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Recent Amendments to Ch. 727 Will Streamline Various Aspects of Assignments for the Benefit of Creditors

Business Law

The recent legislative session produced significant changes to several practice areas within Florida business law, including assignments for the benefit of creditors or “ABCs.” These amendments to F.S. Ch. 727 clarified and streamlined procedures relating to notice, bond amounts, discovery, an assignee’s deed, the rejection of unexpired leases, and objections to claims in an ABC proceeding. This article briefly reviews the changes and the reasons for those changes.

A Brief History of ABCs in Florida
An ABC is a state law procedure for the administration of an insolvent estate, under which a debtor or “assignor” voluntarily and irrevocably assigns its assets to a third party of the debtor’s choosing. That third party (the assignee) is charged with liquidating the debtor’s assets to satisfy his or her creditors’ claims. Many ABC cases are filed with the consent of some or all of the debtor’s creditors.

Though the practice has been codified since Roman times, ABCs originally existed at common law in the United States.1 In Florida, the original ABC act was enacted in 1889 (Laws of Florida Ch. 3891), but was substantially redrafted in 1987 (Laws of Florida Ch. 87-174) and further amended in 1989, 1991, 1997, 1998, 1999, 2007, and 2008 (as amended, the ABC statute). The constitutionality of an ABC was affirmed by the Florida Supreme Court in 18962 and has been upheld in subsequent cases.3

ABCs are similar to federal bankruptcy liquidation proceedings in that they ensure full reporting to creditors and require equal distribution of a debtor’s assets according to the priorities established in the ABC statute. An ABC is primarily distinguishable from the federal bankruptcy process in that 1) it does not impose an automatic stay in favor of the debtor4 ; 2) it does not grant an assignee special authority to recover assets that were transferred immediately before the filing5 ; and 3) unlike most types of bankruptcy proceedings, it does not provide a discharge of any debt.

Amendments to Notice Provisions
Prior to the amendments, F.S. §727.108(4) allowed an assignee to conduct the business of the assignor for a limited period of time (up to 14 days) or longer upon notice. Section 727.111(4) required such notice to be given at least 20 days before the assignee’s operation of that business beyond the initial 14 days. Common sense dictates that an assignee’s compliance with the notice provision was impossible unless the notice required by §727.111(4) was sent before the assignment had even occurred.

To remedy this conflict, the amendments extend the time within which an assignee may conduct the business of the assignor under §727.108(4) from 14 days to 45 days.6 The enlarged time frame is a more realistic window for an assignee to assess the business, determine a strategy for liquidation, and, if necessary, give notice of intent to operate the business for an additional period of time. To streamline the deadlines set forth in the ABC statute into multiples of seven days (as recently implemented under federal law), the amendments also extend the minimum amount of time for notice under the statute from 20 to 21 days.7 The amendments leave intact the condition that such operation of the business must be in the best interest of the estate.

Additionally, the amendments introduce a negative notice procedure in ABC cases.8 The purpose of a negative notice procedure is to reduce the administrative burden on the court and the administrative costs on the estate which are necessitated by the conduct of hearings for relief that is neither contested nor opposed. Negative notice is a common procedural tool in federal bankruptcy court, and attorneys and creditors are generally familiar with the requirements for utilizing such notice.

For example, under the amendments, in the case of an assignee’s notice that it will conduct the business of the assignor for a period longer than the prescribed period of time, such notice may be served on negative notice by including a specific form “warning” in the document (as set forth in §727.111(4)) that 1) the assignee proposes to take the actions described therein without further notice or a hearing unless a party in interest files an objection within 21 days of service of the notice; 2) any such objection must be filed with the clerk of court and served on the assignee’s attorney and any other appropriate person(s); 3) if an objection is filed and served, the court may schedule a hearing; and 4) if no objection is filed, the assignee and the court will consider the proposed relief unopposed.

If an objection is not filed within the time prescribed, the assignee may continue to operate the assignor’s business for an additional 90 days. The negative notice procedure is also available for a proposed sale of assets of the estate other than in the ordinary course of business, the compromise or settlement of a controversy, an objection to a claim, and the payment of fees and expenses to an assignee or professional persons employed by the assignee.

Amendments to Bond Provisions
Much like a receiver in a receivership, assignees are required to file a bond with the clerk of court to ensure the faithful discharge of their duties. The purpose of the bond is to protect the assignor’s creditors from potential loss in the event of the assignee’s improper and irreparable disposition of the assignor’s assets.9 Section 727.104(2)(b) formerly required the court to set the bond “in an amount not less than double the liquidation value of the assets of the estate.” “Liquidation value” is defined in §727.103(12) as “the value in cash obtainable upon a forced sale of assets after payment of valid liens encumbering said assets.” The reason for deducting the value of liens encumbering the assets when calculating “liquidation value” is that a debt secured by a lien against the debtor’s asset does not need the protection of a bond. It is already protected by the lien, which attaches to the asset and may be enforced despite disposition by the assignee.

In addition to assets secured by liens, unliquidated assets are also less susceptible to immediate and irreparable disposition by an assignee because the difficulty of valuing the asset consequently increases the difficulty of selling the asset. As a result, in cases in which a significant portion of the debt is secured and/or unliquidated, some courts have been requiring a bond that is artificially high. An unnecessarily high bond requirement causes an estate to incur needless additional cost and may even discourage otherwise qualified assignee candidates from serving as assignees.

