What is a bankruptcy remote entity and why do we use this?
The bankruptcy remote entity is not a new concept. It is primarily used in CMBS and large commercial transactions.
What is a bankruptcy remote entity?
In general terms, a bankruptcy remote entity is when the borrowing entity is a single purpose/special purpose entity. It is commonly called a Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE). This type of entity changes its operating agreement to provide for bankruptcy remote language.
This takes away the borrower’s ability to file for bankruptcy. By changing the operating agreement of the entity to a special purpose entity and a bankruptcy remote entity, this prevents the borrower from filing a BK claim.
How do we do this?
In the operating agreement, there is a clause that states a special director will be appointed to the entity and this special director is the only one authorized to file for bankruptcy. There are numerous companies who act as special directors in exchange for a fee.
Additionally, there is a tri-party agreement signed between three groups: The Lender, the special director, and the owner of the entity. Essentially, this agreement states that the special director will only agree to file for bankruptcy if the lender approves.
This agreement requires our consent for the borrower to file bankruptcy and is another tool that we use to prevent a borrower from fighting or stalling any legal action from us.
