Last month the Delaware Chancery Court sent a clear message to Delaware companies that failure to strictly comply with the Delaware Assignment for the Benefit of Creditors (“ABC”) statute will result in severe consequences, including dismissal.

On December 27, 2023, WMT (an ABC) LLC (the “Assignee”) filed an assignment petition which provided that it had entered into an assignment agreement on March 13, 2023 with WindMIL Therapeutics, Inc. (the “Assignor”). The petition noted that the assignment agreement was attached—it was not. The assignment agreement was only provided to the Chancery Court in response to a scheduling order (the “Initial Order”) entered on January 3, 2024. The Assignee also filed an affidavit in response to the Initial Order and provided two purported valuation opinions that had been obtained by the Assignee. The first was an appraisal stamped “draft” from Redwood Valuation Partners (“Redwood”) dated November 21, 2023, which valued the intellectual property assigned to the Assignee at $409,000 based on a fair market value analysis. The second was an appraisal prepared by Braun Co. (“Braun”) dated November 22, 2023, with a valuation date of October 31, 2023, which offered a speculative $100 value on the intellectual property. 

On March 6, 2024, several months after filing the petition and four-and-a-half months after receiving the appraisals, the Assignee filed a motion (the “Appraiser Motion”) seeking entry of an order retroactively appointing Redwood and Braun as appraisers. In the Appraiser Motion, the Assignee failed to provide any explanation why it chose to obtain appraisals from Redwood and Braun months before asking the Chancery Court to appoint them as appraisers. That same day, the Assignee also filed a motion (the “Bond Motion”) asking the Chancery Court to fix a bond for the value of the assets (as required by 10 Del. C. § 7383) at $152,000, which represented amounts due for tax refunds that the Assignee has collected and the value of intellectual property. As part of the Bond Motion, the Assignee requested that the Chancery Court ignore Redwood’s draft appraisal of the intellectual property on the basis that the licensor of the intellectual property indicated that it would not consent to an assignment of the license rights.

This case, like most other ABC cases, proceeded ex parte, which the Chancery Court found “[h]istorically. . . provide[s] little transparency to creditors, [provides] limited and incomplete information about the initiation of the ABC, and, frequently, fail[s] to comply with the statutory requirements.”[1] The Chancery Court also noted that while practice under the Delaware ABC statute is often referred to as “the wild west of Bankruptcy,” the court has previously encouraged counsel to address shortcomings and to comply with the statute.[2] To bring more transparency to the ABC process, the Chancery Court has issued orders requiring assignees to provide more detailed information and establishing firm deadlines to the extent not otherwise contained in the ABC statute. The Initial Order issued in this case was one such order. 

The Delaware ABC statute is short and consists of only seven sections, and the Chancery Court found that the Assignee had violated at least three of these sections, including:

• 10 Del. C. § 7381 – Requiring the filing of an affidavit of inventory within 30 days of the execution of the assignment agreement. Here, the affidavit was required to have been filed by April 12, 2023, but the Assignee filed the affidavit more than eight months later, on December 27, 2023.
• 10 Del. C. § 7382 – Requiring court appointment of two appraisers before obtaining the appraisals. Here, the Assignee purported to retain appraisers and procure appraisals without first seeking authorization. In fact, the Redwood appraisal was issued one month before the ABC was initiated, had a valuation date of two months before the ABC was initiated, was unsigned and marked as a draft. The Braun appraisal was issued one month before the ABC was initiated and had a valuation date of two months before the ABC was initiated. It offered a “speculative value” of $100 for the Assignor’s patents and intellectual property. 
• 10 Del. C. § 7383 – Requiring the court to fix a bond after the appraisers submit their appraisals. Here, the Assignee sought approval of a bond contemporaneous with the appointment of appraisers who are tasked with appraising the assets subject to the bond.

The Assignee provided no explanation for any of these statutory violations. Because the Assignee failed to comply with the statutory requirements under the Delaware ABC statute, the Appraiser Motion and Bond Motion were both denied, and the petition was dismissed. Vice Chancellor Fioravanti presided over the WindMIL Therapeutics case, and his ruling here followed his recent ruling in Aeolus Pharmaceuticals, Inc. where he also dismissed the petition for failure to comply with the ABC statute.[3] 

Parties contemplating a Delaware ABC proceeding should take note. Although arguably less detailed and onerous than the statutory requirements of a liquidation under Chapter 7 of the Bankruptcy Code, the ABC statute has its own set of requirements. And, as evidenced by the dismissal of the WindMIL Therapeutics petition, compliance with the statue is being enforced. Failure to comply with the statute may result in serious consequences, including dismissal of the assignment petition, potentially leaving Chapter 7 as the only liquidation alternative. 

[1] See In re WindMIL Therapeutics, Inc., To: WMT (an ABC) LLC, C.A. No. 2023-1294 at 6 (Del. Ch. March 13, 2024).

[2] Id.

[3] In re Aeolus Pharmaceuticals, Inc., C.A. No. 2018-0212-PAF, at 5-6 (Del. Ch. Oct. 20, 2023) (dismissing ABC proceeding for failure to comply with the statutory requirements of Delaware’s ABC statute).