The Not-So-Remote Possibility Of The Bankruptcy Of A Bankruptcy Remote Entity

A bankruptcy remote entity is a special-purpose vehicle (or special purpose entity) ("SPV") that is formed to hold a defined group of assets and to protect them from being administered as property of a bankruptcy estate. See Paloian v. LaSalle Bank Nat'l Assn (In re Doctors Hospital of Hyde Park, Inc.), 507 B.R. 558, 701, 702 (N.D. Ill. 2013). Bankruptcy remote entities are intended to separate the credit quality of assets upon which financing is based from the credit and bankruptcy risks of the entities involved in the financing. See id. However, "bankruptcy remote "does not necessarily mean "bankruptcy proof." Lenders should recognize the bankruptcy risks that cannot be eliminated, even if the borrower is bankruptcy remote entities.

Bankruptcy Remote Entities

To achieve bankruptcy remote status, the borrower must be legally separate from all affiliated entities. Id. Amongst other things, the borrower should have its own organizational documents, maintain all corporate formalities, maintain separate books and records, maintain separate accounts, prepare separate financial statements, avoid commingling of its assets with those of any other person, act solely in its own corporate name and through its own officers and agents, and conduct only arm-length transactions with affiliated entities. Id. The SPV should also be prohibited from incurring debt or other obligations, and limited in its purpose and the activities in which it may engage. The SPV's sole asset is frequently the property securing a loan or debt obligation and its sole purpose should be to own and manage that property. The corporate documents may also attempt to create impediments to a bankruptcy filing. For example, they may impose limitations on the directors ability to authorize a bankruptcy filing. These restrictions reduce (but do not eliminate) the risk that the SPV will file for bankruptcy, be forced into bankruptcy, or otherwise be adversely affected by a bankruptcy of its affiliates.

Bankruptcy Remote Entities May File for Bankruptcy

Despite restrictions on the ability to file for bankruptcy, bankruptcy courts have permitted remote entities to file for bankruptcy over their lenders' objections. For example, in General Growth Properties Inc., 409 B.R. 43 (Bankr. S.D.N.Y. 2009), the debtors comprised a large commercial real estate enterprise. The debtors' affiliated entities included numerous bankruptcy-remote SPVs. The lenders believed that the SPVs were bankruptcy-proof...