delaware assignment for the benefit of creditors automatic stay

Delaware ABCs (Assignments for the Benefit of Creditors): No Longer as Easy as 1-2-3

Companies forced to wind down operations and liquidate their assets often choose a liquidation process known as an ABC (Assignment for the Benefit of Creditors). An ABC is usually more streamlined, requires fewer public disclosures and less court involvement, and is significantly less expensive than other formal liquidation processes such as federal bankruptcy proceedings. 1 However, recent rulings by the Delaware Court of Chancery, a popular forum for ABCs, suggest that ABCs may no longer be as easy as 1-2-3 — at least, not in Delaware.

An ABC is a liquidation process governed by state law by which a company (referred to as the assignor or the debtor) assigns all of its assets to an assignee (typically, a professional firm specializing in ABCs) that will manage the liquidation process and distribute the assets’ proceeds to the company’s creditors in accordance with the priorities dictated by state law. The assignee serves as a neutral, independent fiduciary whose duty is to maximize value for the company’s creditors and shareholders.

Certain states, such as Delaware, have enacted comprehensive statutory schemes that require various degrees of court oversight over the ABC process, including court approval of significant transactions, such as asset sales. Other states have less-developed ABC statutes and do not require any court supervision or approvals.

Recently, because of its “growing concern” regarding the “transparency and consistency” of ABC proceedings, 2 the Delaware Court of Chancery has begun requiring robust public disclosures at the outset of an ABC proceeding regarding the company and the assignee, akin to disclosures that a company typically makes within the first few days of a federal bankruptcy case. 3 At least one Vice Chancellor on the court has announced that he will require such disclosures in all future ABC cases assigned to him. 4 The purpose of these disclosures is to ensure that the court has sufficient information to evaluate the relief requested by the assignee. This is particularly important in ABC cases, which are handled ex parte — i.e., without notice to all parties who may be affected by the relief. 5

The Court of Chancery explained that the information that should be disclosed may vary from case to case. However, in at least three recent ABC proceedings, 6 the court has entered similar orders requiring assignees to make the following disclosures in a publicly filed affidavit in the early stages of the ABC proceeding:

• Description of the affiant and the affiant’s relationship with the debtor or assignee
• Description of the assignee, its experience, its principal or parent entity, and the events leading up to its creation
• Description of the debtor, its business prior to the assignment, and its corporate and capital structure
• Description of any debt obligation secured by all or substantially all of the debtor’s assets, including the purpose of the obligation at the time it was entered and its current status
• Description of events leading up to the assignment
• Description of any efforts to sell the debtor or its assets within the year prior to the date of the assignment
• Description of how the assignee was engaged
• Description of the terms of any agreement, arrangement, or understanding concerning the debtor or its assets between or among, on the one hand the assignee or its principal and on the hand any director, officer, employee, or creditor of the assignor, or any potential acquirer of the debtor or its assets
• If the assignee contemplates the disposition of any of the assigned assets prior to the submission of the appraisals required by 10 Del. C . §7382 and the bond required by 10 Del. C . §7383, a detailed explanation for doing so
• Description, if applicable, if any of the debtor’s known creditors are directors, officers, employees, or stockholders of the debtor or are otherwise affiliated with any of the foregoing persons

In addition, the affidavit must attach the following disclosures:

• Documents evidencing the debtor’s authorization to enter into the assignment
• Documents evidencing the terms of the assignee’s engagement, including the assignee’s fee schedule
• Documents evidencing the terms of any engagement of the assignee or its parent entity with the assignor, any of its directors, officers, employees, or creditors relating to the assignor or its assets at any time within one year of the date of the assignment
• Documents evidencing any agreement, arrangement, or understanding between the assignee or its parent entity and any person relating to the assignment or the assigned assets
• Documents evidencing any agreement, arrangement, or understanding between or among any director, officer, employee, or creditor relating to the assignment
• A list of all engagements for which the parent of the assignee or any of its affiliates has served as an assignee in an assignment proceeding filed in the Court of Chancery over the past three years
• A debtor’s balance sheet as of the date of the assignment or the most recent fiscal period available
• A list of all of the debtor’s known creditors, organized by the creditors’ status as secured or unsecured creditors, each creditor’s priority to the assigned assets, and the amounts owed to each creditor

These are not the only disclosures that may be required in an ABC. Depending on the circumstances of the case and the relief requested by the assignee, the Court of Chancery may require additional affidavits and reports, which the assignee may be required to serve upon all creditors and other parties in interest.

