US Special Purpose Vehicles’ Independent Directors and the Need for Fiduciary Duties

June 01, 2016

Essentially all securitization structures utilize a bankruptcy remote entity, a/k/a special purpose entity (“SPE”), to reduce the lenders’ or investors’ exposure to a bankruptcy of the sponsor. A standard feature of SPEs is the appointment of an independent person (director, member, manager) to the body managing the SPEs. That independent person’s consent is required for “major decisions,” one of which is the filing of, or consenting to a bankruptcy of the SPE (hence the court’s reference to them as “blocking directors”). When properly structured, courts enforce these provisions and dismiss bankruptcy cases filed without the vote of such independent person. But that is not always the case as is shown by In re Lake Michigan Beach Pottawattamie Resort, LLC, 547 B.R. 899 (N.D. Ill. 2016) (“Lake Michigan”).

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