On December 17, 2015, the Eleventh Circuit Court of Appeals issued a decision of first impression, finding that an assignee for the benefit of creditors under Florida’s Assignment for the Benefit of Creditors statute (Fla. Stat. chap. 727, et. seq.) (“ABC”), did not obtain the power to file a bankruptcy petition for the assignor when the assignor executed the form of assignment provided for in the state statute, Fla. Stat. § 727.104, in favor of the assignee.
The case arose out of the operations of Nica Holdings, Inc., which owned the stock of a Nicaraguan company that operated a fish farm. Following financial difficulties, Nica executed an assignment for the benefit of creditors in favor of Kenneth Welt. Although Mr. Welt attempted to sell the fish farm to one of two competing bidders, his efforts were stymied by the other competing bidder, and ultimately the fish farm closed and rendered Nica’s stock worthless.
That left the ABC estate with only a malpractice claim against Mr. Welt’s counsel, and a separate claim brought by Mr. Ullrich, one of the former shareholders and the buyer who was unable to purchase the fish farm, against Mr. Welt for damages and his removal as assignee.
Mr. Welt purported to commence a chapter 7 bankruptcy case for Nica, thereby relinquishing control of the assets of Nica to a chapter 7 trustee. Mr. Ullrich moved to dismiss the bankruptcy case, on the grounds that Mr. Welt lacked authority as assignee to commence the case. The bankruptcy court denied the motion.
Thereafter, the chapter 7 trustee moved separately to settle both the action against Mr. Welt for damages, in exchange for a release and immunity, and the malpractice claim against the former assignee’s counsel. The bankruptcy court approved both motions, over the objections of Mr. Ullrich. The district court affirmed the bankruptcy court’s orders approving the settlements.
On appeal from the district court’s order approving the settlement of the claim against Mr. Welt, the Eleventh Circuit considered two issues. First, whether the appeal was equitably moot based upon the appellee’s argument that the settlements had been consummated, and second, whether the bankruptcy court had subject matter jurisdiction based upon the appellant’s argument that Mr. Welt lacked authority to file the bankruptcy case.
On the issue of equitable mootness, the Eleventh Circuit noted that this type of argument is generally made in the context of chapter 11 bankruptcy cases in which third parties unassociated with the bankruptcy case, such as a third party buyer or unsecured creditors, who have received property or cash that would have to be recovered if the settlement was undone. By contrast, the court found that in a chapter 7 case, in which the only parties who would be affected by the settlement being undone were parties intimately involved with the bankruptcy case and related adversary proceedings, the doctrine of equitable mootness was inapplicable. As a result, the Eleventh Circuit found that the settlement order from which the appeal was taken was not equitably moot.
The Eleventh Circuit then determined that the issue of subject matter jurisdiction required that the bankruptcy case be dismissed based upon the lack of authority to file by Mr. Welt as assignee of Nica’s assets. The assignor had utilized the statutory form of assignment which provides for assets to be assigned to the assignee for liquidation purposes, and such attendant rights necessary to accomplish the liquidation of those assets. The Eleventh Circuit concluded that those rights did not include the right to file a bankruptcy case on behalf of the assignor, without an express statement to that effect. The statutory form of assignment did not contain that authorization, and therefore, Mr. Welt did not have the authority file a bankruptcy case for Nica.
In reaching its conclusion, the Eleventh Circuit noted that an ABC and a chapter 7 bankruptcy case were alternative procedures to accomplish the liquidation of assets. When an assignor has chosen an ABC to facilitate the liquidation of assets, absent specific authorization, the assignee is without the power to choose an alternative method of liquidation of the assets of the ABC estate.