Key Takeaways

In light of the Court of Chancery’s focus on additional disclosures, the ABC process in Delaware may no longer be as streamlined and efficient as it once was. A company considering winding down and liquidating its assets through an ABC in Delaware should be prepared at the outset to provide significantly more information about its business, financial affairs, and events leading up to the ABC. Although these additional disclosures may add time and expense to the process, an ABC—whether in Delaware or elsewhere—is still a viable and cost-effective alternative to a federal bankruptcy proceeding that should be considered by companies facing liquidation.

[ 1 ] A bankruptcy or other proceeding may, in certain circumstances, be necessary or preferable to an ABC. A company facing financial distress should consult with experienced counsel to advise on the company’s specific situation and options. [ 2 ] See In re Theonys, Inc. , C.A. No. 2023-0195-PAF, Letter (Del. Ch. May 22, 2023) (the “Theonys Letter”). [ 3 ] See In re Glob. Safety Labs, Inc. , 275 A.3d 1278, 1284 (Del. Del. Ch. 2022) (“What the Petition lacks, and what the court invariably needs, is context. The bankruptcy courts and their practitioners have developed a vehicle for providing that context through a submission known as a ‘First-Day Declaration’ or a ‘First-Day Affidavit.’ . . . This case calls out for a comparable declaration, tailored by skilled counsel to provide the information that the court needs to evaluate the Petition. . .”). The Global Safety decision examined a petition by a company seeking to dissolve under Delaware law. However, the court explained that its concerns regarding the lack of transparency in that case also applied to ABC proceedings. See id . at 1279-80 (“The Petition is a bare-bones four-page document consisting principally of conclusory averments. It is not an outlier. It is representative of petitions that the court sees regularly in cases involving defunct or dissolved entities and in proceedings involving assignments for the benefits of creditors.”). [ 4 ] See Theonys Letter. [ 5 ] See Glob. Safety , 275 A.3d at 1280 (“Many of these proceedings are handled ex parte , so the court never has the benefit of an interested party that can provide a different perspective or ask probing questions.”). [ 6 ] In re Theonys Inc . C.A. No. 2023-0195-PAF, Order (Del. Ch. May 22, 2023); In re Boston Security Token Exchange LLC , C.A. No. 2023-0494-PAF, Order (Del. Ch. May 22, 2023); In re Secure Transfusion Solutions, Inc. , C.A. No. 2023-0463-PAF, Order (Del. Ch. May 22, 2023).

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.

Barry Z. Bazian

Kizzy Jarashow

Artem Skorostensky

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Delaware ABCs (Assignments for the Benefit of Creditors): No Longer as Easy as 1-2-3

Companies forced to wind down operations and liquidate their assets often choose a liquidation process known as an ABC (Assignment for the Benefit of Creditors). An ABC is usually more streamlined, requires fewer public disclosures and less court involvement, and is significantly less expensive than other formal liquidation processes such as federal bankruptcy proceedings. 1 However, recent rulings by the Delaware Court of Chancery, a popular forum for ABCs, suggest that ABCs may no longer be as easy as 1-2-3 — at least, not in Delaware.

An ABC is a liquidation process governed by state law by which a company (referred to as the assignor or the debtor) assigns all of its assets to an assignee (typically, a professional firm specializing in ABCs) that will manage the liquidation process and distribute the assets’ proceeds to the company’s creditors in accordance with the priorities dictated by state law. The assignee serves as a neutral, independent fiduciary whose duty is to maximize value for the company’s creditors and shareholders.

Certain states, such as Delaware, have enacted comprehensive statutory schemes that require various degrees of court oversight over the ABC process, including court approval of significant transactions, such as asset sales. Other states have less-developed ABC statutes and do not require any court supervision or approvals.

