You Can’t Un-Ring the Bell (or the Assignment): Bankruptcy Court Dismisses Chapter 11 Cases in Favor of a Pending ABC Proceeding

In In re Nussbaum Lowinger LLP,¹ the Bankruptcy Court for the Southern District of New York (the Court) dismissed Chapter 11 bankruptcy cases commenced by two law firms and did so in favor of their assignment for the benefit of creditors proceeding already pending in New York state court. This decision provides useful guidance for creditors, assignees, and debtors evaluating whether to move from a state law assignment for the benefit of creditors to a federal bankruptcy case. Several practical points stand out from the Nussbaum Lowinger decision:

• First, a pending assignment proceeding with a demonstrated track record of investigation, litigation, and recoveries is powerful evidence supporting dismissal of a bankruptcy case in favor of allowing the assignment proceeding to continue. 
• Second, the timing of the bankruptcy case relative to the commencement of the assignment proceeding matters. A bankruptcy case filed shortly after an assignment is accepted, before the state court proceeding has meaningfully progressed, sits in a very different posture than one filed many months later after meaningful progress had already been achieved in the assignment proceeding. The greater the head start of the assignment proceeding, the harder it will be to justify a late pivot to bankruptcy. 
• Third, courts will scrutinize the motives behind a bankruptcy commenced with an assignment proceeding already pending. A bankruptcy filing that appears designed to frustrate specific recovery efforts, rather than to achieve a genuine reorganization or orderly liquidation, invites a bad faith finding under section 1112(b) of the Bankruptcy Code and dismissal of the bankruptcy case. 
• Finally, debtors and their principals should not assume they can unilaterally terminate assignments after filing bankruptcy simply because the assignment agreement appears to provide that right. Indeed, postpetition actions that terminate or modify an existing assignment agreement are generally not ordinary course transactions and terminating such agreements postpetition requires notice, a hearing, and bankruptcy court approval under section 363 of the Bankruptcy Code before the termination becomes effective. 

Background

Mark J. Nussbaum formed two entities to provide legal services, primarily in commercial real estate: Nussbaum Lowinger LLP and its predecessor, Mark J. Nussbaum and Associates PLLC (together, the Debtors). Beyond legal services, the Debtors also ran a lending business, including hard money lending, liquidity enhancement loans, and short-term bridge loans. The Debtors claim that certain escrow funds became depleted after a single client received substantial funds but could not repay them, eventually leaving the Debtors unable to close real estate transactions even where clients had properly escrowed the necessary funds.

ABCMN LLC, a special purpose entity created to serve as the Assignee (the Assignee), tells a starkly different story. It contends the lending operation was in fact a Ponzi scheme run by Mr. Nussbaum and a real estate businessman named Mendel Steiner (who died in January 2025), and that hundreds of millions of dollars deposited into escrow were diverted to Mr. Nussbaum, and to Mr. Steiner and his family under the pretense of real estate investments. Things unraveled in January 2025, when the Debtors ceased operations after their escrow shortfalls came to light following a creditor lawsuit.

Following the shutdown of the firms, Mr. Nussbaum was indicted on felony charges, including grand larceny, resigned from the practice of law, and was disbarred. In June 2025, the Debtors chose to pursue an assignment for the benefit of creditors under Article 2 of the New York Debtor and Creditor Law. Mr. Nussbaum executed a General Assignment for the Benefit of Creditors (the Assignment Agreement) in June 2025, in favor of the Assignee, and in August 2025, a New York state court formally commenced the assignment proceeding (the ABC Proceeding), appointing the Assignee.

Notwithstanding the still ongoing ABC Proceeding, 10 months after Mr. Nussbaum executed the Assignment Agreement, in April 2026, the Debtors, through their newly appointed chief restructuring officer who Mr. Nussbaum selected, filed Chapter 11 bankruptcy petitions, asserting that the ABC Proceeding had “stalled,” making minimal progress towards effectuating asset recoveries or making distributions to creditors while the Debtors continued to be faced with several actions against them that were draining their resources. The Debtors also claimed that the bankruptcy court would be better positioned to address the Ponzi scheme allegations.

Four days after the bankruptcy petition date, the Debtors’ chief restructuring officer sent the Assignee a letter purporting to terminate the Assignment Agreement outright. The Assignee moved to dismiss the Chapter 11 cases and asserted: (1) the Court should abstain from hearing the Chapter 11 cases under section 305(a) of the Bankruptcy Code in favor of the ABC Proceeding pending in New York state court; and (2) the Chapter 11 cases should be dismissed for cause under section 1112(b) of the Bankruptcy Code because of the Debtors’ bad faith in initiating the Chapter 11 cases, the lack of a legitimate bankruptcy purpose in pursuing the Chapter 11 cases, and the Debtors’ lack of authority to institute the Chapter 11 cases.² The Court dismissed the Chapter 11 cases, holding that dismissal was warranted under Section 305 (abstention) and Section 1112 (bad faith).

The Court’s Decision

Although abstention is viewed as an extraordinary remedy, Section 305(a) permits bankruptcy courts to dismiss or suspend cases if the interests of both the debtor and its creditors would be better served outside of bankruptcy. Courts typically consider seven factors to determine whether to dismiss or suspend a bankruptcy case under Section 305(a), including: (1) the economy and efficiency of administration; (2) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (3) whether federal proceedings are necessary to reach a just and equitable solution; (4) whether there is an alternative means of achieving an equitable distribution of assets; (5) whether the debtor and the creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case; (6) whether another insolvency proceeding has progressed so far that it would be costly and time consuming to start afresh under the Bankruptcy Code; and (7) the purpose for which bankruptcy jurisdiction has been sought.

