Many financial and commercial real estate lenders attempt to mitigate the risks of a borrower’s insolvency by lending to a newly created subsidiary that holds sufficient assets to secure the loan. These special purpose entities (SPEs) allow a parent company to obtain less expensive financing than it could otherwise.
They also create an important job for lawyers. Counsel for the lender must ensure that an SPE is properly structured to (i) minimize the likelihood that the SPE will file for bankruptcy and (ii) ensure that the SPE’s assets will not be consolidated with the parent’s assets and become entangled in any insolvency. An SPE that is properly organized and structured is referred to as being “bankruptcy remote.”
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