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Presenting a live 90-minute webinar with interactive Q&A
Fraudulent Conveyance Exposure for
Intercorporate Guaranties, Integrated
Transactions and Designated-Use Loans Navigating the Contours of Section 548 Reasonably Equivalent
Value Defense in Complex Lending Transactions
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, JANUARY 4, 2017
Michael D. Fielding, Partner, Husch Blackwell, Kansas City, Mo.
Michael W. Kaufman, Robinson & Cole, Stamford, Conn.
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Fraudulent Conveyance Exposure
for Intercorporate Guaranties,
Integrated Transactions and
Designated-Use Loans
Navigating the Contours of Section 548
Reasonably Equivalent Value Defense
in Complex Lending Transactions
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© 2016 Husch B lack we l l LLP
Discussion Topics I. Overview of types intercompany guaranties and
integrated transactions at risk
II. Fraudulent transfer analysis
A. Reasonably equivalent value in multi-party transactions
B. Timing of guaranty and the financial condition of the guarantor
III. Loans supported by intercorporate guaranties
IV. Integrated transactions and designated-use loans
V. Best practices for lenders to establish reasonably equivalent value
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I.
Overview of Types
Intercompany Guaranties
and
Integrated Transactions at Risk
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Sub.
Parent
Debtor Sis.
Corp.
Types of Guarantees
Downstream
Cross-stream
Upstream
Cross-stream Sis.
Corp.
Downstream
Sub.
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Downstream Guarantees
This is where a parent guarantees the obligations of its
subsidiaries.
In a secured transaction, parent holding companies are
customarily required to pledge the stock of their borrower
operating companies.
That pledge is usually accompanied by a guaranty.
Downstream guarantees are also common in situations
where a lender requires a personal guaranty from the
principal of a business.
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Upstream Guarantees
Upstream guarantees occur when a subsidiary
guarantees the debt of its parent.
A lender may be making a loan to an operating company,
and as a condition to that loan the lender will require that
all of the borrower’s subsidiaries provide guarantees.
The borrower and its subsidiaries are all part of a
common enterprise.
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Cross-Stream Guarantees
This is where an entity guarantees the obligations of an
affiliate.
This is particularly common in a transaction where there
is a holding company with multiple direct subsidiaries,
one of which is a borrower and the others are
guarantors.
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A Guaranty by any other name . . .
Sometimes borrowers will structure a loan so that
instead of having a borrower supported by guarantors,
there are multiple borrowers.
Borrowers may believe that this co-borrower structure
eliminates any concerns regarding guarantees
This structure could still be subject to fraudulent transfer
concern – particularly if one or more co-borrowers do not
receive the proceeds of the loan.
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II.
Fraudulent Transfer Analysis
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When does a Constructively
Fraudulent Transfer Occur?
(1) When the debtor transfers a property interest (or
incurs a debt obligation) but does not receive value
in exchange for that transfer that is reasonably
equivalent to what the debtor gave up –and–
(2) The debtor is insolvent or becomes insolvent at the
time of the transfer or the debtor is left with
unreasonably small capital to conduct its business
or pay its debts as they come due
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Fundamental Consideration
How does the
Transfer Impact the
Debtor’s Creditors?
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Debtor
Payee/
Transferee
Debtor transfers
property interest in
exchange for
reasonably
equivalent value
Normal Transaction
Before the Transfer After the Transfer
The Transfer
“Same” amount of the debtor
for unsecured creditors
Payee/
Transferee
Debtor
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© 2016 Husch B lack we l l LLP
Debtor
Payee/
Transferee
Debtor transfers
property interest
without getting
reasonably equivalent
value in exchange
Constructively Fraudulent Transaction
Payee/
Transferee
Debtor
Before the Transfer After the Transfer
The Transfer
“More” of the Debtor
for Creditors
“Less” of the Debtor
for Creditors
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What is a Transfer?
11 USC § 101(54): “Transfer” means
– Creation of a lien
– Retention of title as a security interest
– Foreclosure of a debtor’s equity of redemption
– Each mode, direct or indirect, absolute or conditional,
voluntary or involuntary, of disposing of or parting with
(i) property or (ii) an interest in property
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General Rules for
Reasonably Equivalent Value
Value given is compared to
value received
Evaluated as of transaction
date
Satisfaction of debt
constitutes REV
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Other Key Factors
Arm’s length
transaction Good faith
Market conditions
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How is Insolvency Determined?
