assignment for the benefit of creditors tennessee

ASSIGNMENT FOR THE BENEFIT OF CREDITORS

An ABC is a mechanism used to monetize the assets of a business under state law. It commences with the execution of a “Deed of Assignment,” between a representative of the company in which all corporate assets are transferred to an “assignee.” The assignee, in accordance with the Deed, must monetize the assets of the business and distribute the proceeds to creditors. In certain states, including Georgia, ABCs do not require court action or supervision. In other states, such as New York, ABCs are statutory and require court supervision.

Some Advantages of an ABC:

• An ABC can be achieved very quickly and with lower expense than a bankruptcy proceeding, increasing proceeds available to stakeholders
.
• The troubled company chooses the assignee who will maximize recovery and has experience marketing similar assets
.
• An assignee often sells the assets of the business as a going concern and can operate the business prior to a sale.
• An ABC is an effective method to communicate with creditors and other stakeholders in the closing of a business.

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Assignment For The Benefit Of Creditors: An Overview

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What is an assignment for the benefit of creditors? An assignment for the benefit of creditors ("ABC") is an alternative to a chapter 7 bankruptcy proceeding. As in a chapter 7, the debtor's assets are shepherded and liquidated for the benefit of the debtor's creditors. An ABC is governed by statute and can either be court-supervised or conducted out of court. In New York, an ABC is governed by Article 2 of the Debtor and Creditor Law.

In an ABC proceeding, the debtor is referred to as an assignor, because it makes a transfer of all its assets to an assignee who serves as a trustee. The assignee is charged with placing all the assets in trust in order to liquidate and distribute the proceeds to creditors. While an ABC has many similarities with a chapter 7 liquidation, the two do differ in two important regards:

• an ABC does not afford a debtor an automatic stay from creditor collection; and
• a sale does not provide the purchaser with the right to purchase the assets free and clear of liens – unlike a 363 sale in Bankruptcy.

To commence an ABC, an assignor executes an assignment conveying all its assets to the assignee, who becomes a fiduciary on behalf of the assignor and its creditors. The assignee then collects and liquidates assets by collecting accounts receivable, conducting an auction sale, sometimes to a stalking horse bidder who starts the bidding, or through a going out of business sale.

An assignor also has powers under state law to recover fraudulent pre-ABC transfers of assets and preferential payments made to creditors. In New York, the "look-back period" for recovering these transfers is four years.

When it comes to distribution of the assets collected by the assignee, an ABC proceeding follows an established order of priority, which is set forth in either the state's unique ABC laws or in the deed of assignment. The assignee tallies the proofs of claim that were filed by the creditors in the proceeding and pays the claims, either in full or on a pro rata basis in accordance with the priority scheme.

After the assignor's assets have been liquidated and creditors have been paid out, the assignee must prepare an accounting detailing the flows of monies in and out of the estate during the case, which may have to be filed with the court supervising the proceedings. As part of the accounting process, the assignee asks the court to close the estate, which notifies all interested parties that (i) the estate has been fully administered, (ii) that the assignee's work is complete, (iii) that no further distributions need be made, and (iv) that the assignment is terminated.

An ABC is a useful, cost-effective alternative to a traditional chapter 7 bankruptcy liquidation, and may suitably serve liquidation requirements in some situations.

Originally published 03/07/2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Assignment For The Benefit Of Creditors

If you do not want to file a bankruptcy petition and cannot get creditors to agree to a workout, you might want to look to the state courts for some relief. In most states (including New York and New Jersey), companies look to a set of statutes governing the assignment for the benefit of creditors or an “ABC”.  However, this option is only used in the event the company has a lot of creditors and the company managers have decided to wind up the business.

In an ABC, the company’s board of directors makes the decision to liquidate through the ABC process and authorizes an officer to commence that proceeding.  That officer prepares and signs a written assignment of all of the company’s assets and debts to a third party.  The assignment contents must comply with very specific state requirements.

