[Editor’s Note: The following piece is authored by Benjamin S. Kaminetzky of Davis Polk & Wardwell LLP.]
Through various affiliated entities, large financial institutions may have multiple touch points to a company client or multiple roles in a complex financial transaction. For example, one affiliate could have an equity interest in a company, another affiliate could have a lending relationship with the company and yet a third affiliate could provide financial advisory services to the same company. Such scenarios pose a risk that the lending entity will be deemed an ‘‘insider’’ of the company under the Bankruptcy Code (the ‘‘Code’’) or similar state law. Insider status may in turn have significant ramifications on any potential recovery from the target company in bankruptcy, putting financial institutions at significantly greater risk of having long- completed transactions reversed and funds clawed back and/or having their claims in bankruptcy sent to the back of the line.
Financial institutions therefore scored a significant victory on April 9, 2013, when Judge Robert Sweet of the United States District Court for the Southern District of New York dismissed Capmark Financial Group Inc.’s (‘‘Capmark’’) insider preference action against four lender affiliates of The Goldman Sachs Group, Inc. (‘‘Goldman Sachs’’), which arose out of Capmark’s 2009 bankruptcy. Davis Polk represented the Goldman Sachs lender affiliates. The court held that mere participation by corporate sister subsidiaries in lending and equity relationships with the debtor is insufficient with- out more to make the lending subsidiary an insider of the debtor, even if a sister subsidiary has a director on the debtor’s board. In doing so, the court reaffirmed that corporate veils separating a lender from an affiliated entity that may be an insider of the debtor will not lightly be disregarded, and that participation in an arm’s-length transaction as an ordinary commercial lender will not give rise to insider status. As a result, the Capmark decision should pose a substantial obstacle to claims alleging that a lender is an ‘‘insider’’ by virtue of affiliated entities’ contacts with a debtor, at least in the absence of evidence that the lender used the affiliates’ contacts to influence the debtor’s decisions.
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