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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. Presenting a live 90-minute webinar with interactive Q&A Fraudulent Conveyance Exposure for Intercorporate Guaranties, Integrated Transactions and Designated-Use Loans Navigating the Contours of Section 548 Reasonably Equivalent Value Defense in Complex Lending Transactions Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JANUARY 4, 2017 Michael D. Fielding, Partner, Husch Blackwell, Kansas City, Mo. Michael W. Kaufman, Robinson & Cole, Stamford, Conn.

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  • 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.

    Presenting a live 90-minute webinar with interactive Q&A

    Fraudulent Conveyance Exposure for

    Intercorporate Guaranties, Integrated

    Transactions and Designated-Use Loans Navigating the Contours of Section 548 Reasonably Equivalent

    Value Defense in Complex Lending Transactions

    Today’s faculty features:

    1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

    WEDNESDAY, JANUARY 4, 2017

    Michael D. Fielding, Partner, Husch Blackwell, Kansas City, Mo.

    Michael W. Kaufman, Robinson & Cole, Stamford, Conn.

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  • Fraudulent Conveyance Exposure

    for Intercorporate Guaranties,

    Integrated Transactions and

    Designated-Use Loans

    Navigating the Contours of Section 548

    Reasonably Equivalent Value Defense

    in Complex Lending Transactions

  • © 2016 Husch B lack we l l LLP

    Discussion Topics I. Overview of types intercompany guaranties and

    integrated transactions at risk

    II. Fraudulent transfer analysis

    A. Reasonably equivalent value in multi-party transactions

    B. Timing of guaranty and the financial condition of the guarantor

    III. Loans supported by intercorporate guaranties

    IV. Integrated transactions and designated-use loans

    V. Best practices for lenders to establish reasonably equivalent value

    6

  • I.

    Overview of Types

    Intercompany Guaranties

    and

    Integrated Transactions at Risk

    7

  • © 2016 Husch B lack we l l LLP

    Sub.

    Parent

    Debtor Sis.

    Corp.

    Types of Guarantees

    Downstream

    Cross-stream

    Upstream

    Cross-stream Sis.

    Corp.

    Downstream

    Sub.

    8

  • © 2016 Husch B lack we l l LLP

    Downstream Guarantees

    This is where a parent guarantees the obligations of its

    subsidiaries.

    In a secured transaction, parent holding companies are

    customarily required to pledge the stock of their borrower

    operating companies.

    That pledge is usually accompanied by a guaranty.

    Downstream guarantees are also common in situations

    where a lender requires a personal guaranty from the

    principal of a business.

    9

  • © 2016 Husch B lack we l l LLP

    Upstream Guarantees

    Upstream guarantees occur when a subsidiary

    guarantees the debt of its parent.

    A lender may be making a loan to an operating company,

    and as a condition to that loan the lender will require that

    all of the borrower’s subsidiaries provide guarantees.

    The borrower and its subsidiaries are all part of a

    common enterprise.

    10

  • © 2016 Husch B lack we l l LLP

    Cross-Stream Guarantees

    This is where an entity guarantees the obligations of an

    affiliate.

    This is particularly common in a transaction where there

    is a holding company with multiple direct subsidiaries,

    one of which is a borrower and the others are

    guarantors.

    11

  • © 2016 Husch B lack we l l LLP

    A Guaranty by any other name . . .

    Sometimes borrowers will structure a loan so that

    instead of having a borrower supported by guarantors,

    there are multiple borrowers.

    Borrowers may believe that this co-borrower structure

    eliminates any concerns regarding guarantees

    This structure could still be subject to fraudulent transfer

    concern – particularly if one or more co-borrowers do not

    receive the proceeds of the loan.

    12

  • II.

    Fraudulent Transfer Analysis

    13

  • © 2016 Husch B lack we l l LLP

    When does a Constructively

    Fraudulent Transfer Occur?

    (1) When the debtor transfers a property interest (or

    incurs a debt obligation) but does not receive value

    in exchange for that transfer that is reasonably

    equivalent to what the debtor gave up –and–

    (2) The debtor is insolvent or becomes insolvent at the

    time of the transfer or the debtor is left with

    unreasonably small capital to conduct its business

    or pay its debts as they come due

    14

  • © 2016 Husch B lack we l l LLP

    Fundamental Consideration

    How does the

    Transfer Impact the

    Debtor’s Creditors?