Once the assignment is complete, the assignee will look to see if the company can be sold as a going concern. The assignee will also send each creditor a claim form to assert their claim against the debtor.  If the assignee cannot sell the company as a going concern, the assignee will put each individual asset up for sale. The assignee will use his/her contacts to find buyers for assets and use publication notices specific to the industry to find buyers and generate cash to pay creditors.

This process almost always yields more for creditors than a chapter 7 bankruptcy because the administrative expenses of a chapter 7 bankruptcy are much higher than they are in state court, and the sale process is usually less cumbersome than it would be under a bankruptcy filing.  Once all of the assets are sold and there is nothing left to liquidate, the assignee will pay creditors in the order of their priority, which is set under the state’s statute.  The entire process usually takes about 6 months.

It should be noted that to the extent any of the company’s managers have personally guaranteed debt, unless the debt is paid in full through an ABC, the guarantor will not be relieved of his/her guaranty obligations.

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Assignment for the Benefit of Creditors

In lieu of filing for Chapter 7 liquidation bankruptcy, a business may wish to settle its debts by entering into an assignment for the benefit of creditors. An assignment is a streamlined liquidation procedure that allows a business to pay off its creditors while avoiding the costs, time, and stigma associated with bankruptcy.

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While almost anyone can assign assets to an assignee, most assignors are corporations or partnerships. The business transfers control and title of its assets, include its accounts receivable, to an assignee. The business cannot rescind an assignment once it has been made.

The law of trusts applies to assignments. The assignee has the same duties and responsibilities to creditors as a trustee would have to the beneficiaries of a trust. The assignee liquidates the debtor’s assets and distributes the proceeds to creditors. The creditors may require the debtor to satisfy any deficiencies, or accept the proceeds as full satisfaction of the debt, also known as a “composition with creditors.” The costs of administering the assignment are paid first from the money generated by liquidation of the estate. Any surplus funds are returned to the business. Secured and Unsecured Creditors, Consent, and Cooperation A creditor does not need to consent to assignment of the asset. However, cooperation with securred creditors is generally sought to maximize the amount recovered from the sale or disposition of the asset. Likewise, while a secured creditor may choose to take back collateral, creditors often cooperate with the assignee to maximize returns on the asset.

Advantages and Disadvantages of Assignments

While business owners may also simply walk away from a failing business, this does nothing to protect the business’s owners or investors. An assignment allows for the opportunity to pay off creditors and to obtain orderly estate administration. An assignee may often be able to sell an asset for a greater price or pursue litigation that a bankruptcy trustee is unable to pursue. Secured creditors consenting to assignment eliminate the costs and litigation associated with the foreclosure and sale of an asset. An assignment may generate less publicity than that of bankruptcy.

There is limited court oversight involved in an assignment, and the automatic stay that prevents creditors from collecting on debts during the pendency of a bankruptcy case does not apply to an assignment case. If the business is not satisfied with the assignment case, it can still file for voluntary bankruptcy. As well, creditors may seek to impose an involuntary bankruptcy under Chapter 11 if they are not satisfied with how the assignment case is proceeding.

Assignment for the Benefit of Creditors

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Our Business Restructuring, Creditors’ Rights & Bankruptcy practice group regularly advises clients in a broad range of industries nationally on issues relating to financial distress, insolvency and the exercise of associated rights and remedies. Our extensive experience and substantial knowledge of the law enables us to develop innovative business strategies and solutions for our clients’ most difficult challenges.

In connection with representations involving the sale of distressed businesses, we have advised each of the key stakeholders including buyers, sellers, sponsors, lenders, directors and officers. Our clients in distressed business transactions include public and private companies, private equity firms and financial institutions. We understand the complexities and sensitivities in these matters and recognize that each transaction has a different mix of risk, certainty, speed and expense. Our job is to understand our client’s needs, master the facts, develop an optimal strategy for accomplishing our client’s business objectives that anticipates all potential challenges and identifies solutions in advance, and efficiently execute the agreed upon strategy to successful completion.

