What's the Power of an ABC Assignee to File Bankruptcy?

An “Assignment for the Benefit of Creditors” (“ABC”) is a state-law alternative to bankruptcy, as already discussed in my prior blog posting on such proceedings. In Florida, business entities can opt to use this fairly inexpensive process under Chapter 727 of the Florida Statutes. The Eleventh Circuit Court of Appeals recently addressed the legal question of whether an ABC assignee has the authority or power to take the assignor from its ABC into a Chapter 7 bankruptcy proceeeding in Ullrich v. Welt (In re NICA Holdings, Inc.), Case No. 14-14685 (11th Cir. Dec. 17, 2015) (hereinafter referred to here as “NICA”). In that case, the Eleventh Circuit concluded that under Florida law, “[a]bsent explicit and plain authorization by the assignor, [an] assignee cannot initiate Chapter 7 bankruptcy proceedings.”

In NICA, the assignee executed an assignment agreement, which, tracks almost exactly the language of the the Florida’s ABC statute, and, in relevant part, provided the following:

The ASSIGNEE shall take possession and administer the estate in accordance with the provisions of chapter 727, Florida Statutes, and shall liquidate the assets of the ESTATE with reasonable dispatch and convert the ESTATE into money, collect all claims and demands hereby assigned as may be collectible, and pay and discharge all reasonable expenses, costs, and disbursements . . . .

If funds of the ESTATE shall not be sufficient to pay [] debts and liabilities in full, then the ASSIGNEE shall pay from funds of the ESTATE such debts and liabilities, on a pro rata basis and in proportion to their priority as set forth in s. 727.114, Florida Statutes.

. . . .

To accomplish the purposes of this assignment, the ASSIGNOR hereby appoints the ASSIGNEE its true and lawful attorney, irrevocable, with full power and authority to do all acts and things which may be necessary to execute the assignment hereby created; to demand and recover from all persons all assets of the ESTATE; to sue for the recovery of such assets; to execute, acknowledge, and deliver all necessary deeds, instruments, and conveyances; and to appoint one or more attorneys under her or him to assist the ASSIGNEE in carrying out her or his duties hereunder.

The ASSIGNOR hereby authorizes the assignee to sign the name of the ASSIGNOR to . . . any instrument in writing, whenever it shall be necessary to do so, to carry out the purpose of this assignment.

The ASSIGNEE hereby accepts the trust created by the assignment, and agrees with the ASSIGNOR that the ASSIGNEE will faithfully and without delay carry out her or his duties under the assignment.

Prior to the ABC, the assignor held stock in Mares Nica Noruegos S.A. (“Nicanor”), a company that ran a Nicaraguan fish farm, and owned several parcels of land associated with that operation. After running into financial troubles, the assignor executed an assignment for the benefit of creditors, which irrevocably assigns all assets to an assignee to dispose of such assets in accordance with Florida law.

During the ABC proceedings, while represented by counsel, the assignee executed separate contracts with two parties for the estate’s equity interest in Nicanor, and accepted deposits from the aspiring buyers. Then, without court authorization, the assignee paid himself and other ABC expenses with these deposits. Eventually, the assignee got court approval for the stock sale to one of the parties. However, the disgruntled parties blocked the sale based on certain stock restrictions. As a result, NICA’s primary asset became worthless.

Legal claims subsequently were brought by the assignee against his legal counsel for professional negligence and malpractice. In addition, a separate suit was filed against the assignee as an attempt to remove him as the ABC assignee. Upon these events occurring, the assignee a voluntary Chapter 7 bankruptcy petition on NICA’s behalf. The assignee claimed that claimed that bankruptcy was “the most expeditious and effective means of administering the remaining assets of Nica”, namely the litigation. Upon the filing of the assignor’s bankruptcy, a Chapter 7 trustee was appointed for NICA’s bankruptcy estate.

The assignee’s bankruptcy filing was contested and opposed from the beginning based on the assignee’s lack of authority to put NICA into bankruptcy. Ultimately, the bankruptcy court denied the dismissal of the NICA bankruptcy case as well as the subsequent motion to allow the taking of an interlocutory appeal from that denial. On appeal, the district court affirmed the bankruptcy court’s ruling on all respects, which brought about a second appellate review to the Eleventh Circuit.

In its opinion, the Eleventh Circuit explained that the assignee “drew his powers as ABC assignee from the ABC agreement.” The Eleventh Circuit noted that a bankruptcy filing is a specific act requiring specific authorization, which state law governs. In Florida, the appellate court explained, the authority to file a bankruptcy petition rest with the corporation’s board of directors. In examining the language of the assignment agreement, the Eleventh Circuit concluded that it did not contain “specific,” “special” authorization to file for bankruptcy on behalf of the assignor. The so-called “residual power” granted to the assignee under the assignment contract with “full power and authority” to do anything, including signing Nica’s name to “any instrument in writing” does not help. In that regard, the court reasoned that only the authority “necessary to execute the assignment hereby created” and “necessary . . . to carry out the purpose of this assignment.” These power-of-attorney paragraphs, as the court explained, gave the assignee broad power to act on behalf of NICA only in furtherance of the ABC – not do the opposite, which was to terminate it by the filing of a bankruptcy case. Accordingly, the Eleventh Circuit held that without specific authorization to file a bankruptcy petition in the assignment agreement, the assignee lacked the authority to initiate a Chapter 7 bankruptcy proceeding on behalf of the assignor.

PRACTICE TIP - - Assignees should be mindful that their power to act on behalf of the assignor only arises from the powers conferred in the assignment agreement.