The case is Wells v. McCallister, Case No. 21-1448 in the United States Supreme Court.

The question presented is:

• whether a debtor’s homestead exemption, existing on the date of bankruptcy filing, can vanish if the debtor sells the homestead during the bankruptcy and does not promptly reinvest the proceeds in another homestead.

The Petition for writ of certiorari explains:

For some reason, there is a fascination out there (not sure where, exactly) with having every assignment for benefit of creditors (“ABC”) supervised by a court from the get-go. 

This fascination suggests that every ABC effort requires court action and judicial approvals, from the beginning and throughout the assignment, to assure that everything about the ABC and its administration is on the up-and-up.

Startling and Puzzling

This fascination is both startling and puzzling.  Here are some reasons why.

In its Siegel v. Fitzgerald opinion, the U.S. Supreme Court declares that disparate quarterly fee amounts between U.S. Trustee and Bankruptcy Administrator districts are unconstitutional, under the uniformity requirement of the U.S. Constitution’s bankruptcy clause.

The most recent fallout from that opinion is the following docket entry by the U.S. Supreme Court in a different case with the same issues:

Illinois follows the common law of assignments for benefit of creditors (“ABC”): a non-judicial, trust-like process for liquidating a failed business.

That ABC process can work, hand-in-hand, with the Bankruptcy Code. The case of In re Computer World Solutions, Inc., Case No. 07-21123, Northern Illinois Bankruptcy Court, shows us how.

FACTS

Debtor is an importer and distributor of computer monitors, televisions and other electronic products, owing $20 million to Bank, which holds a first-lien on virtually all of Debtor’s assets.

Many years ago, back when mediation is a rarity in bankruptcy disputes, I asked an old-timer this question:

Why is the bankruptcy system a lagging adopter of mediation?”

A Surprising Answer

The old-timer gave this surprising answer:

“At the time of the Bankruptcy Code’s enactment, the bankruptcy judge was viewed as a mediator in the judge’s own court.”

The old-timer added this.  When the Bankruptcy Code was enacted:

The Supreme Court’s long-awaited decision in the Sequana case (handed down on 5 October 2022)^[1] is the first time that the UK’s highest court has been asked to consider the proposition that directors are, in certain circumstances, under a duty in respect of creditors’ interests as distinct from shareholders’ interests.

The key takeaway points from this ‘momentous decision for company law’ (the words of Lady Arden who gave one of the leading judgments) are:

You’ve gotta admire the Debtor in In re Deirdre Ventura.

Debtor has been fighting to save a Bed and Breakfast business through bankruptcy: beginning in 2018 with a regular Chapter 11, and then struggling to get into Subchapter V.

Debtor’s is a you-can’t-make-this-stuff-up story of persistence through adversity.

Debtor has survived, for example, an inexplicably-bad appellate opinion refusing to allow Debtor’s Subchapter V election. The appellate opinion declares:

Assignment for benefit of creditors (“ABC”) has existed for centuries under the common law of England and the United States. And the ABC process has worked well under that common law!

ABC Function

ABC has been an effective tool in the toolbox of debtor and creditor remedies for resolving financial stress. Specifically, ABC allows a failing business to shut down with efficiently and credibility:

In the years since its independence, Ukraine's public and private sectors have faced one crisis after another. Notwithstanding different factors causing distress and incomparable peculiarities of each, restructuring has always remained one of the key mechanisms to make it through these difficult periods and get back on track. This includes the current crisis due to Russia’s invasion of Ukraine. Even in the present unprecedent environment, inaction is not a solution.

The interrelationship between an assignment for benefit of creditors (“ABC”) proceeding and an involuntary bankruptcy filing, for the same debtor, is governed by various portions of the Bankruptcy Code.

But that relationship remains ill-defined, nonetheless.

What follows is an attempt to summarize a bankruptcy court opinion dealing with that relationship. And here is two of its main conclusions: