In 1987, the Florida Legislature enacted a statutory scheme called an Assignment for Benefit of Creditors (ABC) more commonly known as an ABC. The ABC process was relatively unknown and seldom utilized until recently. In the last two (2) years, many companies facing insolvency are considering their options (e.g., bankruptcy, ABC, dissolution, walking away, etc.), and choosing an ABC.
An ABC is a state law process whereby a company turns over its assets to an independent third party, the Assignee. The Assignee holds the assets (and any others collected) and pays creditors in accordance with their priority. The process, which is supervised by a State Court Judge, is generally simpler, faster and less expensive than bankruptcy. In addition, the ABC process allows a party to “abandon” collateral to a creditor. The abandonment process has been strategically utilized recently in two (2) scenarios.
The first scenario is where a company owns real property, cannot afford the mortgage on the property and there is a personal guaranty. Generally, the guarantor is at the mercy of the lender, who will either: (a) do nothing and allow the loan to amortize forcing the guarantor to inject capital into the company, or (b) slowly complete a foreclosure and then potentially pursue a claim on the guaranty. The ABC process allows the company to “abandon” the property back to the lender in the short term, forcing the lender to credit the value of the property against the outstanding debt. Often, this strategy can be utilized to entirely avoid a deficiency judgment by the guarantor.
The second scenario is where a pass through company (ie., a partnership or subchapter S corporation) owns a parcel of property that is clearly worth less than the outstanding debt. Generally, the property owner cannot utilize the tax loss until a transfer event occurs.
The process of abandonment through an ABC allows a company to accelerate the loss recognition into the current tax year, rather than waiting for a short-sale or foreclosure. An ABC is not, however, a panacea. The bankruptcy process still retains some advantages, (i.e., it allows reorganization and not merely liquidation.) Also, during the bankruptcy process, creditors are barred from taking any action against the debtor.
The suitability of a particular strategy will depend on a case by case analysis for each client. Questions regarding options should be directed to an attorney in our business litigation group.