Client feedback lauds our practice group as “five-star” for providing “a very high level of client service” and for going “above and beyond to assist the client.” We are also known for being “proactive and attentive. Always accessible. Creative and forward with advice.”

A representative sample of our completed ABC transactions include:

Health, Life Sciences & Wellness

• Representing the assignee in the ABC for a life sciences company specializing in cancer treatment options.
• Representing the assignee in the ABC for a provider of musculoskeletal wellness and soft tissue illness treatment and prevention solutions to employers.
• Representing the assignee in the ABC for a manufacturer of radiation protective products for the health care, dental, veterinary and nuclear industries.

Technology & Software

• Representing the assignee in the ABC for a developer of three-dimensional long-range facial recognition technology.
• Representing an assignee in a motion technologies company’s ABC in the Delaware Court of Chancery.
• Representing the assignee in the ABC for a developer of technology in the cable television industry.
• Representing the assignee in the ABC for a developer of marker-less motion capture software and systems.

Manufacturing

• Representing the assignee in the ABC for a developer of energy conversion systems for wind energy and industrial markets, including advising our client on liquidation of assets and distribution to creditors.
• Representing three assignees in the ABC for the world’s largest privately held designer, manufacturer and marketer of winch systems.

Media, Entertainment & Leisure

• Representing the senior lender in the ABC for a nationwide religious bookstore.
• Representing the assignee in the ABC for a developer of interactive video games and digital content.
• Representing the assignee in the ABC for a vacation rental distributor.
• Representing the assignees in multiple ABCs involving a national trampoline park.

Consumer Products

• Representing a special purpose entity in the ABC for an online grocery provider.
• Representing the assignees in the ABCs for an online estate auction house.

Real Estate & Other Services

• Representing the assignees in the ABCs for an office leasing company with 22 U.S. locations.
• Representing a secured lender’s interest in an ABC involving a government contract-related dispute.
• Representing the assignee in the ABC for a provider of advertising material.
• Representing three assignees in the ABC for an SAS company.
• Representing the assignee in the ABC for a provider of a mobile delivery network software development kit.
• Representing the assignees in multiple ABCs for a software company based in Denver, Colorado.
• Representing the assignee in the ABC for a software company based in Missoula, Montana.

assignment for benefit of creditors

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Assignment for the benefit of the creditors (ABC)(also known as general assignment for the benefit of the creditors) is a voluntary alternative to formal bankruptcy proceedings that transfers all of the assets from a debtor to a trust for liquidating and distributing its assets. The trustee will manage the assets to pay off debt to creditors, and if any assets are left over, they will be transferred back to the debtor. 

ABC can provide many benefits to an insolvent business in lieu of bankruptcy . First, unlike in bankruptcy proceedings, the business can choose the trustee overseeing the process who might know the specifics of the business better than an appointed trustee. Second, bankruptcy proceedings can take much more time, involve more steps, and further restrict how the business is liquidated compared to an ABC which avoids judicial oversight. Thirdly, dissolving or transferring a company through an ABC often avoids the negative publicity that bankruptcy generates. Lastly, a company trying to purchase assets of a struggling company can avoid liability to unsecured creditors of the failing company. This is important because most other options would expose the acquiring business to all the debt of the struggling business. 

ABC has risen in popularity since the early 2000s, but it varies based on the state. California embraces ABC with common law oversight while many states use stricter statutory ABC structures such as Florida. Also, depending on the state’s corporate law and the company’s charter , the struggling business may be forced to get shareholder approval to use ABC which can be difficult in large corporations. 

[Last updated in June of 2021 by the Wex Definitions Team ]

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What Is an Assignment for the Benefit of Creditors and How Does It Differ From a Bankruptcy? - Creditor’s Rights Toolkit

An assignment for the benefit of creditors (ABC) is a process by which a financially distressed company (referred to as the assignor) transfers its assets to a third-party fiduciary (referred to as the assignee). The assignee is responsible for liquidating those assets and distributing the proceeds to the assignor's creditors, pursuant to the priorities established under applicable law.

