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
Your article provides a good review of the recent decision in MF Financial Bank, as Successor in interest to American Chartered Bank v. Clayton D. Jacobs and Dwyer Products Corp . What is missing however is a broader discussion of how an assignee for the benefit of creditors is acting as a fiduciary for all creditors and not just secured creditors.
You write that the “Assignee’s duties were to sell and dispose of secured creditors’ collateral, pay the unsecured creditors off with the 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 the Borrower” (emphasis added). The assignee’s fiduciary duty is to liquidate the assets of the assignor, no matter whether they are collateral for a lender, lessor or unencumbered. The assignee also has the duty to validate the claims by any creditor claiming to have liens against the assignor’s assets, so your comment is overly simple and does not fully describe the assignee’s obligations.
The board of directors resolution and consent by shareholders to approve the making of the ABC is something not written about often enough. In the MF Financial case, the board and shareholder action was (a properly) important factor. However, in my experience, an assignee needs to do more when dealing with assets subject to a lender’s lien rights (e.g. collateral) to be able to liquidate the lender’s collateral. Assuming the lender’s lien is validated by the assignee’s counsel, an assignee should obtain the consent of the lender to take possession of and liquidate the lender’s collateral. An assignee has the right of a lien creditor upon the making of an ABC. That right is not however superior to a properly perfected secured creditor lien. Therefore, taking possession of a properly perfected lien creditor’s collateral, without that lender’s consent, can expose the assignee to liability to the lender. Yes, effectively the lender can control the choice of the assignee by withholding its consent to the use of the lender’s collateral. But if the choice of assignee is ratified by the assignor’s board and shareholders, the independence of the assignee should not be in question.
Your article also does not address how a secured lender, or in this instance MF Financial could have avoided the guarantor’s claim about the liquidation of the assets upon the execution of the ABC and the resulting deficiency claim. Lenders who hold guarantees of third parties to guaranty payment of any deficiency upon the liquidation of the borrower’s assets typically will ask the guarantor to reaffirm the guaranty as part of the process of the lender consenting to the making of the ABC. With the guaranty reaffirmed, the question of commercial reasonableness of the sale of assets and any resulting deficiency claim becomes almost moot.
Your reference to the commercial code for a definition of commercially reasonable is well taken. Section 9-627(c)(4), wherein “[A] collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved (4) by an assignee for the benefit of creditors” provides support for an assignee’s actions to liquidate collateral. A note of caution however is appropriate. Mere reliance on Section 9-627(c)(4) does not protect an assignee from breach of fiduciary duty claims if the assignee does not take the appropriate steps to seek a fair value for the assets.
Quoting from the MF Financial decision.
Commercially reasonable means 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 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 (emphasis added).
For example, if an assignee sells assets of an assignor to the principal of the assignor (through a newly formed entity) without making any effort to see if there was a better market based value, a claim that the assignee’s sale was not commercially reasonable and that UCC 9-627(c)(4) should not apply, would I believe, be well founded. This is even if a secured lender “consented” to the sale. Why – because the assignee failed to see if he/it was getting the best value for the assets. Merely using an ABC to wash asserts from creditor claims, while legal, may still not be in the best interests of creditors generally and therefore make the assignee subject to breach of fiduciary duty claims.
Regarding your “takeaways from the case”, generally yes, a secured lender with a validated and properly perfected lien on assets will not be liable for the disposition of its collateral if that disposition is by an assignee for the benefit of creditors through a properly authorized ABC. The assignee is not, and unless facts show otherwise, an “agent” of the secured lender. But the statement “a sale by an assignee in an ABC is a commercially reasonable sale” is too broad a generalization. As noted above, the facts of a sale by an assignee will dictate whether the assignee acted in a commercially reasonable manner and whether they properly fulfilled their fiduciary duty to all creditors by the manner in which their sale was conducted.
Comment to “The ABCs of Being Reasonable”
From: Geoffrey L. Berman
Senior Managing Director, Development Specialists, Inc.
I am the author of the American Bankruptcy Institute’s publication on general assignments, ”General Assignments For The Benefit of Creditors, The ABCs of ABCs”, now in its third edition and a former President of the ABI.
2018 IL App (1st) 171939-U, August 23, 2018
The asterisks refer to quotes from the MF Financial Bank decision
See the applicable state Commercial Code, Section 9-309(12) or as enacted by each state.
I am not trying to pre-judge cases where the facts of each case may change the result.
Supra, MF Financial Bank, as Successor in interest to American Chartered Bank v. Clayton D. Jacobs and Dwyer Products Corp