Mitigating Lender Risks of Fraudulent Transfers in Bankruptcy and Under State Uniform Voidable Transactions Acts
The landmark Seventh Circuit decision in Sentinel Management Group illustrated the risks lenders face if they fail to exercise due diligence with respect to a borrower's collateral. The court ruled that the lender could not assert a good faith defense to the debtor's fraudulent transfers because the lender had knowledge of a potential problem with the collateral and/or the operations of the borrower and failed to follow up. Cases in the years since this pivotal decision have held similarly.
Senior lenders also face risks with respect to highly leveraged borrowers such as in a leveraged acquisition financing situation like a leveraged buyout or a leveraged recap. In transactions that add substantial debt and give rise to a substantial risk of bankruptcy or insolvency, fraudulent transfers by a highly leveraged borrower to the lender may result in invalidation of the security interest or subordination of the lien.
Counsel to lenders must recognize red flags with respect to questionable conduct on the part of the borrower or high risk financial transactions that may give rise to fraudulent transfers and take effective due diligence measures to investigate the conduct and proposed transaction and take steps to protect its lien.
Partner Evan Miller joins an esteemed panel that will analyze fraudulent transfer risks that lenders face when payments made by the borrower to the lender are challenged in bankruptcy or under a state Uniform Voidable Transactions Act. The panel will suggest measures lenders should take to minimize the risks of fraudulent transfer challenges before and after the loan is made.