Troutman Pepper's Creditor’s Rights Toolkit is a series that provides practical insights to help creditors confront the challenges of commercial bankruptcy.

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Assignments for the Benefit of Creditors: Overview | Practical Law

Assignments for the Benefit of Creditors: Overview

Practical law practice note overview w-006-7771  (approx. 19 pages).

Assignment For The Benefit Of Creditors

An Assignment for the Benefit of Creditors (“ABC”) is a legal process in which a debtor company voluntarily transfers its assets to a third-party assignee for the purpose of liquidation and distribution to creditors. This alternative to a bankruptcy provides a streamlined and cost-effective method for winding down a financially distressed business. In Florida, the ABC process is governed by state law and offers several advantages for both debtors and creditors.

To initiate a Florida ABC, the debtor company executes a formal assignment document, transferring its assets to an assignee, who then assumes responsibility for liquidating the assets and distributing the proceeds to creditors. The assignee is typically a neutral third party, often an experienced insolvency fiduciary.

The Florida ABC process follows a transparent and structured approach. The assignee conducts a thorough review of the debtor’s financial affairs, identifies and values the assets, and formulates a plan for liquidation. Creditors are then notified, and the assignee proceeds with the orderly sale of assets. The proceeds are distributed to creditors in accordance with the priority established by Florida law.

While an ABC is a powerful tool for resolving financial distress, it is crucial for both debtors and creditors to seek legal advice to navigate the intricacies of the process effectively. Understanding the specific provisions of Florida’s ABC laws is essential for all parties involved, ensuring a fair and efficient resolution to the financial challenges faced by the debtor company.

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Assignment for the Benefit of Creditors: A Remedy to Avoid Bankruptcy

May 24, 2021

When it comes to California contract law, ABC contracts are a well-established tool that can help individuals and entities avoid a formal bankruptcy filing. “ABC” stands for “Assignment for the Benefit of Creditors,” and the term describes a contract in which an economically troubled “Assignor” transfers control of its assets and property to an independent third party. This third party is called the “Assignee,” and they liquidate and wind-up the entity. 

How Do ABCs Work?

When a business is struggling financially without much hope of recovery, bankruptcy isn’t the only option. ABC contracts can help the entity avoid traditional or formal bankruptcy proceedings. 

These contracts work when there are significant assets that are ready to be liquidated. If the entity doesn’t have valuable assets, then an ABC contract is not typically a realistic option. However, in these circumstances where there are significant assets, the Assignor transfers all custody, control, and title to a neutral third party. 

This neutral third party navigates and facilitates the liquidation of assets and transfer of funds to the assignor’s creditors. 

Benefits of Using an ABC

There are several benefits to using an ABC. 

One of the biggest factors for most entities is avoiding Chapter 11 or Chapter 7 bankruptcy. Because ABCs are governed by state law, not federal law, struggling companies can pursue an ABC contract on their own without going through the courts. 

Working with a neutral third party can take away a lot of the stress that accompanies economic difficulties. Instead of trying to liquidate assets and transfer funds to creditors, struggling companies can pass those challenges on to the Assignee. 

Lastly, Assignors get to choose their own Assignees. That means that they are not at the mercy of the court to assign a bankruptcy trustee they don’t know or trust. When a company pursues an ABC contract, they maintain more control over process and costs. 

Going through financial difficulties can lead to feelings of helplessness and a loss of control, but this is something that you continue to have control over. 

Responsibilities of an Assignee

When the Assignor assigns property to the Assignee, that can include all corporate property, both tangible and intangible, as well as accounts, rights, and credits, including law and equity credits. 

The Assignee liquidates and sells these assets. (Note that the Assignee cannot sell the corporation or the stock.) Importantly, the corporation continues to exist during this process, even though there are no assets left by the end of the process.

The Assignee typically sells all assets without any representation or warranty. An as-is sale allows things to proceed quickly; ABCs are known for being one of the fastest ways to address significant debt issues. 

Assignees protect the assets of the estate or corporation. They are required to administer those assets fairly and in the interest of the Assignor and its creditors. 

