Florida Legislature overhauls assignment for the benefit of creditors: more similar to bankruptcy, but with a twist.

• Author: Neiwirth, Ronald G.

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Ask any dozen attorneys if they know how an assignment for the benefit of creditor works. Most of them will probably understand that it provides a means to liquidate an insolvent business' assets. Someone might suggest that an assignment is very much like probating the estate of a company that has died. The most frequent response is that an assignment for the benefit of creditors is very much like a state court version of a bankruptcy proceeding. On June 19, 2007, the governor approved Ch. 2007-185 of the laws of Florida. (1) The short title of the bill is "An Act Relating to Debts and Debtors." (2) The long title indicates that it amends F.S. [section] 222.25, concerning certain exemption of personal property from legal process; F.S. [section] 702.035, concerning publication of foreclosure notices; and a number of different portions of F.S. Ch. 727 that concerns itself with assignments for the benefit of creditors.

Overview

An assignment for the benefit of creditors, generally speaking, is analogous to a Ch. 7 bankruptcy liquidation of a business entity. (3) An assignment proceeding is commenced with the execution of an irrevocable assignment in writing, in compliance with the statutory form which is provided. (4)

Once the assignment is executed, the next step is to record the original in the public records in the county where the assignor had its principal place of business and a certified copy in each county where assets of the estate are situated. (5) In addition, the assignee for the benefit of creditors must file a petition with the clerk of the court commencing an assignment proceeding. The assignee must also file a motion asking the court to fix the appropriate amount of the assignee's bond. (6)

The assignee's duties are congruent to those of a bankruptcy trustee. They include collection of the assets of the estate and reducing them to money; conducting an initial examination of the assignor under oath within 30 days; giving notice to creditors; conducting the business of the assignor for limited periods, if appropriate; paying administrative expenses of the estate to the extent that they are reasonable and necessary; keeping regular accounts and furnishing information concerning the estate to parties-in-interest; examining the validity and priority of all claims against the estate; abandoning assets to perfected lien creditors where the estate has no equity; accounting; hiring professionals as necessary; paying dividends as appropriate; and submitting a final report. (7)

Unlike bankruptcy cases, however, there is no general automatic stay, such as federal law provides in 11 U.S.C. [section] 362(a). Instead, a holder of a consensual lien may foreclose upon its collateral without leave of court. Like the Bankruptcy Code, there is a specific provision that allows governmental entities to enforce police or regulatory powers. (8)

Significantly, one of the powers of the court is to allow the assignee to operate the business of the assignor for limited periods, if it is in the best interest of the estate to do so. (9) This enables the assignee the opportunity to sell the business as a going concern, in order to obtain more value for the creditors, as there is generally a substantial incremental "going concern value" component to an ongoing business, even if it is insolvent.

After six months, the assignee is required to file an interim report. (10) At the close of the administration, when the assignee is ready to make a final distribution, the assignee must file a final report of all receipts and disbursements and request approval from the court. (11) Upon approval of the assignee's final report, the court shall discharge the assignee and release the assignee's bond. (12)

Changes Made by Laws of Florida, Ch. 2007-185

Prior to the revisions enacted in 2007, F.S. Ch. 727 had received little attention from the legislature since 1987, when it was enacted. (13) The legislature had addressed the commencement of proceedings and the form of the assignment in 1989, (14) 1991, (15) 1997, (16) and 1998. (17) Other than that particular section of the assignment chapter, the last time the legislature had addressed any portion of it was in 1997. (18) Some of the current changes are intended for efficiency; some are to clarify legal issues that have arisen as a result of case law or overrule specific case law; (19) and some are to create more conformity with the Bankruptcy Code.

The definition of "asset" in F.S. [section] 727.103(1) has been expanded now to include "claims and causes of action, whether arising by contract or in tort." There had previously been a controversy over whether an assignee for the benefit of creditors is the direct successor of the assignor, with respect to a claim against assignor's former counsel for legal malpractice. In Cowan Lebowitz & Latman, PC v. Kaplan, 902 So. 2d 755 (Fla. 2005), the Florida Supreme Court affirmed the reinstatement of a legal malpractice claim which had been dismissed by the trial court on the basis that it had been commenced by an assignee for the benefit of creditors. The trial court had concluded that legal malpractice choses in action are personal and, therefore, not assignable. The district court of appeal reversed the dismissal.

The Supreme Court affirmed the DCA, concluding that, only in cases where the public was misled, a legal malpractice cause of action was appropriately assignable to an assignee for the benefit of creditors, as liquidator of the assignor.

The new definition of "asset" provided under F.S. [section] 727.103(1) clearly embraces the result in Cowan. It goes considerably further, however, by including all claims and causes of action, whether arising by contract or in tort, and whether the public is generally affected. The standard assignment form corresponds to the statute by specifically including "choses in action." Under the terms of the assignment (20) the assignor conveys to the assignee all of its assets (as defined in [section] 727.103(1)), except such assets as are exempt by law from levy and sale under an execution. Collectively, the assets create an "estate." The assignee, in turn, is required to take possession of, protect and preserve, and liquidate the assets of the estate and to convert the estate into money. (21)

Section 727.103 also adds two new terms to the definitions: The first is "claims bar date," which means the date 120 days following the date upon which the petition for commencement of the assignment case is filed with the court. This gives a clear, "bright line" claims bar.

The other new term is "consensual lien holder." (22) A "consensual lien holder" is "a creditor that has been granted a security interest or lien in personal property or real property of the...