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

handle is hein.journals/buslwme10 and id is 1 raw text is: p

September/October 1989
Volume 10 Number 1
Section of Business Law  ,L

Insider Guaranties:
New Theory for Preference Recovery From Lenders

From the Section

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

FIRREA, the recently enacted thrift bailout legislation,
contains tough new enforcement provisions      3
This month we spotlight the Dispute Resolution


1988 securities laws developments affect
banking and thrift industries: part II                   5

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