How to Choose an Assignee

Choosing an Assignee is about finding the right third party representative. We recommend that you look for the following characteristics in your chosen Assignee:

• Experience: Choose an Assignee who has significant experience with managing and liquidating assets for struggling businesses.
• Reputation: These days, reputation means everything. It’s easy to find out through some searching if a potential Assignee is qualified and reputable. 
• Knowledge: A knowledgeable Assignee will be able to answer your questions about the process and chart out likely outcomes.  

Do You Need an Assignee? 

Griswold Law regularly manages and sells business assets. We serve as court-appointed receivers as well as ABC-contracted Assignees. To learn more about ABCs and how we can help you avoid bankruptcy, reach out today .

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Creditor successfully levies on debtor’s funds held in attorney trust account in dickson.

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Retainer Agreement

In the post-judgment world, a creditor may levy execution upon the debtor's non-exempt assets wherever they are found within the court's jurisdiction. This includes the debtor's cash, whether in physical form or in a bank account. If a creditor finds the debtor's bank account, the creditor can have the sheriff serve a notice of levy on the bank and thereby levy upon (read: collect against) any and all accounts that are owned by the debtor. The bank must freeze the account funds immediately and then respond to the levy within a few days by turning over all the debtor's cash to the sheriff. Usually a couple of weeks later, the sheriff then turns the funds over to the creditor.

But what if the debtor's funds are held in the name of somebody else who has an account at the bank? In that event, the creditor has the sheriff serve the notice of levy upon the person holding the funds for the benefit of the debtor, and that person must then freeze the debtor's funds and turn them over to the sheriff. If that person claims that they are the real owners of the funds, they can request that the court have a hearing wherein they can make a third-party claim against the funds by asserting that their right to the funds is superior to that of the creditor.

What happens with the debtor's deposit for legal fees that are held in an attorney's client trust fund? You see, creditors absolutely love to levy upon the debtor's attorneys for any money they are holding for the benefit of the debtor. Not only can hitting this money provide the creditor with immediate cash to be applied against the judgment, but also taking those fees can deprive the debtor of legal representation thus making the creditor's job that much easier.

Can the creditor really do this? The answer was given by the California Court of Appeals in its opinion in Dickson v. Mann , 2024 WL 3421751 (Cal.App.Distr. 4, July 16, 2024), which we shall now consider.

Nicholas Dickson sued Jack Mann for alleged misconduct relating to Dickson's living trust. Mann ultimately stipulated to a $12 million judgment in favor of Dickson which was entered on August 8, 2022. To enforce the judgment, two weeks later, on August 22, 2022, Dickson had the sheriff levy upon Mann's law firm, being Higgs, Fletcher & Mack LLP ("HFM"), for any funds which HFM was holding for Mann. In response, HFM gave the sheriff a notice of third-party claim. In this third-party claim, HFM held an ownership or at least security interest to protect its fees in $585,000 that it had received from Mann. This resulted in a hearing before the Superior Court of San Diego County on the third-party claim.

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Now we have to dive into the nitty-gritty of HFM's agreement with Mann as it related to the $585,000. The HFM engagement agreement with Mann provided that HFM would provide him with a legal defense, including defending against Dickson's efforts to enforce the judgment, and that Mann agreed "to pay a flat fee in the amount of $585,000, inclusive of costs." In other words, were one to look at that clause in isolation, Mann paid HFM $585,000 to handle the matter from start to finish and Mann would not be getting any money back at the end.

But that clause would not be looked at in isolation. HFM's engagement agreement then went on to state:

"Both [HFM] and [Mann] understand and acknowledge that (1) [Mann] has the right to have [HFM] deposit the Flat Fee in a trust account until the fee is earned; and that in such case, (2) [Mann] is entitled to a refund of any amount of the Flat Fee that is unearned because the services were not completed. Despite being fully informed of the rights described in the preceding sentence, [Mann] consents to [HFM] depositing the Flat Fee into [HFM]'s operating account upon payment and consents to such fee being deemed earned by [HFM] when received."