Recently, because of its “growing concern” regarding the “transparency and consistency” of ABC proceedings, 2 the Delaware Court of Chancery has begun requiring robust public disclosures at the outset of an ABC proceeding regarding the company and the assignee, akin to disclosures that a company typically makes within the first few days of a federal bankruptcy case. 3 At least one Vice Chancellor on the court has announced that he will require such disclosures in all future ABC cases assigned to him. 4 The purpose of these disclosures is to ensure that the court has sufficient information to evaluate the relief requested by the assignee. This is particularly important in ABC cases, which are handled ex parte — i.e., without notice to all parties who may be affected by the relief. 5

The Court of Chancery explained that the information that should be disclosed may vary from case to case. However, in at least three recent ABC proceedings, 6 the court has entered similar orders requiring assignees to make the following disclosures in a publicly filed affidavit in the early stages of the ABC proceeding:

• Description of the affiant and the affiant’s relationship with the debtor or assignee
• Description of the assignee, its experience, its principal or parent entity, and the events leading up to its creation
• Description of the debtor, its business prior to the assignment, and its corporate and capital structure
• Description of any debt obligation secured by all or substantially all of the debtor’s assets, including the purpose of the obligation at the time it was entered and its current status
• Description of events leading up to the assignment
• Description of any efforts to sell the debtor or its assets within the year prior to the date of the assignment
• Description of how the assignee was engaged
• Description of the terms of any agreement, arrangement, or understanding concerning the debtor or its assets between or among, on the one hand the assignee or its principal and on the hand any director, officer, employee, or creditor of the assignor, or any potential acquirer of the debtor or its assets
• If the assignee contemplates the disposition of any of the assigned assets prior to the submission of the appraisals required by 10 Del. C . §7382 and the bond required by 10 Del. C . §7383, a detailed explanation for doing so
• Description, if applicable, if any of the debtor’s known creditors are directors, officers, employees, or stockholders of the debtor or are otherwise affiliated with any of the foregoing persons

In addition, the affidavit must attach the following disclosures:

• Documents evidencing the debtor’s authorization to enter into the assignment
• Documents evidencing the terms of the assignee’s engagement, including the assignee’s fee schedule
• Documents evidencing the terms of any engagement of the assignee or its parent entity with the assignor, any of its directors, officers, employees, or creditors relating to the assignor or its assets at any time within one year of the date of the assignment
• Documents evidencing any agreement, arrangement, or understanding between the assignee or its parent entity and any person relating to the assignment or the assigned assets
• Documents evidencing any agreement, arrangement, or understanding between or among any director, officer, employee, or creditor relating to the assignment
• A list of all engagements for which the parent of the assignee or any of its affiliates has served as an assignee in an assignment proceeding filed in the Court of Chancery over the past three years
• A debtor’s balance sheet as of the date of the assignment or the most recent fiscal period available
• A list of all of the debtor’s known creditors, organized by the creditors’ status as secured or unsecured creditors, each creditor’s priority to the assigned assets, and the amounts owed to each creditor

These are not the only disclosures that may be required in an ABC. Depending on the circumstances of the case and the relief requested by the assignee, the Court of Chancery may require additional affidavits and reports, which the assignee may be required to serve upon all creditors and other parties in interest.

Key Takeaways

In light of the Court of Chancery’s focus on additional disclosures, the ABC process in Delaware may no longer be as streamlined and efficient as it once was. A company considering winding down and liquidating its assets through an ABC in Delaware should be prepared at the outset to provide significantly more information about its business, financial affairs, and events leading up to the ABC. Although these additional disclosures may add time and expense to the process, an ABC—whether in Delaware or elsewhere—is still a viable and cost-effective alternative to a federal bankruptcy proceeding that should be considered by companies facing liquidation.

