Fraudulent Transfers + Substantive Consolidation Flashcards
What are the two routes for fraudulent transfer avoidance?
Use the bankruptcy code’s 548 provision
Use state law (still available per 544(b))
What is the scope of the good faith purchaser exception for fraudulent transfers?
Good faith purchasers for value without knowledge are protected to the extent they gave value
What are the different types of illegal dividends?
Transfer of cash, property, or intangible right to the shareholder or assign obligations due from the shareholder back to the shareholder, or cancel debts owed from he shareholder
What is structural subordination?
It’s a transfer to a subsidiary plus the sub taking on new debt that subordinates a parent creditor’s claim to the sub’s new debt
How does a creditor avoid structural subordination?
If done right, Fraudulent transfer law doesn’t help, so get subsidiary guarantees, designate debt incurred by subs as senior debt, designate purchase of stock in subs as a dividend for purposes of the dividend covenant
What does substantive consolidation do?
It collapses parent and subsidiaries which eliminate duplicate or intracompany claims and guarantees.
When is it time to substantively consolidate per Owens Corning?
Either
1) would be a mess to untangle the intercorporate transfers (Commercial Envelope)
2) Creditors actually and reasonably relied on the dissolution of the corporate walls
When is it time to substantively consolidate per Consolidated Rock
Companies are managed with unified operations and direct intervention into subsidiaries
(Justice Douglas Veil Piercing language)
What are the cons of substantive consolidation?
1) It might affect the rights of parties in unexpected ways
2) Posner says that loans can be made to subs at lower cost because of lower diligence and monitoring and this should be protected
What are the advantages of SPVs and Asset Securitizations?
- No post petition interest worries
- No substantive consolidation worries (if true sale)
- Adds cash to the parent’s balance sheet
When is a non-con opinion needed?
When is a true sale opinion needed?
Non-cons evaluate the substantive consolidation risk of a subsidiary, and true sale opinions are relevant to the bankruptcy remoteness of an SPV
What is the statutory authority to substantively consolidate?
There is none! The doctrine of necessity lives on
What is the risk of an SPV?
The court sees through it and calls it a secured loan and drags the SPV into the bankruptcy. This can be evaluated by looking at how much recourse the buyer has against the seller (guarantee)