Here, the Court held that the application of these seven factors overwhelmingly favored abstention and dismissal of the Debtors’ Chapter 11 cases. According to the Court, the ABC Proceeding offered an available alternative forum capable of achieving an equitable distribution, and had already produced concrete results over nearly a year, including a claims bar date, extensive investigation and depositions of Mr. Nussbaum, multiple lawsuits including litigation against the estate of the deceased alleged co-conspirator, settlements exceeding $16 million dollars, and default judgments exceeding $300 million dollars. Against that record, the Court rejected the Debtors’ characterization of the ABC Proceeding as “stalled,” calling it a conclusory label unsupported by the evidence, and noted that courts have consistently dismissed bankruptcy cases in favor of assignment proceedings where the assignee has already made significant progress towards resolving the debtor’s obligations.³

The Court also distinguished Nogin Com. LLC,⁴ wherein the Nogin court declined to abstain and dismiss a bankruptcy case under Section 305(a) in favor of a pending assignment proceeding. In Nogin, less than a month had passed between execution of the assignment agreement and the bankruptcy filing, and the state court had not yet even ruled on the motion to commence the assignment proceeding. When declining to abstain, the Nogin court highlighted that “nothing substantial has occurred in the [a]ssignment [p]roceeding to date[;]” and it “is not the case that the [a]ssignment [p]roceeding has gone so far that it would be costly and time consuming to ‘start afresh’ here.” The Court thus distinguished Nogin because here, by contrast, the Assignment Agreement was nearly 10 months old and the state proceeding had been formally pending for more than eight months with substantial results already achieved, making a fresh start in bankruptcy needlessly costly and duplicative.

The Court additionally found cause for dismissal under Section 1112(b) based on the totality of the circumstances, including the presence of bad faith. While some of the traditional badges of a bad faith filing were absent, i.e., the Debtors had multiple assets, an entirely unsecured creditor body, and this was not a two-party secured creditor dispute, the Court held the Debtors commenced the Chapter 11 cases in bad faith because they were not operating, had no employees and no cash flow, and had no reasonable likelihood of reorganizing or emerging from bankruptcy.

Most significantly, though, the Court found the timing and sequence of events prepetition troubling. Prior to the bankruptcy petition date, the Assignee had filed a lawsuit against Mr. Nussbaum’s personal attorney, alleging he was assisting Mr. Nussbaum in diverting assets that should have been turned over to the Assignee. The Assignee agreed to dismiss that lawsuit without prejudice in reliance on promised remedial steps from the attorney’s law firm and Mr. Nussbaum that were never taken. Instead, the Debtors commenced their Chapter 11 cases, which, according to the Court, demonstrated that the bankruptcy filings may have been motivated by “Mr. Nussbaum’s desire to restart the process, with no plausible rationale other than to delay the discovery of additional assets.” The Court also noted with concern that the Debtors had installed a chief restructuring officer with a familial connection to Mr. Nussbaum’s former law partner, and that Mr. Nussbaum purported to terminate the ABC Proceeding and the Assignment Agreement unilaterally rather than seeking relief on notice to creditors or either court. Taken collectively, the Court concluded that the true purpose of the bankruptcy filings was to frustrate the Assignee’s recovery efforts, not to pursue a genuine reorganization.

The Assignee also moved to be excused from any turnover obligations under the Bankruptcy Code. Section 543(d)(2) excuses an assignee from turnover obligations where the assignee was appointed more than 120 days before the bankruptcy petition date, unless turnover is necessary to prevent fraud or injustice, and here, more than 10 months had passed since the assignment date. Even so, the Debtors asserted that the Assignee had to turn over estate assets because the Debtors terminated the Assignment Agreement pursuant to a contractual reservation of rights provision in it that authorized them to do so. The Court rejected this argument on multiple independent grounds, holding that: (1) as a matter of New York law, an accepted assignment for the benefit of creditors becomes irrevocable and cannot be undone without the consent of the state court that approved it; (2) a private contractual termination right cannot override the mandatory nature of Section 543(d)(2); and (3) the purported termination initiated postpetition was invalid under Section 363 as an unauthorized out of the ordinary course transaction.

Conclusion

Nussbaum Lowinger illustrates that the upfront decision of whether to pursue an assignment for the benefit of creditors or a bankruptcy is significant. Parties should evaluate that choice with the expectation that it will, as a practical matter, be treated as final once the assignment proceeding has meaningfully progressed, and not as a reversible first step that can be abandoned for bankruptcy if circumstances change. The later in time a bankruptcy filing comes after an assignment has been accepted, and the more progress the assignee has made, the more a court will view any attempt to switch forums with suspicion, particularly where the timing suggests the filing was motivated by frustration with the assignee’s approach rather than a genuine reorganization purpose. This means that debtors and principals who elect the assignment route should go in with clear eyes: dissatisfaction with the pace or direction of an assignment proceeding is not, standing alone, a basis to pivot to Chapter 11 once the assignee has built a record of investigation, litigation, and recoveries. Courts will not let a debtor use bankruptcy as a do-over merely because the state court process is not unfolding the way the debtor would like.

© 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.