The amendments modify §727.104(2)(b) to provide that the assignee’s bond must not be less than $25,000 or double the liquidation value of the unencumbered and liquid assets of the estate, whichever is higher. Such modification guarantees a minimum bond amount, yet ensures that the bond amount is not substantially and artificially inflated by a large amount of secured and/or unliquidated debt.

Amendments to Discovery Provisions
Disputes have recently arisen among practitioners concerning the applicability of the discovery provisions in the Florida Rules of Civil Procedure to ABC cases. Since assignees are statutorily charged with the duties to 1) determine whether prosecution of the estate’s claims and causes of actions is in the best interest of the estate10 ; 2) examine the validity and priority of claims against the estate11 ; and 3) conduct due investigation of the estate’s assets’ value and benefit to the estate,12 discovery capabilities are imperative. An assignee must be able to conduct discovery related to claims and potential causes of action in order to properly discharge his or her obligations to an estate.

For this reason, the amendments clarify and confirm an assignee’s right to conduct discovery (as provided for in the Florida Rules of Civil Procedure) in the following circumstances: 1) in order to determine whether to prosecute claims and causes of action on behalf of the estate; and 2) concerning objections to claims.

Amendments to Procedure for Rejecting Unexpired Leases
The ABC statute allows an assignee to reject unexpired leases of nonresidential real property or personal property.13 However, until the amendments, it set forth little guidance regarding the proper procedure for such rejection. In the interest of establishing consistent practices, the amendments to §727.110 clarify and codify the proper procedure for such rejection, specifically 1) the parties entitled to notice of the rejection; 2) the information that should be included in the notice of such rejection; and 3) the effective date of the rejection. The amendments also confirm the termination of an estate’s rights, obligations, and liability concerning the property in the event a lessor fails to take possession thereof upon proper rejection.

Amendments to Procedure for Claim Objections
The claims process is a fundamental part of an ABC proceeding. Creditors of the assignor file claims with the assignee, who is charged with determining the validity and priority of such claims before distributing the assignor’s assets in accordance with statutory requirements. The assignee or any other party in interest may object to a creditor’s claim if there are grounds to believe the claim is improper or unsupported. The amendments clarify which parties are entitled to service of any such objection and the service address of the claimant. Also, the objector may now utilize the negative notice procedure.

Drafted by a subcommittee of the Bankruptcy-UCC Committee of the Business Law Section, the amendments are the result of several years of study of evolving ABC practices, perceived or actual conflict between provisions in the statute, and judicial concern regarding the extent of an assignee’s authority. The subcommittee utilized its members’ historical knowledge,14 together with contributions from current participants in all facets of a typical ABC to draft amendments that better accommodate current practices and conditions, yet leave the original intent of the statute fully intact. The amendments do not address every issue brought before the subcommittee, but they do represent changes believed to be necessary and noncontroversial. Additional amendment to other aspects of ABC law may be considered by the Business Law Section at a later date.

1 See Moecker v. Antoine, 845 So. 2d 904, 910 (Fla. 1st DCA 2003).

2 See Dorr v. Schmidt, 38 Fla. 354, 359 (Fla. 1896).

3 See Pobreslo v. Joseph M. Boyd Co., 287 U.S. 518, 526 (1933) (“[I]t is apparent that Congress intended that such voluntary assignments, unless so put aside, should be regarded as not inconsistent with the purposes of the federal act.”); In re Mader’s Store for Men, Inc., 77 Wis. 2d 578, 592 (Wis. 1977).

4 Although there is no automatic stay in favor of the debtor, the statute does preclude creditors from commencing proceedings against the assignee, except as provided therein, and from levying, executing, attaching, or similarly pursuing assets of the estate in the possession, custody, or control of the assignee, unless the creditor is a consensual lienholder. See Fla. Stat. §727.105(13).

5 Certain other state laws allow such recovery under some circumstances, such as Florida’s Fraudulent Transfer Act ( Fla. Stat. Ch. 726), but those laws are independent of the ABC process.

6 This extended time frame also requires amendment of Fla. Stat. §727.109(3).

7 See Fla. Stat. §§727.103(13) & 727.111(4).

8 The proposed amendments define “negative notice” as the notice procedure set forth in Fla. Stat. §727.111(4).

9 See Williamson v. Leith, 36 F.2d 643, 644 (Fla. 5th DCA 1929).

10 See Fla. Stat. §727.108(1)(a).

11 Fla. Stat. §727.108(10).

12 Fla. Stat. §727.108(11).

13 See Fla. Stat. §§727.108(5) & 727.109(6).

14 Members of the Bankruptcy-UCC Committee participated in a substantial redraft of Ch. 727 in 1987, and several of those individuals contributed to the subcommittee that drafted the recent ABC amendments.

Jodi Daniel Cooke is a creditors’ rights attorney with Beggs & Lane in Pensacola. Her practice focuses primarily on commercial creditor representation in bankruptcy and other insolvency matters, but she also represents bankruptcy trustees, receivers, assignees, creditors’ committees, and landlords in various legal proceedings. Cooke chaired the subcommittee of the Business Law Section that drafted these amendments to F.S. Ch. 727.

This column is submitted on behalf of the Business Law Section, Stephen E. Nagin, chair, and Lynn Sherman, editor.

Business Law