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The Golden Share: An Analysis of the Latest Failure to Create Bankruptcy-Proof Entities

Norton Annual Survey of Bankruptcy Law
September 2017, Matthew J. O'Toole, R. Stephen McNeill and Eric R. Glickman

Recent case law re-affirms the long-standing principle that a lender may not by contract eliminate a borrower's ability to seek federal bankruptcy protection. In the context of structured finance transactions, some lenders have pursued inventive ways of evading this tenet, but courts continue to strike down attempts “to circumvent the bankruptcy laws by ‘circuity of arrangement.’”

This article provides a brief overview of the use of bankruptcy-remote, special purpose entities, particularly Delaware limited liability companies, in structured finance transactions, and focuses on the doctrine of federal preemption as a basis for courts' steadfast refusal to enforce contractual provisions that would in effect waive the availability of bankruptcy protections. It also evaluates the potential impact recent case law may have on structured finance transactions, and discusses some practical considerations for structuring bankruptcy-remote, special purpose entities.

This article appears in the Norton Annual Survey of Bankruptcy Law, Volume 2017, Issue 2017 (September 2017) and is posted with permission.

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