ASSIGNMENT FOR BENEFIT OF CREDITORS

ASSIGNMENT FOR BENEFIT OF CREDITORS

The voluntary transfer of all or most of a debtor’s
property to another person in trust so that he or
she will collect any money that is owed to the
debtor, sell the debtor’s property, and apply the
money received to the payment of the debts,
returning any surplus to the debtor.
The debtor is the assignor, the transferor;
and the person who takes legal title to the prop-
erty is the assignee.
Types
There are three types of assignments that are
categorized according to the limitations
imposed upon the arrangement. A general
assignment is one involving the transfer of all
the debtor’s property for the benefit of all his or
her creditors. A partial assignment is one in
which only part of a debtor’s property is trans-
ferred to benefit all the creditors.When property
is assigned to benefit only designated creditors,
it is a special assignment.
The assignment results in the property being
beyond the control of the debtor. It is different
from agency arrangements, pledges, or mort-
gages.
Trust Law
Unless otherwise expressly provided, trust
law governs assignments for the benefit of cred-
itors. The assignee is considered a trustee and his
or her duties and responsibilities to the debtor’s
creditors are the same as a trustee’s to the bene-
ficiaries of a trust. The document that embodies
the terms of the assignment authorizes the
assignee to liquidate the debtor’s property in sat-
isfaction of the creditors’ claims against the
debtor as quickly as possible. Under COMMON
LAW, this was the assignee’s chief function. Even
if the assignment instrument does not expressly
empower an assignee to sell the property, the
assignee still has the power to do so in order to
pay the creditors.
Creation
It is not necessary for a debtor to obtain the
consent of creditors before making an assign-
ment for their benefit. An owner of property has
a right to transfer legal title to it by virtue of
ownership. The limitation derived from com-
mon law that is placed upon its creation is that
it cannot be done to dishonestly deprive a
debtor’s creditors of their rights to have prop-
erty sold to repay debts.When an assignment for
the benefit of creditors is intended by the debtor
to place his or her property beyond the legal
reach of creditors, it is called a FRAUDULENT
CONVEYANCE. This type of assignment is void,
or legally ineffective, under statutes that prohibit
such arrangements. An assignment by which the
assignor-debtor retains any interest, benefit, or
advantage from the conveyance, such as keeping
the right to revoke the assignment, made to
defraud creditors is also a fraudulent con-
veyance, as is an assignment by which the
assignee is required to delay liquidation of the
assets.
In some jurisdictions, a partial assignment is
considered a fraudulent conveyance because the
creditors are hindered and delayed in receiving
payment if they must seek payment from the
debtor after first being referred to the assignee.
Other jurisdictions treat any assignment by a
solvent debtor as fraudulent on the theory that
such an arrangement prevents the immediate
sale of the property so that creditors are delayed
and hindered.
Deficiency
A debtor is still liable to pay his or her cred-
itors if the proceeds from the sale of personal
and real property pursuant to an assignment for
the benefit of creditors are not sufficient to
completely repay the debts. When, however,
creditors agree to accept the proceeds in satisfac-
tion of the debtor’s obligations, such an agree-
ment is called a COMPOSITION WITH
CREDITORS. For this reason, assignments for the
benefit of creditors are used by corporate, rather