    15

  • © 2016 Husch B lack we l l LLP

    Debtor

    Payee/

    Transferee

    Debtor transfers

    property interest in

    exchange for

    reasonably

    equivalent value

    Normal Transaction

    Before the Transfer After the Transfer

    The Transfer

    “Same” amount of the debtor

    for unsecured creditors

    Payee/

    Transferee

    Debtor

    16

  • © 2016 Husch B lack we l l LLP

    Debtor

    Payee/

    Transferee

    Debtor transfers

    property interest

    without getting

    reasonably equivalent

    value in exchange

    Constructively Fraudulent Transaction

    Payee/

    Transferee

    Debtor

    Before the Transfer After the Transfer

    The Transfer

    “More” of the Debtor

    for Creditors

    “Less” of the Debtor

    for Creditors

    17

  • © 2016 Husch B lack we l l LLP

    What is a Transfer?

    11 USC § 101(54): “Transfer” means

    – Creation of a lien

    – Retention of title as a security interest

    – Foreclosure of a debtor’s equity of redemption

    – Each mode, direct or indirect, absolute or conditional,

    voluntary or involuntary, of disposing of or parting with

    (i) property or (ii) an interest in property

    18

  • © 2016 Husch B lack we l l LLP

    General Rules for

    Reasonably Equivalent Value

    Value given is compared to

    value received

    Evaluated as of transaction

    date

    Satisfaction of debt

    constitutes REV

    19

  • © 2016 Husch B lack we l l LLP

    Other Key Factors

    Arm’s length

    transaction Good faith

    Market conditions

    20

  • © 2016 Husch B lack we l l LLP

    How is Insolvency Determined?

    Balance Sheet Test

    Do Assets Exceed Liabilities?

    21

  • © 2016 Husch B lack we l l LLP

    Who Pursues a Constructively

    Fraudulent Transfer?

    Constructively fraudulent conveyances are

    typically pursued through a bankruptcy

    proceeding by the Trustee

    Constructively fraudulent conveyances can be

    brought by creditors outside of bankruptcy

    Most states have a 4-year lookback period (but

    be careful—a few states have a longer lookback

    period)

    22

  • A.

    Reasonably Equivalent Value

    in Multi-Party Transactions

    23

  • © 2016 Husch B lack we l l LLP

    Remember This!

    In a constructively fraudulent

    conveyance action involving

    a multi-party transaction the

    defendant has the burden of

    proving that the debtor

    received reasonably

    equivalent value as part of

    the transaction.

    24

  • © 2016 Husch B lack we l l LLP

    Also Remember This!

    Whether or not

    reasonably equivalent

    value is given will be

    viewed from the

    perspective of the

    debtor’s creditors.

    25

  • © 2016 Husch B lack we l l LLP

    Reasonably Equivalent Value

    (“REV”) and Indirect Benefits

    General Rule: Transfers solely for the benefit of

    third parties do not furnish REV

    Exception: REV can come from someone other

    than the recipient of the payments

    26

  • © 2016 Husch B lack we l l LLP

    Payee/

    Transferee

    Transferor

    of REV

    Transfer of

    Interest

    in property

    Some value or other

    contractual relationship

    REV the debtor

    indirectly receives

    because of the

    transfer

    Debtor

    Normal Transaction

    27

  • © 2016 Husch B lack we l l LLP

    Test for Indirect REV Totality of the Circumstances

    28

  • © 2016 Husch B lack we l l LLP

    Indirect REV Factors include:

    • Fair market value

    • Arm’s length

    • Economic circumstances

    • Relationship of the parties

    • Maturity, competitiveness, and efficiency

    of market

    • Industry standards

    29

  • © 2016 Husch B lack we l l LLP

    Indirect REV & Intangibles:

    • Goodwill

    • Increased ability

    to borrow

    • Synergy

    • Retention of important supply

    source or customer

    30

  • © 2016 Husch B lack we l l LLP

    Be Careful

    Intangible REV is Not Without Limits

    The indirect REV must be fairly concrete

    31

  • © 2016 Husch B lack we l l LLP

    Fundamental Consideration

    Is it balanced—i.e., is

    the realizable going

    concern value of the

    debtor following the

    transaction equal to the

    going concern value

    before the transaction?

