The seventh circuit’s recent decision in Paloian v. LaSalle Bank, N.A. (In re Doctors Hospital of Hyde Park Inc.) (Paloian)1 sheds some new and perhaps disturbing light on the use of special purpose entity (SPE) structures in corporate finance and also has implications for attorneys who deliver opinions to support transactions involving SPEs.
SPE structures have long been useful to companies seeking to alter the composition of their balance sheet. When properly used, SPE structures are a valuable tool of modern corporate finance, permitting companies to obtain needed liquidity by monetizing otherwise illiquid assets on their balance sheet, particularly receivables. Unfortunately, SPE structures can also facilitate “aggressive” accounting by companies who use them to conceal debts by shifting them to off-balance sheet SPEs. SPE structures played a key role in the financial maneuvering by Enron and others that ultimately unraveled in their highly publicized collapses.
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