HFM claimed that Mann already owed HFM $948,260 and that ― had the levy not occurred first on August 22 ― by the end of August HFM would have applied the entire $585,000 against Mann's outstanding bill of $948,260 thus leaving nothing of Mann's money remaining. However, " HFM presented no evidence during the litigation of its third party claim that it had begun providing any of the legal services covered by the $585,000 flat fee at the time the notice of levy was served on August 22, 2022."

Dickson opposed HFM's third-party claim by pointing out that HFM held the $585,000 in its client trust account. This is an account that is meant to only and exclusively hold client funds in trust for the client's benefit. The $585,000 was held in HFM client trust account this, Dickson argued, meant that the entirety of the $585,000 still belonged to Mann and was dispositive of the whole matter.

After the third-party hearing, the Superior Court ruled in favor of Dickson, denied HFM's third-party claim, and awarded Dickson the $585,000. The Superior Court had two grounds for its ruling:

First, under the California Rules of Professional Conduct (the state bar ethical rules), where a law firm such as HFM has charged a flat fee, that flat fee is not considered to be earned until the matter has been concluded. In the meantime, until the fee is earned the funds remain the property of the client, being Mann. Since HFM was still obligated to represent Mann on the enforcement of the judgment (and some other matters), the Superior Court held that HFM had not yet earned its fee and so the funds in the account remained Mann's funds.

Second, and although neither Dickson nor HFM raised this matter, the Superior Court concluded that Mann had transferred the $585,000 to HFM for purposes of defrauding Dickson, and thus the California Uniform Voidable Transactions Act ("CUVTA") would apply to void Mann's attempted transfer of the funds to HFM.

On the basis of all this, the Superior Court ordered HFM to turn over $585,000 by December 13, 2022. HFM filed a motion for reconsideration asking that the Superior Court allow HFM to keep $53,458 for certain services that it had provided previously to Mann, but the Superior Court denied this request as well because, essentially, HFM did not timely raise the issue prior to or at the third-party hearing. HFM then appealed, which resulted in the opinion next to be discussed.

After a lengthy explanation of the third-party hearing process, the California Court of Appeals agreed with HFM that the location of the funds in HFM's trust account was not dispositive. Instead, the Court noted that there may be exceptional circumstances where a law firm's own funds may be held in a client trust account, such as where the law firm has billed against the funds but has not yet removed them from the account to pay the law firm's invoice.

If the location of the fund is not dispositive, then what is dispositive? The answer is that the law firm's engagement agreement with the client that describes how the law firm's fee is earned and how the client's funds are to be held is dispositive.

The Court of Appeals turned its attention to HFM's agreement with Mann that HFM would charge a flat fee for its services. Under the California Rules of Professional Conduct, a flat fee cannot be earned on receipt or be nonrefundable. Instead, the fees deposited by the client can only be paid to the attorney either as certain tasks are completed (as the law firm and the client have agreed) or upon the conclusion of the matter.

Here, the Court of Appeals distinguished a flat fee where the client has paid in advance against something known as a true retainer . A true retainer is an amount of money which a client pays to an attorney to make sure that the attorney will be available to handle the client's matter if it arises, but does not compensate the attorney for the attorney's work. One could think of a pure retainer as basically an availability deposit. Unlike a flat fee, a true retainer can be earned upon receipt or made nonrefundable to the client.

Returning to the concept of a flat fee, the Court of Appeals reiterated that a flat fee cannot be deemed to have been earned until certain specified tasks have been completed or the matter is finally concluded. With a flat fee, until the attorney completes the tasks or concludes the matter fully, the client has a right to a refund of the fee, but only if the client chooses to have the fee held in the attorney's client trust account instead of in the attorney's operating account (which is permissible with flat fees only).

Applying all this to the facts of the case before it, the Court of Appeals noted that HFM had utterly failed to present any evidence that it had performed any legal services at all to earn the $585,000 flat fee. Thus, HFM failed to prove that it was the owner of the $585,000 at the time of the levy, which meant that Mann was still the owner of those funds at that time. The Superior Court's finding that HFM had not established its ownership of the $585,000 was thus affirmed.

