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60 Am. Bankr. L.J. 109 (1986)
Fraudulent Transfer Attacks on Guaranties in Bankruptcy

handle is hein.journals/ambank60 and id is 117 raw text is: Fraudulent Transfer Attacks on Guaranties in Bankruptcy by Kenneth J. Carl* I. INTRODUCTION In biblical times, King Solomon warned: He that is surety for a stranger shall smart for it: and he that hateth suretyship is sure., Today, the credi- tor, rather than the surety or guarantor, may smart after relying upon a guaranty or a third party security interest and later finding it unenforceable against the guarantor in bankruptcy because it was a fraudulent transfer. This article considers the area of fraudulent transfer law involving trans, fers by insolvents for less than adequate consideration and the applicability of this law to guaranties and grants of security interests made by affiliated corporations.2 These guaranties are often made to enable a corporate group to borrow as a single unit, even though each member of the group is a dis- tinct legal entity. When a corporation makes a guaranty, or grants a security interest in its property to secure an affiliate's debt, two questions are espe- cially important: (1) was the guarantor corporation insolvent when it made the guaranty, or was it rendered insolvent by the guaranty; and (2) did the guarantor receive less than adequate consideration for the guaranty? If the answer to both these questions is yes, the guaranty or security interest is a fraudulent obligation or transfer and is voidable by the bankruptcy trustee or by creditors of the guarantor outside bankruptcy. This article will provide a framework in which these questions may be answered, as well as discuss some of the special problems guaranties raise under the Bankruptcy Code. *Member of the Illinois Bar practicing in the Banking Department at Chapman and Cutler, Chicago, Illinois. J.D., Harvard Law School (1985); A.M. (Economics) and A.B. (Economics), University of Chi- cago (1982). The author gratefully acknowledges the invaluable advice of Professor Vern Countryman in the preparation of this article, which was originally written under his supervision as a third-year paper at Harvard Law School. 'Proverbs 11:15. See also Proverbs 17:18 (A man without sense gives a pledge, and becomes surety in the presence of his neighbor.). 2For a more general discussion of the potential problems associated with corporate guaranties, includ- ing corporate authority issues, equitable subordination, and problems presented by other areas of fraudu- lent transfer law, see Coquillette, Guaranty of and Security for the Debt of a Parent Corporation by a Sub- sidiary Corporation, 30 CASE W. RES. L.R. 433 (1980).

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