[ 1 ] A bankruptcy or other proceeding may, in certain circumstances, be necessary or preferable to an ABC. A company facing financial distress should consult with experienced counsel to advise on the company’s specific situation and options. [ 2 ] See In re Theonys, Inc. , C.A. No. 2023-0195-PAF, Letter (Del. Ch. May 22, 2023) (the “Theonys Letter”). [ 3 ] See In re Glob. Safety Labs, Inc. , 275 A.3d 1278, 1284 (Del. Del. Ch. 2022) (“What the Petition lacks, and what the court invariably needs, is context. The bankruptcy courts and their practitioners have developed a vehicle for providing that context through a submission known as a ‘First-Day Declaration’ or a ‘First-Day Affidavit.’ . . . This case calls out for a comparable declaration, tailored by skilled counsel to provide the information that the court needs to evaluate the Petition. . .”). The Global Safety decision examined a petition by a company seeking to dissolve under Delaware law. However, the court explained that its concerns regarding the lack of transparency in that case also applied to ABC proceedings. See id . at 1279-80 (“The Petition is a bare-bones four-page document consisting principally of conclusory averments. It is not an outlier. It is representative of petitions that the court sees regularly in cases involving defunct or dissolved entities and in proceedings involving assignments for the benefits of creditors.”). [ 4 ] See Theonys Letter. [ 5 ] See Glob. Safety , 275 A.3d at 1280 (“Many of these proceedings are handled ex parte , so the court never has the benefit of an interested party that can provide a different perspective or ask probing questions.”). [ 6 ] In re Theonys Inc . C.A. No. 2023-0195-PAF, Order (Del. Ch. May 22, 2023); In re Boston Security Token Exchange LLC , C.A. No. 2023-0494-PAF, Order (Del. Ch. May 22, 2023); In re Secure Transfusion Solutions, Inc. , C.A. No. 2023-0463-PAF, Order (Del. Ch. May 22, 2023).

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Last month the Delaware Chancery Court sent a clear message to Delaware companies that failure to strictly comply with the Delaware Assignment for the Benefit of Creditors (“ABC”) statute will result in severe consequences, including  dismissal .

On December 27, 2023, WMT (an ABC) LLC (the “Assignee”) filed an assignment petition which provided that it had entered into an assignment agreement on March 13, 2023 with WindMIL Therapeutics, Inc. (the “Assignor”). The petition noted that the assignment agreement was attached—it was not. The assignment agreement was only provided to the Chancery Court in response to a scheduling order (the “Initial Order”) entered on January 3, 2024. The Assignee also filed an affidavit in response to the Initial Order and provided two purported valuation opinions that had been obtained by the Assignee. The first was an appraisal stamped “draft” from Redwood Valuation Partners (“Redwood”) dated November 21, 2023, which valued the intellectual property assigned to the Assignee at $409,000 based on a fair market value analysis. The second was an appraisal prepared by Braun Co. (“Braun”) dated November 22, 2023, with a valuation date of October 31, 2023, which offered a speculative $100 value on the intellectual property. 

On March 6, 2024, several months after filing the petition and four-and-a-half months after receiving the appraisals, the Assignee filed a motion (the “Appraiser Motion”) seeking entry of an order retroactively appointing Redwood and Braun as appraisers. In the Appraiser Motion, the Assignee failed to provide any explanation why it chose to obtain appraisals from Redwood and Braun months before asking the Chancery Court to appoint them as appraisers. That same day, the Assignee also filed a motion (the “Bond Motion”) asking the Chancery Court to fix a bond for the value of the assets (as required by 10 Del. C. § 7383) at $152,000, which represented amounts due for tax refunds that the Assignee has collected and the value of intellectual property. As part of the Bond Motion, the Assignee requested that the Chancery Court ignore Redwood’s draft appraisal of the intellectual property on the basis that the licensor of the intellectual property indicated that it would not consent to an assignment of the license rights.

This case, like most other ABC cases, proceeded  ex parte , which the Chancery Court found “[h]istorically. . . provide[s] little transparency to creditors, [provides] limited and incomplete information about the initiation of the ABC, and, frequently, fail[s] to comply with the statutory requirements.”[1] The Chancery Court also noted that while practice under the Delaware ABC statute is often referred to as “the wild west of Bankruptcy,” the court has previously encouraged counsel to address shortcomings and to comply with the statute.[2] To bring more transparency to the ABC process, the Chancery Court has issued orders requiring assignees to provide more detailed information and establishing firm deadlines to the extent not otherwise contained in the ABC statute. The Initial Order issued in this case was one such order. 

