Bankruptcy Based Lender Liability Claims

Summary

This practice note addresses lender practices that potentially exposes lenders to liability based on claims arising under the Bankruptcy Code. If a borrower files for bankruptcy, a lender may be subject to additional claims. This includes (1) claims that a transfer made by the borrower to the lender may be avoided as preferential under Section 547 of the Bankruptcy Code (but only as to any unsecured or under-secured portion of a lender's claim), (2) claims that a transfer or obligation should be avoided because it constituted an actual or constructive fraudulent transfer, (3) claims that the lender's claims are unperfected or should be equitably subordinated, (4) claims that the lender's claims should be recharacterized as equity rather than debt, and (5) claims for surcharge under Section 506(c) of the Bankruptcy Code.