Bankruptcy Court Examines Value in Parent Guaranty and Affiliate Debt Payment

Chairman and CEO Andy Kassner and Philadelphia and Wilmington associate Joe Argentina co-authored an article for The Legal Intelligencer titled “Court Examines Value in Parent Guaranty and Affiliate Debt Payment.” The article discusses Giuliano v. World Fuel Services, Inc. (In re Evergreen International Aviation, Inc.), a recent case in with the Delaware Bankruptcy Court considered whether a parent company’s incurring of an obligation to its affiliate’s creditor prior to a Chapter 7 filing was a fraudulent transfer.

In Evergreen, a debtor had filed for bankruptcy soon after it had guaranteed its affiliate’s debt and later paid a portion of the debt. After the filing, the chapter 7 trustee filed a complaint against the creditor, trying to avoid the parent company’s guarantee of the debtor’s obligation and payment. Under the U.S. Bankruptcy Code, a trustee can avoid a transfer of a debtor’s property or an obligation incurred by the debtor if, among other things, the debtor received less than “reasonably equivalent value” in exchange for the property or obligation. The Evergreen court noted that a debtor that incurs an obligation on behalf of a third party does not usually receive value, but in this case, the debtor and third party shared an “identity of interests” and therefore the debtor did receive value. The court therefore granted the defendant’s motion for summary judgment, declining to allow the trustee to avoid the debtor’s obligation.

Andy and Joe conclude by reminding creditors that any transaction with a distressed company may be reviewed under fraudulent transfer law if the company later files bankruptcy. Since courts evaluate “reasonably equivalent value” on a case-by-case basis, outcomes remain uncertain and creditors should be cautious.

Read “Court Examines Value in Parent Guaranty and Affiliate Debt Payment.”