A Tussle with Tousa: Savings Clauses in Intercorporate Guaranties
George G. Triantis
Stanford Law School
December 10, 2009
Harvard Public Law Working Paper No. 09-68
In October, 2009, the bankruptcy court of the Southern District of Florida rendered its opinion in Tousa, in which subsidiaries incurred upstream and cross-stream guaranty obligations, secured by their assets, while insolvent. The proceeds of the loan were used to pay the indebtedness to a third party of the parent and of one of the subsidiaries. The unsecured creditors of the other subsidiaries challenged the new obligations, the security interest and the payment to the third party, as fraudulent transfers. The court ruled in favor of the unsecured creditors and unwound the entire transaction. It strongly criticized the diligence of the lenders in investigating the insolvency of the guarantor debtors, interpreted narrowly the range of indirect benefits that would qualify as value, and declined to enforce the savings clauses in the loan agreements. Judge Olson remarked that “[t]he savings clauses are a frontal assault on the protection that section 548 provides to other creditors. They are, in short, entirely too cute to be enforced.” Legal and financial commentary on the opinion has warned that it may lead to more litigation against lenders who rely on intercorporate guaranties and, as a result, a further chill in the availability of credit to distressed corporate groups. This paper reviews the opinion in Tousa and outlines its implications for savings clauses and intercorporate guarantees. In brief, the analysis suggests that savings clauses will offer little protection against avoidance proceedings if the lender acted in bad faith, by failing to investigate adequately the debtor’s solvency. Conversely, a savings clause is more likely to be effective if the lender continues to monitor the solvency of the debtor during the term of the loan and to adjust periodically the amount of indebtedness in accordance with the clause. In any event, Tousa sets a precedent that threatens to increase the cost and decrease the availability of credit to distressed corporate groups. This may be bad news for these borrowers and the lenders, but its policy merits deserve closer evaluation. After all, fraudulent transfer laws themselves increase borrowing costs and reduce the availability of credit to distressed borrowers, and yet are generally regarded as socially beneficial because of the protection these laws provide to existing creditors. A closer look at the rationale behind multiple-entity enterprises and the policy behind fraudulent transfer doctrine is warranted, before rejecting the court’s treatment of savings clauses.
Number of Pages in PDF File: 15working papers series
Date posted: December 15, 2009 ; Last revised: February 6, 2010
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