A Gap in the Armor: Bankruptcy Remote Entities Under Scrutiny

Rated commercial conduit and structured loans regularly require a special purpose or bankruptcy remote entity (SPE) as the borrower. The entity of choice is often a Delaware limited liability company. The structure may include a "golden share" or blocking member/director position held by lender with a requirement for unanimous consent for filing a bankruptcy petition. In two recent decisions, bankruptcy courts denied a lender’s motion to dismiss the filing despite no consent from lender’s nominee. In each case, the debtor’s operating agreement was amended during prepetition restructuring. Analysis of the manner in which the entity was restructured is instructive to practitioners on how to successfully walk the constitutional line.

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