In my last post — here — I listed some of the advantages a privately held, financially distressed company might realize by choosing to liquidate by way of a state law ABC, or assignment for the benefit of creditors, instead of a federal bankruptcy proceeding.
In this post, I provide a recent real-life example of how the ABC process works.
The Debtor — LeisureLink, Inc.
LeisureLink, Inc. used its proprietary software algorithms and hospitality industry network connections to provide operators of vacation rental, hotel timeshare and resort lodging properties an online platform to increase their reservations and bookings through online travel agents, tour operators, travel aggregators and other distribution systems. LeisureLink acted as an intermediary to collect receivables from customers (guests) and subsequently remit the proceeds to the operators (after deducting LeisureLink’s fee). LeisureLink was a high-flying Delaware corporation based in Salt Lake City in January 2016 when it closed a $17 million round of funding with a small group of California, New York and Texas funds to scale up LeisureLink’s operations to meet growing demand for LeisureLink’s services. But within a few months, LeisureLink’s business operations began to falter beneath the weight of an expanding customer base too large for LeisureLink’s service capacity. Its hospitality property operator clients began to notice longer and longer lag times between the dates their guests’ stays ended and the dates the operators collected payments from LeisureLink. Some operators reduced or discontinued use of LeisureLink’s services. Like many companies facing liquidity crises, LeisureLink tried at first to survive through cost-cutting measures including employee layoffs and freezing expenditures, but quickly shifted into a search for a buyer. Unable to sell the entire company, LeisureLink in August 2016 sold off the most desirable portion of its business to a competitor in the resort industry. It tried to sell the remainder of its business to non-specialized hospitality booking services but rumored deals fell apart. Without formal prior warning, LeisureLink in late September sent letters to its clients announcing that it would be immediately ceasing operations, terminating all of its employees, and shutting its online platform.
LeisureLink’s abrupt shutdown left its clients — the operators of hospitality properties — holding the bag as unsecured creditors. They had honored the bookings of guests made through LeisureLink, which had collected payments from those guests for their stays. But LeisureLink went out of business without passing on millions of dollars in those payments to the operators.
Choosing an ABC instead of Bankruptcy
LeisureLink did not enter bankruptcy proceedings. instead it chose to use an Assignment for the Benefit of Creditors under Delaware law to effect an orderly disposition of its assets, with the proceeds to be distributed among its creditors in accordance with their respective legal priorities.
The documents referenced below may be found at http://www.proofofclaims.com/leisurelink/documents/.
An ABC Step by Step
LeisureLink engaged Sherwood Partners, a California-based company providing services in connection with corporate restructurings, ABCs and receiverships, as its ABC advisor and manager. Sherwood formed a Delaware limited limited liability company (Newco) named “LeisureLink (assignment for the benefit of creditors), LLC” to serve as the assignee of LeisureLink’s assets.
On September 23, LeisureLink and Newco entered into a General Assignment instrument (just six pages long) assigning to Newco “in trust, for the benefit of Assignor’s creditors generally, all of the property of Assignor of every kind and nature and wheresoever situated ….” and authorizing Newco to sell the property on terms it considered fit, paying the net proceeds to LeisureLink’s creditors pro rata after deducting amounts paid to release liens, to pay priority debts as required by law, and expenses (including the fee of Newco and its attorneys).
Newco sent a one page “Notice of Assignment” to the creditors and equity holders of LeisureLink on September 28. Newco fixed March 21, 2017 as the deadline for any interested party to file a proof of claim using the single sheet “Proof of Claim” form (documentation evidencing and supporting the claim had to be attached separately) and instructions prepared by Sherwood and available online at the link mentioned above. Although set up for an ABC, the Proof of Claim form and its instructions were clearly derived from and similar to the forms of those documents typically used in federal bankruptcy proceedings. Sherwood designed the Proofs of Claim to be prepared, signed and submitted online, but also allowed creditors and other interested parties to download the Proof of Claim form onto paper for completion, manual execution and submission by mail or fax to the assignee at Sherwood’s office.
From the perspective of an unsecured creditor, an ABC is a process that gets underway quickly with minimal documentation. From the perspective of the debtor, it’s a fast-moving process largely subject to the control and timing of the debtor (although the debtor must obtain the authorization of its directors and stockholders and would almost always have to obtain the consent of its secured creditors). Unfortunately for every interested party, it’s a process well-suited to a collapsing business like LeisureLink, where there’s little cash left for paying creditors or for administering a winding up and liquidation.