Bankruptcy and Assignments for the Benefit of Creditors: Sometimes Perfect Together In New Jersey

Article

The Business Advisor

March 16, 2004

A recent New Jersey bankruptcy case demonstrates that a federal bankruptcy case and a state law assignment for the benefit of creditors can complement each other. On November 4, 2003, Curtis Papers, Inc. (“CPI”), executed and filed with a state court in Ohio a Deed Assignment for Benefit of Creditors (“Assignment”). CP Assignment, Ltd. (“Assignee”) was appointed as the assignee. On the same, three of CPI’s creditors (collectively, “Petitioning Creditors”) filed an involuntary Chapter 7 bankruptcy petition against CPI in the bankruptcy court in New Jersey.

The bankruptcy filing stayed the Assignment proceeding. Nonetheless, the parties-in-interest, in fact, formulated a means of addressing the liquidation of CPI’s assets that combined elements of both a bankruptcy case and an assignment proceeding. CPI, the Assignee, the Petitioning Creditors and CPI’s pre-petition lender, Fleet Capital Corporation (“Fleet”), entered into a stipulation authorizing CPI’s continued, albeit limited, use of Fleet’s cash collateral to fund expenditures (e.g., security, maintenance of boilers) necessary to maintain the value of CPI’s assets pending liquidation and to pay certain professional fees. The bankruptcy court approved the stipulation on November 18, 2003.

Meanwhile CPI, Fleet and the Petitioning Creditors reached an agreement to allow the Ohio Assignment proceeding to continue so that the Assignee could expeditiously liquidate CPI’s assets and distribute them, without the delay and expenses inherent in the Chapter 7 process. In that way, parties-in-interest could utilize the knowledge the Assignee had obtained through (a) becoming familiar with CPI’s assets and liabilities; (b) preserving CPI’s assets pending liquidation, and (c) maintaining lines of communication with potential purchasers of CPI’s assets. To that end, on December 5, 2004, CPI and the petitioning creditors filed a joint motion to suspend the involuntary bankruptcy case to allow the Assignment proceeding to proceed. On December 17, 2003, the bankruptcy court entered an order, inter alia, (a) suspending proceedings in the CPI bankruptcy and (b) and setting June 14, 2004 as a status conference date. By the order, the Petitioning Creditors preserved their right to seek the reactivation of CPI’s bankruptcy case, if reactivation would be in the best interest of creditors.

The foregoing demonstrates the manner in which a bankruptcy case and a state court assignment proceeding may be coordinated and the benefits of such coordination. Such coordination may not always be possible, however, especially if a trustee is actually appointed in the bankruptcy case. Moreover, subsequent events in the CPI case demonstrate that conflicts between the creditors and the assignee may derail a coordinated bankruptcy/assignment proceeding. On February 10, 2004, the Petitioning Creditors filed a motion to reactivate CPI’s bankruptcy case, alleging (a) failure by the Assignee to timely respond to their information requests, (b) delays in taking the actions necessary to liquidate CPI’s assets, (c) delays in retaining professionals, (d) inadequate financing, and (e) excessive expenditures. The Assignee, joined by CPI, has opposed the motion, denying the Petitioning Creditors’ allegations. Though contested, the Petitioning Creditors’ motion, which is currently set for hearing on March 22, 2004, highlights some of the more important types of conflict that my erupt between creditors and the assignee and suggests areas requiring attention by assignees.