Page 3 - John Hundley 2011

Sharp Thinking

No. 42 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. February 2011
ABCs: Court Issues a Primer on

Assignments for Benefit of Creditors

By John T. Hundley, Jhundley@lotsharp.com, 618-242-0246

An assignee’s claim for compensation under an Assignment for Benefit of Creditors (“ABC”) trumps even a
properly-perfected security interest under the Uniform Commercial Code (810 ILCS
5), a panel of the Illinois Appellate Court ruled recently.

In First Bank v. Unique Marble & Granite Corp., __ Ill.App.3d __, 938 N.E.2d
1154 (2010), the panel in the Second District issued a valuable primer on ABCs, an
infrequently-used but significant tool for dealing with business insolvency.
In First Bank, Unique Marble & Granite Corp. entered into an ABC but First
Bank proceeded to judgment on its claim against Unique Marble nonetheless.
When First Bank sought to enforce the judgment by citation to discover assets, the
assignee intervened and asserted a claim for compensation for his services under
the ABC. First Bank responded that it had a pre-existing, perfected “blanket”
security interest in all the assets of Unique Marble and argued that that lien trumped
the assignee’s claim. The trial court agreed but the Second District reversed. Hundley
The appellate panel began its analysis by noting that “[a]n ‘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.” An ABC
ordinarily is an out-of-court remedy, which a debtor may choose instead of bankruptcy because ABCs
“are less costly and completed more quickly”, the court observed. It said such an 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.”
Absent some defect in the creation of the assignment itself, an ABC passes legal and equitable title to the
debtor’s property from the debtor to the assignee. Moreover, the court noted, such an assignment is valid
without the consent of any of the debtor-assignor’s creditors. Generally an assignee (and his or her
attorney) is entitled to compensation for his or her services.

An assignee under an ABC is charged with respecting competing claims upon the assigned assets much
the same as a court would. Thus, if a mortgagee or other creditor has a properly perfected priority claim
to an asset under general law, that claim carries over to the assignee’s disposition of the asset or its
proceeds.

However, in First Bank it was the assignee’s claim for compensation which came into conflict with the
secured creditor’s lien, and the law on that conflict was unclear. Analyzing that issue, the court noted that an
ABC is perfected as a security interest upon attachment and “[n]o filing or other action is required to
perfect an assignment for the benefit of creditors. These assignments are not financing transactions, and
the debtor ordinarily will not be engaging in further credit transactions” (citing 810 ILCS 5/9-309 and official

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