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Should You Reconsider Your Bankruptcy Remoteness Strategy?
Two recent bankruptcy court decisions have highlighted certain weaknesses regarding bankruptcy remoteness ' a concept that typically arises in the context of structured finance and asset securitization transactions. These transactions use special-purpose vehicles and seek to accomplish two primary objectives: first, to isolate a borrower's assets so as to remove them from risk if the special purpose vehicle becomes insolvent. The second objective is to make the special purpose vehicle bankruptcy remote, meaning that provisions in transactional documents and entity-control documents such as operating agreements are tailored to make it difficult for the borrower to file bankruptcy voluntarily or to collude in an involuntary bankruptcy filing.
As a result of these two recent cases, certain techniques used in these transactions to create bankruptcy remoteness by either using independent board members or issuing golden shares to effectively prevent bankruptcy filings have largely been rejected. Among other things, these cases will obviously require that opinion letters that are provided in connection with such structured finance transactions be updated to address these case law developments.
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