What Is an Asset Liquidation Agreement (ALA)?
An asset liquidation agreement (ALA) is a contract between the Federal Deposit Insurance Corporation (FDIC) and a company that agrees to manage the sale of the assets of a failed financial institution.
ALAs outline the types of fees that the company can receive compensation for and the value of distressed assets that the company is responsible for handling.
These contracts are also referred to as Partnership Dissolution Agreements,
- An asset liquidation agreement (ALA) spells out the terms and obligations for third-party contractors who acquire the assets of a bank in liquidation.
- The terms of the ALA terms are defined by the FDIC, which seeks out banks willing to acquire the assets of failed banks to ensure a quick and orderly resolution.
- ALAs were created in the 1980s to help resolve the savings and loan crisis.
Understanding an Asset Liquidation Agreement (ALA)
Asset liquidation contracts first appeared during the 1980s, at a time when the U.S. savings and loan industry was suffering a financial meltdown. More than 1,000 savings and loans companies, nearly a third of those in existence in the U.S., had failed by 1989.
The FDIC wanted to resolve failed banks and financial institutions as quickly as possible in order to safeguard the interests of depositors, other financial institutions, and the overall economy. At the same time, the FDIC wanted to protect the federal deposit insurance fund. That meant that it had to sell the assets of the failed banks for the highest price it could obtain.
ALAs were designed to maximize the present value of net cash flows that the FDIC could recover through the sale of distressed assets.
Asset liquidation agreements are now used routinely to dissolve business partnerships.
Other Uses for ALAs
This type of contract is now used by business owners seeking to dissolve a business partnership or by business owners whose partners wish to exit the businesses.
Partners who want to go their separate ways must file a statement of dissolution to the Department of Treasury and with the county clerk's office of every county in which the business has routinely operated. Both partners must also agree to publish at least two notices that announce the liquidation of the business.
Fees and Incentives of ALAs
Asset liquidation agreements were initially offered only to asset management affiliates of banks that were interested in acquiring the assets of the liquidating bank. Ultimately, any private sector asset management company could take part.
The agreement generally allows contractors to be paid for their overhead expenses and expenses related to the handling of the assets. These expenses included taxes and reports as well as legal and consulting fees.
The incentive fee is a major component of the fee structure of the ALA. The fee is scaled, with the contractor receiving a higher fee for achieving a high level of net collections.