an independent fiduciary selected by the company and typically has experience in insolvency matters, the relevant industry, or both. In many states, such as California, Texas, and Illinois, the ABC process ordinarily is initiated and undertaken with little or no court involvement. Other states, such as Delaware and New York, provide for varying levels of court involvement with the ABC process, though generally substantially less than a bankruptcy proceeding. Once the ABC commences (which includes the appointment of the independent fiduciary), the company’s board has no further role in the ABC process.
• The assignee provides notice of the assignment to creditors and other parties in interest and requests submission of claims within a certain time. The time period in which notice must be given and claims must be filed varies by state and is based on specific statutory requirements (such as in California) or, in the absence of specific statutory requirements, may be based on local practice or custom (such as in Delaware and Illinois). 
• The assignee liquidates the assets, seeking to maximize the value it obtains. In some cases, the assets are sold as a going concern shortly following commencement of the ABC, pursuant to definitive documentation that has been negotiated with the proposed buyer prior to commencement of the ABC. The liquidation may take other forms as well, such as by sale of certain key assets in bulk and sale of the remaining assets through auctions or other private or public methods. 
• The assignee distributes the net proceeds of sale to the company’s creditors in accordance with priorities under applicable law.

The Buyer’s Perspective. As a potential buyer, you may already be in discussions with the target company prior to the ABC process or you may become involved through the assignee. Although there are some similarities with a Section 363 sale (like a shorter period for due diligence and the potential to lose key personnel through the process), the ABC process differs in several notable respects from a bankruptcy proceeding: 

• The commencement of an ABC does not (i) give rise to an automatic stay of collection or enforcement actions against the company or its property, (ii) prevent creditors from attempting to commence an involuntary bankruptcy case against the company, or (iii) invalidate contractual provisions allowing for counterparties to terminate or modify a contract. 
• Unlike a sale conducted under Section 363 of the Bankruptcy Code, the assignee generally cannot sell assets “free and clear” of liens and security interests—if you are buying assets subject to a security interest, the secured party will need to be paid in full or agree to release its lien. Some states that provide for judicial approval of a sale, such as Florida and Minnesota, may provide some ability for an assignee to obtain relief similar to a “free and clear” sale order in an ABC process. 
• Anti-assignment provisions in leases or contracts cannot be overridden. So, any consents required under contracts that the buyer wants to assume will need to be obtained. 

How We Can Help. We have successfully navigated the ABC process for our clients in a variety of states and industries, including technology, finance, chemicals, and manufacturing and maximized the advantages that acquiring assets through an ABC can provide to buyers. Although sales are usually done on an “as-is, where-is” basis, with limited ability to obtain operational or asset-level representations and warranties and without any indemnity rights in favor of the buyer, we have advised buyers in transactions where additional rights have been obtained (without the use of representation and warranty insurance).

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Getting and staying paid: protect yourself from preference liability.

Posted by Hopkins & Carley on May 04, 2020

Periods of economic uncertainty, such as the COVID-19 pandemic, create challenges not only in receiving timely payment for goods, services and other debts, but in retaining payments when dealing with customers or other obligors who may be on the verge of bankruptcy. A bankruptcy filing opens the door to preference liability, which could result in the obligation to return a payment or other property received prior to the bankruptcy.  

A “preference payment” is any transfer, including money, by an insolvent party within ninety days of the filing of a bankruptcy. In California, a similar law applies to assignments for the benefit of creditors (“ABC”). Typically, a bankruptcy trustee asserts a “preference claim” against each of its creditors believed to have received an offending payment in an effort to equalize distribution of assets among similarly situated creditors.

Of course, “Getting Paid” is a primary goal for any creditor/business.  Consequently, the “Golden Rule” of debt collection is a good one to follow: when offered the “gold” to pay a debt, take it. When receiving payment from a company or individual that may be in financial distress, the informed creditor understands its potential exposure and takes protective measures that may help ensure it “Stays Paid.” 

Not every payment made within 90 days of bankruptcy or an ABC constitutes a preference payment. There are a number of statutory exceptions and defenses to preferential transfers. At the top of that list are payments to a fully secured creditor, payments received in the “ordinary course” of business, and payments received in exchange for “new value.” Fully secured status at the time of receipt of a payment is fairly straightforward. “Ordinary course” and “new value” payments are potentially more complicated.    

