Insiders, Subrogated to Secured Claims or Priority Claims, Wipe Out the Estate

• Author: David J. Cook
• Pages: 43-48

Insiders, Subrogated to

Secured Claims or Priority

Claims, Wipe Out the Estate

This chapter asks you to take a breather. We are going to revisit common

business transactions that, when examined, open doors that allow insiders

to exit a disaster without a scratch. These points can seem rudimentary,

but correctly identifying the parties peels back layers of uncertainty and

confusion.

We start with a debtor that is usually a corporation or limited liability

company (LLC). This debtor owns and operates a business that requires

cash capital, which is another version of a loan. The lender, which is usually

a bank, hard money financier, or private third party, might make the loan but

will demand the following:

1. Promissory note executed by the debtor that probably provides

for periodic payments. Some loans are lines of credit that permit

the debtor to draw down a required amount, but the line of credit

comes due on an annual basis.

2. A blanket first lien on the assets of the debtor. This lien might

consist of a line on the personal property that consists of the

inventory, equipment, lease, receivables, and general intangibles,

now owned and hereinafter acquired. If possible, the lender will

demand a lien (i.e., deed of trust or mortgage) on the debtor’s real

property.

3. A personal guaranty by the principal shareholder and spouse.

The personal guaranty obligates the guarantors to pay the debt

owed by the debtor to the lender in the event that the lender

defaults. Nearly every lender (absent some hard money lenders)

demands a guaranty. These lenders include the SBA. Hard money-

lenders might forgo a personal guaranty if the lender is secured

by real property with a deep loan to value ratio that fully secures

the lender three or four times.

Absent contractual waivers and in the event of a default, here is the

usual outcome. The debtor defaults. The bank has the following options. The

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