Borrower made an assignment for the benefit of creditors and assignee briefly operated the business pending an auction. Following the auction conducted by the assignee, Bank brought an action against Guarantor for a deficiency judgment as well as for actual fraud. The fraud claim was dismissed after the Bank presented its case, but the deficiency judgment was granted.
Guarantor appealed arguing that (1) he did not owe a deficiency because the trial court improperly applied the law regarding the commercial reasonableness of the disposition of Borrower’s assets at the auction and because the disposition was not commercially reasonable, and (2) in the alternative, the trial court erred in calculating the amount owed in the deficiency judgment.
The Guarantor later argued that the assignor/auctioneer was acting as an agent of the Bank.
The Bank responded by pointing out that it had no duty to show the sale was commercially reasonable because it did not market or sell Borrower’s assets, the assignee handled the liquidation of Borrower, including the sale of assets. The Bank asserted in the alternative that even if it had to establish the question of commercial reasonableness, the evidence in the record established that the sale was commercially reasonable. The Bank also maintained that the trial court did not err in calculating the deficiency judgment.
The record demonstrated that the Borrower opted to enter into an assignment for the benefit of creditors to wind down the business and that the Bank suggested that Borrower retain the assignee. The Borrower’s board of directors and shareholders executed a trust agreement and an assignment for the benefit of creditors which specifically named the assignee.
The Borrower transferred its property to assignee “so that the property so transferred may be expeditiously sold or liquidated” with the proceeds distributed to creditors. Pursuant to the ABC, a trust was created and “its object shall be the orderly liquidation of assets and property of [Borrower] and the distribution of the proceeds of the liquidation to creditors of [Borrower.]” Assignee’s duties were to sell and dispose of secured creditors’ collateral, pay the unsecured creditors off with funds not subject to any valid liens, and “to do and perform any and all other acts necessary and proper for the orderly liquidation or other distribution *** and the distribution of the proceeds therefrom to the creditors of Borrower.
The trial court addressed Guarantor’s counsel, stating:
The problem you have, is that there just is inadequate testimony that had [assignee] acted in a different way, or the bank acted in a different way, there would have been a different result.
The appellate court, wrote:
[The UCC] provides that, “[a]fter default, a secured party may sell *** or otherwise dispose of any or all of the collateral ***.” Unless there is an agreement to the contrary, the debtor is liable for any deficiency that results from the sale ***. Absent such an agreement, the only defenses available to a debtor against a deficiency judgment are lack of reasonable notice of the sale and commercial unreasonableness of the sale.
The court further stated:
An assignment for the benefit of creditors is a voluntary transfer by a debtor of [its] property to an assignee in trust for the purpose of applying the property or proceeds thereof to the payment of [its] debts and returning the surplus, if any, to the debtor. ***A debtor may choose to make an assignment for the benefit of creditors, which is an out-of-court remedy, rather than to petition for bankruptcy, because assignments are less costly and completed more quickly.*** The assignment is ‘a unique trust arrangement in which the assignee (or trustee) holds property for the benefit of a special group of beneficiaries, the creditors.’ *** The assignee owes a fiduciary duty to the creditors. Absent some defect in the creation of the assignment itself, an assignment passes legal and equitable title to the debtor’s property from the debtor to the assignee. In such case, the assignment is valid without the consent of any of the debtor-assignor’s creditors
The appellate court affirmed the trial court’s rejection of Guarantor’s argument that the assignee was an agent for the Bank, finding that Borrower retained the assignee and that under the UCC a disposition by an assignee for the benefit of creditors is, by statute, commercially reasonable.
Even if the Bank was required to prove that the sale ***was commercially reasonable, section 9-627(c)(4) provides that a sale approved by an assignee for the benefit of creditors *** is commercially reasonably. “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.” *** “commercially reasonable” means that the disposition is made: (1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time of the disposition; or (3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition. *** Whether a sale is commercially reasonable is a question of fact.
So what are our takeaways from this case?
- A lender will not be liable for commercially unreasonable disposition of collateral if it did not sell the assets.
- The assignee (or consultant) retained by the borrower (and approved by its board and officers) will not be deemed to be an agent of the lender.
- The assignee in an ABC owed a fiduciary duty to the creditors of the assignor.
- Notwithstanding, a sale by an assignee in ABC is commercially reasonable by statute.
The court noted that ABCs are less costly and completed more quickly. This method of liquidating a company has had a significant renaissance in recent years for this very reason. Where small and middle market Chapter 11 cases once dominated the Bankruptcy Court dockets they are now rare. Small and middle market companies just cannot afford to go bankrupt.
This case is a good example of how ABCs are effectively taking the place of small and middle market liquidating Chapter 11s and the benefits of that process.
MB Financial Bank, as successor in interest to American Chartered Bank v. Clayton D. Jacobs and Dwyer Products Corp., Appellate Court of Illinois, August 23, 2018, 2018 IL App (1st) 171939-U