Standardizing State-Level Liquidations: The New Uniform Assignment for the Benefit of Creditors Act

Small- and medium-sized enterprises (SMEs) are the backbone of the American economy, and the approximately 30 million SMEs in the U.S. have accounted for nearly two-thirds of new private sector jobs in recent decades. Some of these SMEs may, regrettably, encounter financial distress and need to liquidate to pay their creditors. Often, federal bankruptcy cases can be too expensive for SMEs. Moreover, some SMEs in the cannabis industry may be precluded from utilizing the federal bankruptcy process. An assignment for the benefit of creditors (ABC), a voluntary, company-initiated state law alternative to liquidation under the U.S. Bankruptcy Code (the Bankruptcy Code), has emerged as an attractive alternative to bankruptcy because it is often more flexible, faster, and cheaper than bankruptcy, yielding higher returns for creditors.

Unfortunately, state laws addressing ABCs vary appreciably from jurisdiction to jurisdiction and often lack detail and concrete guidance for the distressed SMEs who might benefit from the process. These material variations in this often underdeveloped area of state law, among other reasons, may cause ABCs to be underutilized. Recently, however, the Uniform Law Commission (ULC), a body of commissioners charged with studying and reviewing the laws of states to determine which might benefit from greater uniformity and who drafted laws such as the Uniform Commercial Code, approved the Uniform Assignment for the Benefit of Creditors Act (the UABC),¹ designed to standardize ABC procedures and bring uniformity across the country to the ABC process to promote its use.

This article describes the varied state-law landscape that propelled the ULC to draft and ultimately adopt the UABC, and then summarizes some of the key substantive and mechanical features of conducting ABCs under the UABC, including descriptions of the benefits and limitations of liquidating through an ABC.

The Existing ABC Landscape

In an ABC, a financially distressed company (the Assignor) transfers, or assigns, its assets to a third-party fiduciary (the Assignee) pursuant to an assignment agreement. The Assignee is then charged with liquidating those assets and distributing the proceeds to the Assignor’s creditors in an orderly manner based on the priorities established under applicable law. ABCs may be governed by state statutory law, common law, or a mix of both, and the applicable law and the amount of court oversight imposed on the process varies depending on the state in which the Assignor commences the ABC.

Several states have statutory schemes governing the ABC process, ranging in coverage from significantly detailed procedural and substantive law, including provisions relating to notice, avoidance, priority, and claims adjudication,² to statutory provisions that do nothing more than authorize ABCs, without legislating specifics concerning the ABC process. On one hand, for example, Florida’s ABC statute takes a maximalist approach, detailing the procedures that must be followed to initiate an ABC, providing a clear priority scheme and rules for the claims process, and granting the Assignee certain avoidance powers. Delaware’s ABC statute, on the other hand, takes a minimalistic approach, leaving much of the detail of the process to the parties with the expectation that the parties will set out more detail in the assignment agreement. Other states, including California and Illinois, partially or completely leave ABCs to common law. States that provide for ABCs are also divided on whether to require court supervision over the ABC process. States such as Delaware, Florida, Michigan, and Minnesota require a court-supervised process. Other states, such as California and Illinois, allow ABCs to proceed wholly out of court.

The UABC tries to address these material variations in often underdeveloped state ABC laws, thereby, hopefully, providing uniformity and consistency across jurisdictions and making ABCs a more attractive alternative to liquidating through bankruptcy.

The UABC

The UABC does not require court supervision over the ABC process, although it does allow the enacting state the discretion to select an appropriate court (the Identified Court) to hear and resolve disputes arising out of the ABC. The ULC’s adoption of this approach should afford SMEs the ability to maneuver through an ABC in a more efficient, faster, and less expensive manner than they otherwise would be able to liquidate in bankruptcy or in a judicially supervised ABC, creating more value for their creditors.

The out-of-court liquidation process under the UABC begins with an assignment agreement by the Assignor and Assignee. That concept is not particularly unique. It is somewhat unique, however, that the UABC sets forth the minimum qualifications for an Assignee to serve in that role and the minimum contents of the assignment agreement.

While the UABC flexibly allows any individual or entity to serve as the Assignee, to do so, the Assignee must be disinterested, meaning neither the Assignee nor its affiliates or insiders may be creditors, affiliates, or insiders of the Assignor. The UABC also addresses the minimum contents for the assignment agreement, and provides that it must: (1) contain the name and address of the Assignor and Assignee; (2) transfer, or provide for the transfer, to the Assignee of all of, not just some of, the Assignor’s property (that is eligible for assignment);³ (3) describe the assigned assets; (4) provide for distribution of the proceeds of the liquidated assigned assets; (5) describe the Assignee’s fees; and (6) include a representation by the Assignor, under penalty of perjury, that all of its eligible property has been assigned.⁴ Of course, the assignment agreement may and often should address other additional issues, such as the maintenance of insurance during the ABC and dissolution of the Assignor following completion of the ABC.⁵

The UABC goes on to identify the duties imposed on the Assignor and the Assignee following the effective date of the assignment. Generally, the Assignor must, among other things, cooperate with the Assignee during the administration of the assignment estate, inform the Assignee about its creditors and employees and how to contact them, identify the Assignor’s assets, and designate a representative to be available in case other documents need to be executed for the ABC. The UABC imposes more significant, substantive duties on the Assignee by designating the Assignee as a fiduciary with several core fiduciary duties,⁶ including the duty of loyalty (which includes the duty to manage the assignment in good faith), the duty to maximize distributions, and the duty to wind up the ABC in a manner compatible with the best interests of the assignment estate and creditors. The Assignee also has other enumerated duties, including: (1) segregating funds of the assignment estate; (2) maintaining appropriate business records; (3) paying the assignment estate’s administrative expenses from unencumbered assets; (4) providing to creditors every six months a summary of the assignment estate’s assets, liabilities, and expenses; and (5) providing a final accounting to creditors after the ABC concludes.