    32

  • © 2016 Husch B lack we l l LLP

    Examples Where Debtor

    RECEIVED Indirect REV

    33

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Shareholder

    Security Interest to Secure Shareholder

    Loan Where Proceeds were Given to Debtor

    Loan

    Loan proceeds

    Security interest in

    debtor’s property

    34

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Shareholder

    Payments on

    line of credit

    Actual recipient

    of all draws

    Line of credit draws

    Payment on Line of Credit where Debtor

    Received the LOC Draws

    35

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Parent Corp.

    Guarantee &

    security interest

    Increased ability

    to borrow

    $$$$

    Guaranty Which Resulted in Synergy

    and Increased Ability to Borrow

    Synergy

    36

  • © 2016 Husch B lack we l l LLP

    Examples Where Debtor

    DID NOT RECEIVE

    Indirect REV

    37

  • © 2016 Husch B lack we l l LLP

    Debtor

    Sis. Corp’s

    Creditors

    Sis. Corp.

    Payments

    Use of Sis. Corp.’s

    real property

    Satisfaction of Sis. Corp.’s debts

    Payments to Creditors

    of Affiliated Corporation

    38

  • © 2016 Husch B lack we l l LLP

    Wife’s

    Creditors

    Payments

    Peace & harmony

    in the home

    Satisfaction of Wife’s debts

    Wife

    Debtor

    Hubby

    $ $ $

    $

    $

    $ $

    $

    $

    $

    Husband’s Pension Fund

    used to pay Wife’s Debts

    39

  • © 2016 Husch B lack we l l LLP

    Debtor

    (Parent Corp.)

    Subsidiary

    Shareholders

    Real property

    Parent’s shareholders eventually

    get Debtor’s shares in subsidiary

    Property Transferred to Subsidiary as

    Part of Restructuring Plan

    Ownership

    40

  • © 2016 Husch B lack we l l LLP

    Brooke Corp.

    $52 Million

    Loan

    Participation

    Facility

    Aleritas

    $10 Million Loan

    Participation Spirit Bank

    Loan

    Proceed

    Majority

    Owner

    $2 Million

    CD

    Contingent

    Repurchase

    Obligation

    (Insolvent Subsidiary) (Insolvent Parent)

    41

  • © 2016 Husch B lack we l l LLP

    Debtors

    (Subsidiaries)

    New Lenders Lien in

    Assets Old Lenders

    Cash

    Ownership

    Tousa Satisfaction

    of Debt

    Lien in

    Assets

    Cash

    42

  • © 2016 Husch B lack we l l LLP

    Guarantees

    General Rule: Direct payments on an existing

    guarantee considered REV

    But Beware: A constructive fraudulent transfer

    may occur when the guarantee is given

    Consider impact of upstream, downstream and

    cross-stream guarantees

    43

  • © 2016 Husch B lack we l l LLP

    Sub.

    Parent

    Debtor Sis.

    Corp.

    Types of Guarantees

    Downstream

    Cross-stream

    Upstream

    Cross-stream Sis.

    Corp.

    Downstream

    Sub.

    44

  • © 2016 Husch B lack we l l LLP

    Transfers Based on Contingencies

    Value of the

    transfer

    depends on the

    likelihood that

    the contingency

    will occur

    45

  • © 2016 Husch B lack we l l LLP

    Potential Defenses

    Debtor remained solvent & viable following

    transaction

    Part of an integrated transaction

    Debtor is a mere conduit

    Debtor received the benefit of the property for

    which it made payment

    46

  • © 2016 Husch B lack we l l LLP

    Good Faith for Value Defense

    General rule: transferor has lien on or retains the

    interest transferred to the extent value given

    Two requirements:

    (1) Good faith (objective) and

    (2) Provide value

    47

  • © 2016 Husch B lack we l l LLP

    Potential Weakness to

    the Good Faith Defense

    § 548(c) requires the transferee to give value

    to the debtor

    48

  • © 2016 Husch B lack we l l LLP

    Debtors (Cash

    Management

    Firm)

    $3 Million Capital

    Lender

    Pledge of

    Assets to

    Secure $300

    Million Loan

    Lenders

    Loan

    The Perils of Lacking Good Faith under § 548(c)

    Lenders

    Lenders

    Lenders

    Investors in Low

    Risk Securities

    Court concludes lender

    did not act in good

    faith and voids the

    security interest

    leaving a $300 million

    unsecured claim

    49

  • B.