The Delaware ABC statute is short and consists of only seven sections, and the Chancery Court found that the Assignee had violated at least three of these sections, including:

• 10 Del. C. § 7381 – Requiring the filing of an affidavit of inventory within 30 days of the execution of the assignment agreement. Here, the affidavit was required to have been filed by April 12, 2023, but the Assignee filed the affidavit more than eight months later, on December 27, 2023.
• 10 Del. C. § 7382 – Requiring court appointment of two appraisers before obtaining the appraisals. Here, the Assignee purported to retain appraisers and procure appraisals without first seeking authorization. In fact, the Redwood appraisal was issued one month before the ABC was initiated, had a valuation date of two months before the ABC was initiated, was unsigned and marked as a draft. The Braun appraisal was issued one month before the ABC was initiated and had a valuation date of two months before the ABC was initiated. It offered a “speculative value” of $100 for the Assignor’s patents and intellectual property. 
• 10 Del. C. § 7383 – Requiring the court to fix a bond after the appraisers submit their appraisals. Here, the Assignee sought approval of a bond contemporaneous with the appointment of appraisers who are tasked with appraising the assets subject to the bond.

The Assignee provided no explanation for any of these statutory violations. Because the Assignee failed to comply with the statutory requirements under the Delaware ABC statute, the Appraiser Motion and Bond Motion were both denied, and the petition was dismissed. Vice Chancellor Fioravanti presided over the WindMIL Therapeutics case, and his ruling here followed his recent ruling in  Aeolus Pharmaceuticals, Inc.  where he also dismissed the petition for failure to comply with the ABC statute.[3] 

Parties contemplating a Delaware ABC proceeding should take note. Although arguably less detailed and onerous than the statutory requirements of a liquidation under Chapter 7 of the Bankruptcy Code, the ABC statute has its own set of requirements. And, as evidenced by the dismissal of the WindMIL Therapeutics petition, compliance with the statue is being enforced. Failure to comply with the statute may result in serious consequences, including dismissal of the assignment petition, potentially leaving Chapter 7 as the only liquidation alternative. 

[1]  See In re WindMIL Therapeutics, Inc., To: WMT (an ABC) LLC, C.A. No.  2023-1294 at 6 (Del. Ch. March 13, 2024).

[3]  In re Aeolus Pharmaceuticals, Inc.,  C.A. No. 2018-0212-PAF, at 5-6 (Del. Ch. Oct. 20, 2023) (dismissing ABC proceeding for failure to comply with the statutory requirements of Delaware’s ABC statute). 

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Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats . It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario . After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

• A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
• The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option . In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs . In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802 , among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).    (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.    (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States . Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes , and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law . Florida is another state in which ABCs are done under specific statutory procedures . For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs , published by the American Bankruptcy Institute .

Important Features Of ABCs . A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

• Court Filing Issue . In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
• Select The Assignee . Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
• Shareholder Approval . Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
• Liquidator As Fiduciary . The assignee is a fiduciary to the creditors and is typically a professional liquidator.
• Assignee Fees . The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
• No Automatic Stay . In many states, including California, an ABC does not give rise to an automatic stay  like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
• Event Of Default . The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause .
• Proof Of Claim . For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form .)
• Employee Priority . Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
• 20 Day Goods . Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9) , which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing . As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights .
• Landlord Claim . Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
• Sale Of Assets . In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale , there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
• Avoidance Actions . Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute , California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court . In February 2008, a Delaware state court followed the California state court decisions , refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

• The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims  compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
• In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
• Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
• If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
• If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
• If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
• While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion . When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.