Balance Sheet Test
Do Assets Exceed Liabilities?
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Who Pursues a Constructively
Fraudulent Transfer?
Constructively fraudulent conveyances are
typically pursued through a bankruptcy
proceeding by the Trustee
Constructively fraudulent conveyances can be
brought by creditors outside of bankruptcy
Most states have a 4-year lookback period (but
be careful—a few states have a longer lookback
period)
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A.
Reasonably Equivalent Value
in Multi-Party Transactions
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Remember This!
In a constructively fraudulent
conveyance action involving
a multi-party transaction the
defendant has the burden of
proving that the debtor
received reasonably
equivalent value as part of
the transaction.
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Also Remember This!
Whether or not
reasonably equivalent
value is given will be
viewed from the
perspective of the
debtor’s creditors.
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Reasonably Equivalent Value
(“REV”) and Indirect Benefits
General Rule: Transfers solely for the benefit of
third parties do not furnish REV
Exception: REV can come from someone other
than the recipient of the payments
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Payee/
Transferee
Transferor
of REV
Transfer of
Interest
in property
Some value or other
contractual relationship
REV the debtor
indirectly receives
because of the
transfer
Debtor
Normal Transaction
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Test for Indirect REV Totality of the Circumstances
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Indirect REV Factors include:
• Fair market value
• Arm’s length
• Economic circumstances
• Relationship of the parties
• Maturity, competitiveness, and efficiency
of market
• Industry standards
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Indirect REV & Intangibles:
• Goodwill
• Increased ability
to borrow
• Synergy
• Retention of important supply
source or customer
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Be Careful
Intangible REV is Not Without Limits
The indirect REV must be fairly concrete
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Fundamental Consideration
Is it balanced—i.e., is
the realizable going
concern value of the
debtor following the
transaction equal to the
going concern value
before the transaction?
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Examples Where Debtor
RECEIVED Indirect REV
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Debtor
Lender
Shareholder
Security Interest to Secure Shareholder
Loan Where Proceeds were Given to Debtor
Loan
Loan proceeds
Security interest in
debtor’s property
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Debtor
Lender
Shareholder
Payments on
line of credit
Actual recipient
of all draws
Line of credit draws
Payment on Line of Credit where Debtor
Received the LOC Draws
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Debtor
Lender
Parent Corp.
Guarantee &
security interest
Increased ability
to borrow
$$$$
Guaranty Which Resulted in Synergy
and Increased Ability to Borrow
Synergy
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Examples Where Debtor
DID NOT RECEIVE
Indirect REV
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Debtor
Sis. Corp’s
Creditors
Sis. Corp.
Payments
Use of Sis. Corp.’s
real property
Satisfaction of Sis. Corp.’s debts
Payments to Creditors
of Affiliated Corporation
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Wife’s
Creditors
Payments
Peace & harmony
in the home
Satisfaction of Wife’s debts
Wife
Debtor
Hubby
$ $ $
$
$
$ $
$
$
$
Husband’s Pension Fund
used to pay Wife’s Debts
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© 2016 Husch B lack we l l LLP
Debtor
(Parent Corp.)
Subsidiary
Shareholders
Real property
Parent’s shareholders eventually
get Debtor’s shares in subsidiary
Property Transferred to Subsidiary as
Part of Restructuring Plan
Ownership
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© 2016 Husch B lack we l l LLP
Brooke Corp.
$52 Million
Loan
Participation
Facility
Aleritas
$10 Million Loan
Participation Spirit Bank
Loan
Proceed
Majority
Owner
$2 Million
CD
Contingent
Repurchase
Obligation
(Insolvent Subsidiary) (Insolvent Parent)
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Debtors
(Subsidiaries)
New Lenders Lien in
Assets Old Lenders
Cash
Ownership
Tousa Satisfaction
of Debt
Lien in
Assets
Cash
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Guarantees
General Rule: Direct payments on an existing
guarantee considered REV
But Beware: A constructive fraudulent transfer
may occur when the guarantee is given
Consider impact of upstream, downstream and
cross-stream guarantees
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Sub.
Parent
Debtor Sis.
Corp.
Types of Guarantees
Downstream
Cross-stream
Upstream
Cross-stream Sis.
Corp.
