Presenting a live 90 ‐ minute webinar with interactive Q&A Fraudulent Conveyance Exposure Fraudulent Conveyance Exposure for Intercompany Loans and Guarantees Navigating the Bankruptcy and Insolvency Risks of Intercorporate Obligations TUES DAY, FEBRUARY 12, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Kyung S . Lee, Partner, Diamond McCarthy , Houston hareholder, Greenberg Traurig , Miami Mark D. Bloom, S Dr. Kose John, S Dr. Kose John, S pecial Consultant, NERA Economic Consulting , New Y pecial Consultant, NERA Economic Consulting , New Y ork ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Fraudulent Conveyance Exposure for Intercompany Loans and Guarantees Stafford Webinar Presentation Sta o d Web a ese tat o February 12, 2013 Dr. Kose John S S pecial Consultant at NERA Economic Consulting i l C l NERA E i C l i (New York, New York) Kyung S . Lee Diamond McCarthy LLP Diamond McCarthy LLP (Houston, Texas) Mark D. Bloom and Ari Newman Greenberg Traurig, LLP g g, (Miami, Florida)
Intercompany/Inter-Estate Claims • Generally, priority of intercompany claims is dependent on whether the claim is dependent on whether the claim resembles or was intended to be debt, equity or preferred equity/subordinated debt debt • Intercompany claims can be treated pari p passu in right of payment with third-party g p y p y unsecured claims • In many significant cases, intercompany claims are ignored or disallowed either claims are ignored or disallowed either because of cost and difficulty reconciling such claims 6
Scheduling of Claims Bankruptcy Code § 521(1) requires the d bt debtor to file schedules of assets and t fil h d l f t d liabilities If not noted as C U or D such creditor is If not noted as C, U or D, such creditor is not required to file proof of claim and under Bankruptcy Rule 3003(b)(1), such scheduling represents prima facie evidence h d li i f i id of the validity and amount of the claim. See, Bankruptcy Code §§ 1111(a), 501 and , p y ( ), 521(1). 7
Intercompany Claims: Debt or Equity Characterization of intercompany claims affects the priority of recovery and thereby affects the priority of recovery and thereby the amount available to creditors Most bankruptcy cases dealing with p y g characterization of obligations as debt or equity have done so in the context of inter- creditor disputes involving p g recharacterization of “third” party, non- debtor “loans rather than treatment of inter-debtor obligations” g 8
Is Loan “Debt” or “Equity”? Courts factors rely upon fall into 3 general categories: t i □ (i) the formality of the loan agreement □ (ii) th fi (ii) the financial situation of the issuer at the time i l it ti f th i t th ti the creditor made the purported loan □ (iii) the relationship between the debtor and creditor 9
Factors Courts Look at to Determine Whether Claim is Debt or Equity Whether Claim is Debt or Equity • Names given to instrument • Fixed maturity date and schedule of payments Fixed maturity date and schedule of payments • Fixed rate of interest and interest payments • Source of Repayment • • Adequacy of capitalization Adequacy of capitalization • Identity of interests between creditor and stockholder • Security for the transfer • • Ability to obtain financing from outside lending institutions Ability to obtain financing from outside lending institutions • Extent to which advances are subordinated to claims of outside creditors • Extent to which advances were used to acquire capital assets • Sinking fund to provide repayment Si ki f d t id t • Right to enforce payment of principal and interest • Participation in management flowing as a result of the advance • Intent of the parties • Source of interest payments and payment of interest according to the terms of the loan 10
Is Intercompany Claim Debt or Equity? In re Radnor, 353 B. R. 820 (D. Del. 2006)(“ . . . overarching inquiry is . . . Intent of overarching inquiry is Intent of parties at the time of transaction . . . Through a common sense evaluation of the facts and circumstances surrounding a facts and circumstances surrounding a transaction.”) The priority of intercompany claims will be p y p y dependent on whether the claim resembles or was intended to be debt, equity or preferred equity/subordinated debt p q y 11
Subordination of Intercompany Claims In addition to recharacterization, intercompany claims may also be equitably intercompany claims may also be equitably subordinated under Bankruptcy Code §510(c) or applicable law Factors courts look to: □ Has claimant engaged in some type of inequitable conduct (fraud, illegality, breach of fiduciary conduct (fraud, illegality, breach of fiduciary duties, undercapitalization, use of debtor as mere instrumentality or alter ego) □ □ Has claimant caused inj ury to creditors or has his Has claimant caused inj ury to creditors or has his conduct conferred an unfair advantage on the claimant □ □ S S ubordinate as long as it is not inconsistent with the ubordinate as long as it is not inconsistent with the provisions of the Bankruptcy Code 12
Elimination of Intercompany Claims Substantive consolidation is another way to deal with intercompany claims deal with intercompany claims The idea is that related companies liabilities are combined, eliminating intercompany claims and creating a larger intercompany claims, and creating a larger pool of creditors to vote on a single plan of reorganization While different depending on circuit the While different depending on circuit, the general inquiry is whether creditors dealt with the entities as a single economic unit in extending credit or whether the affairs in extending credit or whether the affairs of the debtor are so entangled that consolidation benefits all creditors 13
How are Intercompany Claims Created? Cash transfers between related entities Contribution of assets among entities Allocation of costs of doing business among entities Allocation of tax benefits among parent and subsidiaries subsidiaries Guarantee claims of parents and subsidiaries subsidiaries 14
Fraudulent Transfer Issues that Arise Relating to Inter-Company Claims in Bankruptcy Subsidiary guarantees the borrowing of S b idi t th b i f Parent (Upstream Guaranty) □ What value did S ub obtain by guaranteeing Parent obligation? bli ti ? □ Was that value fair consideration or for reasonably equivalent value to the cost of the guaranty Difficult issues □ Requires a determination of what the “ cost” of the R i d t i ti f h t th “ t” f th guaranty □ What + value did S ub confer upon Parent by signing the guaranty? the guaranty? 15
Parent guarantees the debts of a Subsidiary (d (downstream guaranty) while Sub is solvent t t ) hil S b i l t should not be a fraudulent conveyance A downstream guaranty however may A downstream guaranty however may qualify as a fraudulent conveyance if the subsidiary is insolvent Not likely to find these guarantees qualify as a fraudulent conveyance 16
I In re TOUSA : A Case Study TOUSA A C S d Mark D. Bloom a oo Greenberg Traurig 333 SE 2nd Avenue Suite 4400 Suite 4400 Miami, FL 33131 bloomm@gtlaw.com
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