Relearning the ABCs: Delaware Court of Chancery Issues Rulings Making Clear That More Information Is Required in Bankruptcy-Alternative Proceedings

The Delaware Court of Chancery took the old maxim “justice delayed is justice denied” to heart recently when it denied a request for a stay of proceedings hours after the request had been filed.  The ruling from Vice Chancellor Paul A. Fioravanti, Jr. in In re Kidbox.com, Inc. , Case No. 2022-0379-PAF, is the latest in a series of rulings from the Delaware Court of Chancery requiring litigants in bankruptcy-alternative proceedings in Delaware to support their petitions for relief with sufficient disclosures and to avoid bare-boned pleadings.  These rulings further signal that counsel engaged in bankruptcy-alternative proceedings in Delaware should be prepared for a higher level of scrutiny from the Court of Chancery.

Factual Background

The petitioner, Kidbox.com, Inc. (“Kidbox”), provides clothing-in-a-box services for kids—similar to services like Rent the Runway, but for a younger audience.  Faced with being behind on its payments to certain creditors, Kidbox filed a petition for assignment for the benefit of creditors (“ABC”), a statutory form of relief governed by Chapter 73 of Title 10 of the Delaware General Corporation Law.  Under an ABC, a company struggling with solvency enters into a contract with an assignee that then monetizes the company’s remaining assets so that the assets may be distributed to the company’s creditors.  ABCs are part of a suite of state-law remedies that are increasingly being used by dissolving companies as alternatives to bankruptcy, because such remedies require less oversight from courts, have fewer statutory requirements, and can potentially avoid the reputational consequences of declaring bankruptcy.

Another difference between bankruptcy proceedings and ABC proceedings in Delaware—and one particularly relevant to In re Kidbox.com —is that, unlike the Bankruptcy Code, companies petitioning for ABCs in Delaware are not granted automatic stays of collection efforts and litigation.  So, in addition to asking the court to accept jurisdiction over its ABC, Kidbox’s petition also asked the court to issue “a stay of collection and litigation against Kidbox and the Assignee comparable to the ‘automatic stay’ provisions under the Bankruptcy Code.”  Kidbox’s petition, however, failed to provide any facts or argument in support of a stay.  Instead, it merely noted that the Delaware Court of Chancery had previously ordered stay provisions comparable to those requested by Kidbox and remarked that the stay was “intended only as an interim measure to channel the claims adjudication process into [the Chancery] Court.”

In a four-sentence order, Vice Chancellor Fioravanti denied Kidbox’s request for a stay.  Vice Chancellor Fioravanti noted that Kidbox’s petition and a related letter to the court did “not provide any information supporting the entry of a stay,” and instead “largely copied, nearly verbatim,” a petition in a previous Delaware Court of Chancery case where a stay was denied after the petition similarly failed to provide any grounds for a stay.

The ruling also cited to an order from a corporate dissolution case that had been issued less than a week earlier.  In that case, In the Matter of Global Safety Labs, Inc. , Case No. 2022-0309, a dissolved company petitioned the Court of Chancery for determinations regarding its obligations to post security for claims brought against it by creditors.  The court noted that the “brief and conclusory” petition failed to include a number of essential facts that could support a ruling on the petition, including basic facts about Global Safety Labs’ business, its organizational and capital structure, and the events that led to its dissolution.  The court ended by noting that, in ex parte proceedings such as the bankruptcy-alternative proceedings involved in In re Kidbox.com and Global Safety Labs , “counsel have a heightened obligation to provide information to the court” so that the court has sufficient information on which to base its rulings.

Key Takeaways

Litigants in Delaware seeking to stay collection actions or litigation in an ABC proceeding should be prepared to support their request for a stay with sufficient facts and argument supporting their request, and should expect that the court will closely scrutinize those requests.

More generally, developing case law in Delaware suggests that courts will require more substantive pleadings in all bankruptcy-alternative proceedings, and counsel should be aware of the “heightened obligation” they have to provide the court with sufficient facts to support a ruling on petitions in these proceedings.  The Delaware Court of Chancery has indicated that conscientious practitioners can glean insight into what is required by considering similar pleadings in bankruptcy court; for example, litigants seeking court determinations on their obligations to post security for claims would do well to model their petitions on First-Day Declarations used in the bankruptcy context.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.

Robert S. Velevis

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Charles M. Persons

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