Paloian v. LaSalle Bank, N.A., 2010 WL 3363596 (7th Cir. 2010) considers whether the parties succeeded in turning a special purpose entity into a true bankruptcy-remote vehicle, and whether there really was a “true sale” of assets or just a scheme to avoid the reach of bankruptcy.
A bankruptcy-remote vehicle functions in a way that if a debtor sells certain assets to another corporation, the lender can rely on those assets without worrying about bankruptcy complications (i.e. preference-recovery actions). To work, the entity must be separate and distinct from the other parties to the transaction. It must own assets, and it must manage those assets in its own interests, not in the debtor’s interest. Both parties must structure their transactions in such a way that their economic substance lies outside the Bankruptcy Code. In this case the SPE lacked the attributes of a legitimate bankruptcy-remote vehicle. It was not independent of the other parties, in particular the hospital from which it purportedly bought the accounts receivable that served as collateral for its loan. The SPE simply operated as a division of the hospital. It did not have an office, a phone number, a checking account, or stationary—all of its letters were written on the hospital’s stationary. There were no financial statements or tax returns filed.
There was also little evidence that a “true sale” of assets occurred. Instead of purchasing the accounts receivables outright, the SPE took a small percentage of the hospital’s proceeds from receivables each month to covers its minimal operational costs. The hospital even continued to carry the accounts receivable on its own books, as a corporate asset, holding out to other creditors that the SPE merely had a security interest in the accounts. The SPE was nothing but a shell corporation.
So, rather than keep the accounts receivable out of the hospital’s bankruptcy proceeding, the structure in this case resulted in the receivables being swept into the bankruptcy estate. The point is this, like piercing the veil cases the courts are going to look through the form of the transaction to its substance. Lawyers, particularly those called on to render “true sale” opinions need to be cautious and conduct appropriate due diligence when rendering these opinions.
-Allison M. Lindner