A debt or invoice paid in a manner consistent with the customary business terms between a payor and payee is considered paid in the “ordinary course,” and exempt from preference liability. To determine whether a payment was “ordinary,” courts review closely the prior course of dealings and may consider industry standards. Creditors seeking payment from a company that seems to be on the “financial cliff” should be wary of the impacts of collection actions, such as extending payment deadlines or an unusually high volume of collections calls or e-mails, as these actions may result in a payment being considered out of the ordinary course of the parties’ business. An informed creditor will consider its history of dealings when pursuing collections and make an effort to stay within those “ordinary” parameters, so as to preserve a defense to a future preference claim. Creditors who pursue the “Golden Rule” with a likely insolvent debtor should do so with precautions (e.g., retain records evidencing “ordinary course”) until the preference period expires with no bankruptcy filing. 

A creditor who provides “new value” in exchange for a payment or other transfer also can avoid preference liability. Generally, “new value” is an extension of further credit (e.g., money, goods, or services) to a troubled debtor. For example, a subcontractor behind on its account to a supplier may make a partial payment, and, in exchange, the supplier may agree to fill a new order for materials despite the continued account arrearage. The credit extended by the supplier in this case would support a “new value” defense to a future preference claim.  

The above are a sampling of the defenses and issues to consider in the area of preference liability. Hopkins & Carley’s highly skilled team of creditor’s rights professionals is ready to assist you in creating and implementing strategies for receiving future payments, or in preparing an effective defense to a preference claim made against you.

Ross Adler Andrew Ditlevsen Erika Gasaway Sepi Ghiasvand Marie Gribble Monique Jewett-Brewster Steve Kottmeier Breck Milde Liam O'Connor Chuck Reed Jay Ross

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Assignments for the Benefit of Creditors in New York | Practical Law

Assignments for the Benefit of Creditors in New York

Practical law practice note w-018-2928  (approx. 19 pages).

Assignment for the Benefit of Creditors

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• Distressed M&A >

Our Business Restructuring, Creditors’ Rights & Bankruptcy practice group regularly advises clients in a broad range of industries nationally on issues relating to financial distress, insolvency and the exercise of associated rights and remedies. Our extensive experience and substantial knowledge of the law enables us to develop innovative business strategies and solutions for our clients’ most difficult challenges.

In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.

Client feedback lauds our practice group as “five-star” for providing “a very high level of client service” and for going “above and beyond to assist the client.” We are also known for being “proactive and attentive. Always accessible. Creative and forward with advice.”

A representative sample of our completed ABC transactions include:

Health, Life Sciences & Wellness

• Representing the assignee in the ABC for a life sciences company specializing in cancer treatment options.
• Representing the assignee in the ABC for a provider of musculoskeletal wellness and soft tissue illness treatment and prevention solutions to employers.
• Representing the assignee in the ABC for a manufacturer of radiation protective products for the health care, dental, veterinary and nuclear industries.

Technology & Software

• Representing the assignee in the ABC for a developer of three-dimensional long-range facial recognition technology.
• Representing an assignee in a motion technologies company’s ABC in the Delaware Court of Chancery.
• Representing the assignee in the ABC for a developer of technology in the cable television industry.
• Representing the assignee in the ABC for a developer of marker-less motion capture software and systems.

Manufacturing

• Representing the assignee in the ABC for a developer of energy conversion systems for wind energy and industrial markets, including advising our client on liquidation of assets and distribution to creditors.
• Representing three assignees in the ABC for the world’s largest privately held designer, manufacturer and marketer of winch systems.

Media, Entertainment & Leisure

• Representing the senior lender in the ABC for a nationwide religious bookstore.
• Representing the assignee in the ABC for a developer of interactive video games and digital content.
• Representing the assignee in the ABC for a vacation rental distributor.
• Representing the assignees in multiple ABCs involving a national trampoline park.

Consumer Products

• Representing a special purpose entity in the ABC for an online grocery provider.
• Representing the assignees in the ABCs for an online estate auction house.

Real Estate & Other Services

• Representing the assignees in the ABCs for an office leasing company with 22 U.S. locations.
• Representing a secured lender’s interest in an ABC involving a government contract-related dispute.
• Representing the assignee in the ABC for a provider of advertising material.
• Representing three assignees in the ABC for an SAS company.
• Representing the assignee in the ABC for a provider of a mobile delivery network software development kit.
• Representing the assignees in multiple ABCs for a software company based in Denver, Colorado.
• Representing the assignee in the ABC for a software company based in Missoula, Montana.