Having decided that Dickson was entitled to the $585,000 on his levy, the Court of Appeals felt that it did not need to address the Superior Court's second grounds for ruling in Dickson's favor, which was the CUVTA theory, i.e., that Mann had fraudulent transferred the $585,000 to HFM. The Court of Appeals also denied HFM's claim for the $53,458 that it claimed had been earned by its representation of Mann because, as the Superior Court had found, HFM's claim was untimely.

Both the Superior Court and the Court of Appeals found that HFM had failed to prove that it was owed any attorney fees. But let's assume hypothetically that HFM was owed fees by Mann: What would happen then?

The answer is that Dickson's successful levy on Mann's funds held by HFM would not somehow make those fees disappear. Instead, HFM would become an unsecured creditor for those fees, but would be in line to recover only after Dickson's judicial liens were satisfied. In other words, the law firm then goes to the back of the line behind other creditors. Good luck recovering anything when you are behind a $12 million judgment.

How could HFM have protected itself against not being paid for work performed? The answer to that question is easy. HFM should have billed Mann by the hour, and not flat fee, and taken a security interest in Mann's funds that were deposited in HFM's client trust account. This would not have protected the entire $585,000 but at the end of the day it would have assured that HFM would be compensated for the work that it did perform.

The underlying problem here is that the the $585,000 transfer by Mann reeked of the smell of Mann transferring those funds to HFM precisely so that Dickson could not recover against them, i.e., a fraudulent transfer under the CUVTA. Indeed, that was the finding which underpinned the Superior Court's second ground for ruling against HFM. To this end, HFM was probably lucky to have lost the $585,000 by the levy as opposed to a finding under the CUVTA. As I have related in numerous past articles, a transferee to a fraudulent transfer in California can not only lose and have the transfer avoided, but there can be tacked on conspiracy damages, attorneys fees, and even trebled damages under Civil RICO and similar theories.

If not obvious from this article, attorneys who represent debtors can be at extreme risk of not being paid for representing the debtor and, if they are not careful, they can also find themselves on the wrong end of a fraudulent transfer lawsuit. This is why attorneys who sometimes represent debtors (my own practice is about 60% creditor-side and 40% debtor-side) must give a lot of thought to how they are going to be paid. Most debtor attorneys will either require that the client come up with their deposit from exempt funds, such as exempt retirement accounts , or that they be paid from some third-party source such as family or friends. Taking non-exempt money from a debtor is quite hazardous, as illustrated by this case, unless you want to be working for the debtor for free.

The hard truth is that many attorneys do not regularly engage in post-judgment representation and thus are blissfully unaware of these pitfalls. It is a common creditor tactic to smother the debtor's attorney with a lot of work up-front, knowing that the debtor attorney will get a large deposit from the debtor to perform that work, and then hit the debtor's attorney with a levy exactly as Dickson did here. Easy money.

But what about the fact that taking this money may leave a debtor such as Mann without counsel, or at least quality counsel? The reality is that a debtor does not have a right to spend their non-exempt funds for their legal defense. Instead, the net effect of the law is that debtor should instead spend that money paying down the judgment instead of paying for somebody to defend him in post-judgment proceeding. Cruel, possibly, but the law offers very little protection for those who don't pay their judgments other than the statutory exemptions allowed to debtors, and the ability to pay legal defense fees is not one of those.

This is a flaw of many asset protection plans: They protect the assets, but do not provide a means for a debtor to properly fund a post-judgment defense. Too many asset protection plans are concocted with the idea that a creditor will see the plan and simply go away, which does not often happen in real life. To the contrary, defending a debtor's asset protection plan can be very expensive, last a long time, and that contingency must be considered well in advance.

Simply transferring a bunch of non-exempt money to one's attorney (even if the attorney is so foolish to accept it) is not a plan, but little more than a temporary stopover of those funds on the way to the creditor.

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