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Brent Blanchard
Brent Blanchard, Bankruptcy Attorney
Category: Bankruptcy Law
Satisfied Customers: 1975
Experience:  Twelve years experience in all aspects of debtor & creditor BK.
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if Company A makes a loan to Company B (loan agreement is bare

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if Company A makes a loan to Company B (loan agreement is bare bones, no special provisions other than due date, rate, quarterly payments, no guaranty, no collateral), and Company B turns around and lends that money to Company C...what happens if Company B goes bankrupt or can't make it's interest payments? does Company A have the right to demand the money from Company C or does it have to abide by the loan agreement between B and C, or does it have no rights whatsoever?
Submitted: 8 years ago.
Category: Bankruptcy Law
Expert:  Brent Blanchard replied 8 years ago.
What happens:

1. Company B lists the loan from Company A as a debt.

2. Company B lists the loan TO Company C as an asset.

3. The bankruptcy filing stops ANY attempt to collect the debt from Company A. There are, however, some routes to get "relief from the automatic stay" and either pursue under state law, or pursue the debt/challenge its dischargeability in the BK court.

4. Even without a BK filing, Company A's right to go after Company C would require some "assignment" of rights under the second loan to Company A. If that happens, Company A's rights are EXACTLY (no more, no less) than Company B's rights.

The answer gets more complicated and beyond the scope of what this forum can provide if there was/is some provable collusion between B and C. Mere agreements are not enough--the agreements must be for an improper purpose or illegal or part of an attempt to hinder, delay or defraud Company B's creditors.

Thank you.


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Customer: replied 8 years ago.
In this case, company B is a shell company with no actual business. The loan was made with the understanding, though not explicitly written, that Company B would, in fact, loan the funds to Company C (except for a 10% margin to be held at all times). The sole owner of Company B is a minority stakeholder in Company C. I think it does get more complicated, because companies A and B are Singapore based Limited Partnerships, and company C is an IndXXXXX XXXXXmited Partnership. There is no attempt to defraud Company A, but given the market conditions, and the fact that the loan agreement between B and C is written in the Borrower's favor, not the Lender's, it is possible Company B could end up out of money and owing Company A before Company C is required to pay. Does writing the second loan agreement in the borrower's favor constitute an illegal action?
Expert:  Brent Blanchard replied 8 years ago.
"The loan was made with the understanding, though not explicitly written, that Company B would, in fact, loan the funds to Company C (except for a 10% margin to be held at all times)."

Like my police friends say to each other, "If you don't write it, it didn't happen." It is VERY hard to prove side agreements even existed or were even enforceable, if there is a written contract. The chances drop to almost zero if the "bare bones" contract includes a paragraph about it being the "entire agreement". You signed it, you own it.

Loaning to an under-capitalized shell company is inherently fraught with risks which company A will be presumed to be fully aware of.

Generally, if there is any ambiguity (could mean this, OR could mean that) in a contract, the doubt is resolved in favor of the party who did NOT write the contract.

There is also an possible or actual conflict of interest and possibility of at least partial "self-dealing" regarding the roles of Company B's owner as a partial stakeholder in Company C. The entire deal could be challenged as not being at "arms length", and possibly even an attempt to HD&D Company B's creditors even if your charitable heart is giving them the benefit of the doubt. If Company B did NOT retain the 10% margin, there could be a basis to try to pierce the corporate veil and go after the owner personally as well.

And yes, there is probably a very high likelihood that Company B could owe Company A long before Company C repays the loan. Besides due dates and contractual obligations, if Company B is already in breach of the contract, there is the LEGAL obligation coming from and adverse court judgment possible in whatever timeline it takes to prosecute the case and get that judgment.

Location of the companies is usually relevant ONLY to the questions of where do you sue and how do you go GET the money owed. Look to the contracts first, because some include not only "use XYZ law", but "any legal action must be filed [at this place]".
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