So, here are couple of not legal advice thoughts from a bankruptcy professional.
First, we have two or more regimes at play here. The bankruptcy process, which has a variety of mechanisms for recovering funds under the bankruptcy code. The US Department of Justice’s ability to recoup criminal proceeds. Finally, the possibility of claims under non-US insolvency statutes. I’m not going to speak to the second since I have little clue of whether that will be an issue when it comes to grants—but my gut says it won’t. The third is sort of speculative at the moment.
On the former, there are two main avenues for recovery. Preferences, which apply to funds transferred within 90 days prior to the bankruptcy filing, and constructive fraudulent transfers.
On preferences the transfer has to be from the debtor. So, if the entity paying the money isn’t one of the companies that actually filed—there’s no preference. The entity paying also needs to be insolvent when the transfer is made. This means it has to have more debts than assets. It seems quite possible that the charitable entities were solvent, even if the parent entities were not. Finally, if the transfer was made in the ordinary course of the business and according to ordinary terms, there is no clawback. This defence seems likely to apply in the context of grants, although I suppose it really depends on the details of the particular grants. I would say that successful preference claims are unlikely, although it is possible that some bankruptcy trustee or professional will decide to send everyone demand letters.
Constructive fraudulent transfers are ones made when the payor is insolvent without receiving similar value in return. Again, if the payor is not actually one of the entities in bankruptcy there is no fraudulent transfer. Also, if the payor was solvent when the grant was made, there is no fraudulent transfer. Finally, it is possible that the agreement of the grantee to use the grant money for the purposes intended is enough to satisfy the return value requirement. I’m not very sure on this last point.
Even if the companies making the grants are not in the bankruptcy yet, or were solvent, you still need to watch out for something called “substantive consolidation.” This is when the bankruptcy court decides to treat some or all of the related entities as one single entity. If that happens, then these payments might be treated as coming from the bankrupt entity when it was insolvent.
So, here are couple of not legal advice thoughts from a bankruptcy professional.
First, we have two or more regimes at play here. The bankruptcy process, which has a variety of mechanisms for recovering funds under the bankruptcy code. The US Department of Justice’s ability to recoup criminal proceeds. Finally, the possibility of claims under non-US insolvency statutes. I’m not going to speak to the second since I have little clue of whether that will be an issue when it comes to grants—but my gut says it won’t. The third is sort of speculative at the moment.
On the former, there are two main avenues for recovery. Preferences, which apply to funds transferred within 90 days prior to the bankruptcy filing, and constructive fraudulent transfers.
On preferences the transfer has to be from the debtor. So, if the entity paying the money isn’t one of the companies that actually filed—there’s no preference. The entity paying also needs to be insolvent when the transfer is made. This means it has to have more debts than assets. It seems quite possible that the charitable entities were solvent, even if the parent entities were not. Finally, if the transfer was made in the ordinary course of the business and according to ordinary terms, there is no clawback. This defence seems likely to apply in the context of grants, although I suppose it really depends on the details of the particular grants. I would say that successful preference claims are unlikely, although it is possible that some bankruptcy trustee or professional will decide to send everyone demand letters.
Constructive fraudulent transfers are ones made when the payor is insolvent without receiving similar value in return. Again, if the payor is not actually one of the entities in bankruptcy there is no fraudulent transfer. Also, if the payor was solvent when the grant was made, there is no fraudulent transfer. Finally, it is possible that the agreement of the grantee to use the grant money for the purposes intended is enough to satisfy the return value requirement. I’m not very sure on this last point.
Even if the companies making the grants are not in the bankruptcy yet, or were solvent, you still need to watch out for something called “substantive consolidation.” This is when the bankruptcy court decides to treat some or all of the related entities as one single entity. If that happens, then these payments might be treated as coming from the bankrupt entity when it was insolvent.