Downstream
Sub.
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Transfers Based on Contingencies
Value of the
transfer
depends on the
likelihood that
the contingency
will occur
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Potential Defenses
Debtor remained solvent & viable following
transaction
Part of an integrated transaction
Debtor is a mere conduit
Debtor received the benefit of the property for
which it made payment
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© 2016 Husch B lack we l l LLP
Good Faith for Value Defense
General rule: transferor has lien on or retains the
interest transferred to the extent value given
Two requirements:
(1) Good faith (objective) and
(2) Provide value
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Potential Weakness to
the Good Faith Defense
§ 548(c) requires the transferee to give value
to the debtor
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Debtors (Cash
Management
Firm)
$3 Million Capital
Lender
Pledge of
Assets to
Secure $300
Million Loan
Lenders
Loan
The Perils of Lacking Good Faith under § 548(c)
Lenders
Lenders
Lenders
Investors in Low
Risk Securities
Court concludes lender
did not act in good
faith and voids the
security interest
leaving a $300 million
unsecured claim
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B.
Timing of the Guaranty and
the Financial Condition
of the Guarantor
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Timing of the Guaranty
Not after you know
what happens
You evaluate the transaction when it occurs
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Financial Condition of the Guarantor
Just because someone says they are solvent
doesn’t necessarily mean they really are solvent
Book value does not equal market value
Liabilities may not be properly stated
Can you get an independent, third-party
valuation to document the solvency of the
transferor?
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III.
Loans Supported by
Intercorporate Guaranties
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Typical Bank Financing Arrangement
Operating Company is the Borrower
Holding Company grants a pledge of stock of the
Borrower and provides a guaranty
Subsidiaries of the Borrower provide a guaranty
Sometimes there will be a sister company at the
Borrower level that is either a co-borrower or a guarantor
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Solvency
If solvency is established at the time of the financing, the
reasonably equivalent value analysis becomes moot.
Generally speaking, the solvency analysis is made at the
time of the initial advance of funds to borrower under the
loan documents.
If there is a secured guaranty, the analysis is also made
upon the filing of an initial financing statement.
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Solvency Certificate
Require delivery of a solvency certificate at close, which
certifies as to:
– Solvency at the time of the transaction
– Not rendered insolvent as a result of the transaction
– Not left with unreasonably small capital with which to
conduct present or future business
– Not incurring, or intending to incur, debts beyond
ability to pay as such debts come due
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Common Enterprise
If basing Reasonably Equivalent Value analysis on
indirect benefits or synergies, say so!
Establish “identity of interests” or “indirect benefits”
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IV.
Integrated Transactions
and
Designated-use Loans
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Examples Where Debtor Received
Indirect REV
Security interest to secure shareholder loan
where proceeds were given to debtor
Payment on line of credit where debtor received
draws
Guaranty which resulted in synergy and
increased ability to borrow
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Debtor
Lender
Shareholder
Security Interest to Secure Shareholder Loan
Where Proceeds were given to Debtor
Loan
Loan proceeds
Security interest in
debtor’s property
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© 2016 Husch B lack we l l LLP
Debtor
Lender
Shareholder
Payments on
line of credit
Actual recipient
of all draws
Line of credit draws
Payment on Line of Credit Where Debtor
Received the LOC Draws
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Debtor
Lender
Parent Corp.
Guarantee &
Security Interest
Increased ability
to borrow
$$$$$
Synergy
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V.
Best Practices for Lenders to
Establish Reasonably
Equivalent Value
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Best Practices
Closely analyze each party in the transaction. Identify
what value is being provided and what value is being
received
Make sure real value is being given and received
If the solvency of the transferor is questionable, get an
independent valuation of the company
Don’t get caught up in the rush of the deal. Ask yourself:
“How would an objective third-party evaluate this
situation?”
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Consider Limiting the Guaranty
Limit guaranty to net worth (or 80%-90% of net worth) of
guarantor, so that guaranty can never render a guarantor
insolvent.
– These are rarely used
– Could potentially exclude assets from guaranty
– Monitoring and determination issues
Savings Clauses
– These limit guarantees to an amount not constituting
a fraudulent conveyance.
– Widely used, but may not survive court scrutiny
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Thank You!
Q&A
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Michael W. Kaufman
203.462.7553
Michael D. Fielding
816.983.8353