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10 Bus. Law. Update 1 (1989-1990)

handle is hein.journals/buslwme10 and id is 1 raw text is: p TH BSIESS .1apE September/October 1989 Volume 10 Number 1 Section of Business Law ,L Insider Guaranties: New Theory for Preference Recovery From Lenders From the Section Chair... The United States Court of Appeals for the Seventh Circuit recently issued an opinion on appeal from a bankruptcy court decision that is unfavorable to lenders to financially-troubled borrow- ers. The case of Levit v. Ingersoll Rand Financial Corp., 1989 U.S. App. LEXIS 6965 (7th Cir. May 12, 1989), involved a lender who also held a guaranty from an insider of the borrower. The lender received a payment from the borrower out of the ordinary course of business more than 90 days but less than one year prior to the date of the borrower's bankruptcy petition, and the bank- ruptcy trustee sued the lender to recover the value of the payment on the ground that the payment was a preferential transfer under section 547 of the Bank- ruptcy Code. The court agreed with the general case law on this issue to the ef- fect that the ordinary lookback pe- riod of 90 days for an alleged preferential transfer will be stretched to one year if the transfer directly or indirectly bene- fited an insider-guarantor. However, the court disagreed with the majority line of lower court decisions by concluding that, even though the lender itself was not an insider of the debtor, the value of a transfer made to a lender between 90 days and one year prior to the bor- rower's bankruptcy could be recovered directly from the lender, not just the benefited insider-guarantor. Ordinarily, if a debtor is insolvent, certain transfers made by the debtor within 90 days prior to the date of the filing of the bankruptcy petition are subject to avoidance and recovery as preferential transfers pursuant to Bankruptcy Code sections 547 and 550. However, if the transfer was made to or for the benefit of' an insider of the debtor, then the avoidance period is extended to the entire year preceding the bankruptcy. What happens when a preferential transfer is made to a lender (for example, payment on a debt out of the ordinary course) more than 90 days but less than one year before the debt- or's bankruptcy when the lender also holds a guaranty from an insider of the debtor? The insider is arguably bene- fited by the transfer, in that the insider's liability on its guaranty is reduced by the value of the transfer to the lender. As a result, there is no question that the value of the transfer can be recovered from the insider. If the debtor chooses to pursue the lender rather than the in- sider, should the lender be required to disgorge the value of the transfer simply because an insider happened to receive an indirect benefit from the transfer? According to the Ingersoll Rand deci- sion, the answer is yes. The relevant facts in Ingersoll Rand were straightforward. The debtor cor- poration had borrowed various sums from time to time from Ingersoll Rand (among others) and had provided guar- anties from the debtor's president and his brothers to assure the debtor's re- payment obligations. More than 90 days but less than one year prior to the date Continued on page 2 Those of us who made it to Honolulu in early August for the Annual Meeting of the American Bar Association and the Section's own Annual Meeting were rewarded with spectacular sun and surf and quality programs. I say those who made it because Section attendance was about 60% of that at our usual August gatherings on the mainland. Both dis- tance and a real shortage of hotel rooms and meeting facilities took their toll. We were required to limit the number of committee meetings as well as Section programs simply because there was in- sufficient accommodation for those ac- tivities. Many Section members brought their families and spent some vacation time on both Oahu and other Hawaiian Islands before and after the Honolulu meetings. The ABA also sponsored add- on meetings after Honolulu, so Aus- tralia claimed a good number of meet- ing attendees as well. The programs were of sufficient cal- iber to make the extra time and distance seem worthwhile, and we did manage to cram 30 offerings into the three-day program schedule (leaving one addi- tional day for committee meetings). To name just a few: Insider Trading: New Continued on page 2 INSIDE FIRREA, the recently enacted thrift bailout legislation, contains tough new enforcement provisions 3 This month we spotlight the Dispute Resolution Committee 1988 securities laws developments affect banking and thrift industries: part II 5

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