Monday, December 6, 2010

FYI: Ill App Ct Says Assignee for the Benefit of Creditors Entitled to Reasonable Compensation Ahead of Perfected Secured Party

The Illinois Appellate Court for the Second District recently held that an assignee for the benefit of creditors was entitled to receive reasonable compensation for services and expenses before the satisfaction of perfected secured interests, because Section 9-102(a) of the Uniform Commercial Code ("UCC") does not transform an assignee for the benefit of creditors into a creditor with a competing security interest for the debtor's collateral.


A copy of the opinion can be found at:


Plaintiff-Creditor obtained a perfected security interest in Defendant-Debtor's collateral on October 22, 2004.  Defendant-Debtor entered into an assignment for the benefit of creditors with third-party intervenor Trustee on November 18, 2008, which provided the trustee "reasonable compensation" for his services and expenses "from the Assets." 


Plaintiff-Creditor first learned of the trust agreement on November 21, 2008.  Plaintiff-Creditor obtained a judgment against Debtor and moved to collect on that judgment.  The trustee intervened, seeking fees and expenses for his duties as assignee.  Plaintiff-Creditor moved for summary judgment against the trustee, asserting that, as a perfected secured creditor under the UCC, it had priority over the trustee, a lien creditor.


The trial court granted summary judgment in favor of Plaintiff-Creditor, and the trustee appealed.  The Appellate Court reversed and remanded, holding that the UCC did not preclude the payment of reasonable compensation to the trustee for his services as assignee in an assignment for the benefit of creditors arrangement.


As you may recall, Section 9-102(a) of the UCC defines "lien creditor" in pertinent part as "an assignee for the benefit of creditors from the time of assignment."  The Plaintiff-Creditor argued that inclusion of an assignee for the benefit of creditors within the definition of "lien creditor" transforms, in the context of assessing an assignee for the benefit of creditor's right to his or her fees and expenses, the assignee into a mere lien creditor with a competing security interest for the debtor's collateral. 


However, the Court disagreed, reasoning that the Plaintiff-Creditor's interpretation of the UCC was illogical and inconsistent with the legislative intent in enacting the UCC, given the role of an assignee for the benefit of creditors. 


The Court noted that, "[i]f assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the task of liquidating assets, and assignments for the benefit of creditors would cease to be available as an efficient method of maximizing the liquidation value of troubled companies."  In addition, the Court noted that the Plaintiff-Creditor's "interpretation would put an assignee in competition with the creditors he or she is bound to serve," which "is an absurd scenario because it transforms a fiduciary into a competing creditor."  Moreover, "an assignment for the benefit of creditors is a common-law vehicle used to liquidate a company's assets, and, pursuant to the common law, the assignee has a right to his or her reasonable fees and expenses." "If the General Assembly had intended to foreclose this common-law right, it would have clearly and explicitly set forth in the statute that a perfected secured creditor such as Creditor has priority over the assignee's right to fees and expenses."


The Court also commented "on the scope of the trial court's calculation of reasonable compensation" on remand.  The "trial court is to take into account that Trustee's compensation shall be based at least in part on the benefits that Creditor received between the date it had notice of Trustee's assignment and the date Creditor notified Trustee to cease his liquidation efforts." The Court reasoned that the Plaintiff-Creditor received certain payments and, by not objecting to the assignment upon notice thereof, Plaintiff-Creditor at a minimum, implicitly accepted the services that Trustee rendered. "In other words, in spite of Creditor's status as a secured creditor, Trustee's notice to the Creditor and the Creditor's implicit acceptance of Trustee's services enable Trustee to collect reasonable compensation for his services" based upon "the concept of quantum meruit."


Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874



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