When Involuntary Bankruptcy Follows an ABC

An assignment for the benefit of creditors (ABC) is a state-law alternative to bankruptcy proceedings whereby a financially distressed business transfers its assets to a third-party fiduciary (an assignee), who liquidates those assets and distributes the proceeds to creditors. An ABC provides speed and flexibility, but — especially in non-judicial ABC states (including Illinois) — there is less transparency into the process than in a public bankruptcy proceeding.

Creditors may challenge and disrupt an ABC by filing an involuntary bankruptcy petition, which brings the debtor under the jurisdiction of the bankruptcy court and results in the appointment of a neutral trustee upon the order for relief. A bankruptcy trustee has significant statutory powers that may be unavailable to the assignee, which include investigating the debtor’s financial affairs and unwinding certain pre-bankruptcy transfers.

Because an ABC and involuntary bankruptcies may be pending at the same time, bankruptcy courts are called upon to determine which process is in the best interest of creditors and will continue and which will be set aside. This article explores how bankruptcy courts evaluate motions to dismiss or abstain from hearing involuntary petitions when an ABC is already underway, and what factors courts have found persuasive in determining whether an ABC will be allowed to proceed or the bankruptcy will supersede.

Why Creditors May File an Involuntary Bankruptcy After an ABC Begins

Under section 303 of the Bankruptcy Code, at least three creditors may join together to file an involuntary petition if they are owed at least $18,600 and the debtor is generally not paying its debts as they come due.

Creditors may seek to initiate an involuntary bankruptcy proceeding even after an ABC has commenced if they believe, among other things, that: (a) the ABC process disproportionately benefits insiders or secured creditors; (b) a bankruptcy trustee’s investigative and avoidance powers may uncover improper conduct or increase recoveries; and/or (c) greater transparency and formal oversight are necessary to protect creditor interests.

Assignees overseeing an ABC may seek to dismiss the involuntary bankruptcy or request that the court abstain from hearing the petition pursuant to section 305 of the Bankruptcy Code. Courts are more likely to rule in favor of the assignee when the ABC has already substantially progressed, when the process is efficient and in the best interests of creditors, and when there are no credible allegations of misconduct, mismanagement, or preferential treatment by the debtor. In addition to the foregoing, courts may consider several factors, including the stage of the ABC, the nature and extent of secured claims (including whether sufficient unencumbered assets exist for a trustee to administer), and whether the ABC is likely to result in a meaningful distribution to creditors without the added cost and complexity of bankruptcy.

Recent Case Studies: In re Nogin Commerce LLC and In re Pure Prairie Poultry, Inc.

In In re Nogin Com. LLC, 670 B.R. 711 (Bankr. S.D.N.Y. 2025), creditors filed an involuntary bankruptcy petition twenty-four (24) days after the debtor initiated an ABC. The creditors claimed that the debtor diverted funds to its parent company prior to the ABC and failed to provide adequate notice of the ABC to key creditors. The assignee moved to dismiss the bankruptcy case, arguing that the ABC was already in progress and that asset sale negotiations were underway. The court denied the motion and kept the case in bankruptcy, finding that the ABC had not meaningfully progressed, that important creditors were unaware of the ABC, and that a bankruptcy trustee would be better positioned to investigate any alleged misconduct or pre-petition transfers.

In contrast, the court in In re Pure Prairie Poultry, Inc., No. BR 24-01098, 2025 WL 419414 (Bankr. N.D. Iowa Feb. 5, 2025), granted a secured lender’s motion to dismiss the bankruptcy case after an ABC was filed (which the assignee supported). In granting the motion to dismiss, the bankruptcy court noted that the ABC was well underway, despite being only seventeen (17) days old, and that the assignee was well suited to liquidate the debtor’s assets. Importantly, the court found that the debtor’s assets were fully encumbered and that there would be little or no value for unsecured creditors. Finally, the court determined that bankruptcy would simply impose unnecessary administrative costs, further eroding any value left for creditors.

Strategic Takeaways

• Timing is critical: Courts are more likely to defer to an ABC if it is already meaningfully underway, the assignee has taken steps to liquidate assets, and creditors have been informed of the ABC. Conversely, for unsecured creditors seeking to keep an involuntary filing under the jurisdiction of the bankruptcy court, it is important that they file an involuntary petition as soon as possible after the commencement of the ABC.
• Substance over form: Courts will scrutinize whether the ABC is genuinely serving creditor interests or merely shielding insiders and benefiting secured lenders.
• Cost-efficiency and practicality: Courts may be more likely to allow the ABC to proceed if the bankruptcy process will add unnecessary expense without improving outcomes.

Questions about a challenged ABC? Reach out to Sean Williams, Lisa Vandesteeg, or another member of LP’s Financial Services and Restructuring Group.