    Timing of the Guaranty and

    the Financial Condition

    of the Guarantor

    50

  • © 2016 Husch B lack we l l LLP

    Timing of the Guaranty

    Not after you know

    what happens

    You evaluate the transaction when it occurs

    51

  • © 2016 Husch B lack we l l LLP

    Financial Condition of the Guarantor

    Just because someone says they are solvent

    doesn’t necessarily mean they really are solvent

    Book value does not equal market value

    Liabilities may not be properly stated

    Can you get an independent, third-party

    valuation to document the solvency of the

    transferor?

    52

  • III.

    Loans Supported by

    Intercorporate Guaranties

    53

  • © 2016 Husch B lack we l l LLP

    Typical Bank Financing Arrangement

    Operating Company is the Borrower

    Holding Company grants a pledge of stock of the

    Borrower and provides a guaranty

    Subsidiaries of the Borrower provide a guaranty

    Sometimes there will be a sister company at the

    Borrower level that is either a co-borrower or a guarantor

    54

  • © 2016 Husch B lack we l l LLP

    Solvency

    If solvency is established at the time of the financing, the

    reasonably equivalent value analysis becomes moot.

    Generally speaking, the solvency analysis is made at the

    time of the initial advance of funds to borrower under the

    loan documents.

    If there is a secured guaranty, the analysis is also made

    upon the filing of an initial financing statement.

    55

  • © 2016 Husch B lack we l l LLP

    Solvency Certificate

    Require delivery of a solvency certificate at close, which

    certifies as to:

    – Solvency at the time of the transaction

    – Not rendered insolvent as a result of the transaction

    – Not left with unreasonably small capital with which to

    conduct present or future business

    – Not incurring, or intending to incur, debts beyond

    ability to pay as such debts come due

    56

  • © 2016 Husch B lack we l l LLP

    Common Enterprise

    If basing Reasonably Equivalent Value analysis on

    indirect benefits or synergies, say so!

    Establish “identity of interests” or “indirect benefits”

    57

  • IV.

    Integrated Transactions

    and

    Designated-use Loans

    58

  • © 2016 Husch B lack we l l LLP

    Examples Where Debtor Received

    Indirect REV

    Security interest to secure shareholder loan

    where proceeds were given to debtor

    Payment on line of credit where debtor received

    draws

    Guaranty which resulted in synergy and

    increased ability to borrow

    59

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Shareholder

    Security Interest to Secure Shareholder Loan

    Where Proceeds were given to Debtor

    Loan

    Loan proceeds

    Security interest in

    debtor’s property

    60

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Shareholder

    Payments on

    line of credit

    Actual recipient

    of all draws

    Line of credit draws

    Payment on Line of Credit Where Debtor

    Received the LOC Draws

    61

  • © 2016 Husch B lack we l l LLP

    Debtor

    Lender

    Parent Corp.

    Guarantee &

    Security Interest

    Increased ability

    to borrow

    $$$$$

    Synergy

    62

  • V.

    Best Practices for Lenders to

    Establish Reasonably

    Equivalent Value

    63

  • © 2016 Husch B lack we l l LLP

    Best Practices

    Closely analyze each party in the transaction. Identify

    what value is being provided and what value is being

    received

    Make sure real value is being given and received

    If the solvency of the transferor is questionable, get an

    independent valuation of the company

    Don’t get caught up in the rush of the deal. Ask yourself:

    “How would an objective third-party evaluate this

    situation?”

    64

  • © 2016 Husch B lack we l l LLP

    Consider Limiting the Guaranty

    Limit guaranty to net worth (or 80%-90% of net worth) of

    guarantor, so that guaranty can never render a guarantor

    insolvent.

    – These are rarely used

    – Could potentially exclude assets from guaranty

    – Monitoring and determination issues

    Savings Clauses

    – These limit guarantees to an amount not constituting

    a fraudulent conveyance.

    – Widely used, but may not survive court scrutiny

    65

  • © 2016 Husch B lack we l l LLP

    Thank You!

    Q&A

    66

  • Michael W. Kaufman

    [email protected]

    203.462.7553

    Michael D. Fielding

    [email protected]

    816.983.8353