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Serving Two Masters: When 'Bankruptcy Remote' Meets Public Policy
Structured financing transactions, including those pertaining to commercial real estate, make extensive use of entities formed for the specific purpose of reducing the likelihood that assets will be involved in a potential bankruptcy proceeding. Known as “bankruptcy-remote entities,” or “BREs,” these entities are subject to structures and covenants in financing documents and their own formation documents, which are designed to reduce the likelihood that the BRE will file for bankruptcy protection.
One such common provision is a requirement that the BRE have an outside director or member whose vote is required for approval of any bankruptcy filing by the BRE. While a contractual provision prohibiting an entity from filing for bankruptcy protection has long been considered void as against public policy, recent cases evaluate situations where the debtor is not contractually prohibited from making a filing, but where a director or member of the debtor who is beholden to the creditor holds the ultimate power to veto a bankruptcy.
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