Minimizing Lender Risks of Fraudulent Transfer in Bankruptcy and Under the Uniform Voidable Transactions Act

Description

The Seventh Circuit’s 2016 Sentinel Management Group decision illustrates 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.

Senior lenders also face risks with respect to highly leveraged borrowers such as in a leveraged acquisition financing situation such as a leveraged buyout or a leveraged recap. In transactions which 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.

Listen as our authoritative panel of finance attorneys analyzes fraudulent transfer risks that lenders face when payments made by the borrower to the lender are challenged under the 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.