The Assignee’s duties come with specific, substantive powers, including, among other things, the power to: (1) operate the Assignor’s business and preserve the assignment estate; (2) incur debt and pay expenses related to the ABC; (3) assert any claim or defense relating to the estate that the Assignor could have asserted; (4) continue any litigation and settle any claim; (5) engage professionals; (6) collect on and dispose of assets of the assignment estate; (7) redeem collateral for any secured obligation; (8) abandon an assigned asset; and (9) if a creditor who filed a proof of claim could have avoided a transfer or the incurrence of an obligation by the Assignor under applicable voidable transactions law, the Assignee has the exclusive power to avoid that transfer or obligation for the benefit of the assignment estate,⁷ subject to certain defenses the target of the claim may assert.

The Assignee also must establish a claims bar date that is between 90 and 210 days after the effective date of the assignment agreement, ensuring that the claims resolution process moves forward in a reasonably expeditious manner, and a clear process for creditors to submit proofs of claim. Creditor proofs of claim, in turn, must contain certain specific pieces of information to enable the Assignee to properly evaluate the claim, including, among other things, the amount of the claim, the nature of the claim, the assets securing the claim (if any), and copies of records upon which the claim is based. Creditors should note, however, that submitting a claim constitutes the creditor’s consent to the jurisdiction of an Identified Court, if judicial intervention is sought.

Eventually, the Assignee must make distributions to creditors on account of their claims, and under the UABC must do so pursuant to the following general priority scheme:

• First, unless otherwise agreed with the creditor, secured creditors receive the proceeds of their collateral if they hold an unavoidable perfected security interest in collateral consisting of assigned assets.
• Second, payment of the Assignee’s fees, the fees of the Assignee’s professionals, and other administrative expenses of the ABC.
• Third, payment of claims entitled to priority under federal law.
• Fourth, payment of wages, salaries, and commissions earned up to a fixed period,⁸ before the ABC was made in an amount equal to the greater of (1) the amount allowed as a priority claim under the Bankruptcy Code and (2) the amount allowed as a priority claim under applicable non-bankruptcy law.
• Fifth, payment of other unsecured claims entitled to priority.
• Sixth, payment of unsecured claims not entitled to priority.
• Seventh, payment of late-filed claims.
• Eighth, if proceeds remain, payment as provided in the assignment agreement.⁹

Secured creditors with unavoidable liens perfected prior to the ABC should note that, based on the priority scheme established by the UABC, Assignees may attempt to negotiate for secured creditors to subordinate all or a portion of their liens to the expenses of the assignment estate, not unlike what debtors do in bankruptcy when requesting use of cash collateral to fund operations and impose a professional fee carve out. To properly consider such a request from the Assignee, secured creditors should ask for a budget and may want to consider requiring certain milestones that the Assignee must meet to continue using the secured creditors’ cash collateral.

Conclusion

The ULC approved the UABC on October 20, 2025, and recommended it for enactment in all the states. Since then, Nebraska has enacted the UABC, and state legislators in Alabama, Arizona, Utah, Iowa, Oklahoma, Colorado, and West Virginia have introduced the UABC into their respective state legislatures. Continued adoption across the country will promote uniformity, predictability, and consistency, with more developed case law, and ultimately make the ABC process a more attractive option in a distressed SMEs toolkit.

Indeed, liquidating SMEs through an ABC may be the most advantageous strategy where the goals are to accomplish one or more of the following: (1) wind down the SME quickly and in a manner designed to minimize negative publicity, (2) limit potential liability for directors and management by largely eliminating their responsibilities in connection with the winding down of the SME and the disposition of its assets,¹⁰ (3) replace the high administrative expenses and burdens that would ordinarily arise in a bankruptcy case¹¹ for the materially less administrative expenses and burdens associated with ABCs, and (4) provide the SME with the ability to hand-select the person or entity charged with liquidating it.

Of course, ABCs are not without their disadvantages and limitations. For example: (1) Ipso facto clauses that are common in contracts and provide that the contract will terminate upon the occurrence of an insolvency event are enforceable in an ABC, while they are not enforceable in bankruptcy, (2) ABCs do not provide for an automatic stay similar to the one the Bankruptcy Code so provides, meaning creditors may continue collection actions during the ABC process, (3) anti-assignment provisions in contracts that prohibit assignment without counter-party consent are enforceable in an ABC, but not in bankruptcy, (4) Assignees may not sell assets in an ABC “free and clear” of all liens and claims without consent from secured lenders, or full payoff, unlike in a bankruptcy where such sales free and clear of all liens and claims are permitted, provided one of certain conditions is satisfied,¹² and (5) unsecured debt is not discharged in an ABC; instead, unsecured claimants retain their claims against the assignment estate and, because there are no “free and clear” sales, the acquiring entity may be subject to successor liability claims from unsecured claimants, among others.

In many instances — e.g., where the SME’s most valuable assets are contracts that may not be monetized because they contain anti-assignment provisions or are subject to termination upon an insolvency event (like the commencement of a bankruptcy or an ABC) — ABCs may not be the most advantageous path to maximizing value for creditors. Distressed SMEs (and their secured lenders) should, however, consider the increased viability of ABCs as efficient, cost-effective alternatives to liquidating under either Chapter 7 or Chapter 11 of the Bankruptcy Code in certain instances where the advantages of the ABC process outweigh its limitations.

© Arnold & Porter Kaye Scholer LLP 2026 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.