A borrower whose bankruptcy is supposedly “remote” because (1) its purpose is limited by its organizational documents, usually to the operation of a single real estate asset, (2) it agrees not to incur debt other than first mortgage debt, deeply subordinated secondary debt, and a limited amount of trade debt, and (3) it agrees to a number of “separateness” covenants to minimize the chance that the borrower’s assets and liabilities will be intermingled with the assets and liabilities of any entity affiliated with the borrower.
These measures help limit the number of potential creditors that might force the borrower into an involuntary bankruptcy and minimizes the possibility that the borrower will be substantively consolidated with an affiliate of the borrower in the affiliate’s bankruptcy. In some cases the vote of an “independent director” is required for the borrower to file a bankruptcy case.
The possible bankruptcy of the borrower is made even more remote (and many believe this will be the most important of all of these devices in preventing a Chapter 11 filing) by requiring the debtor’s principals to sign a guaranty providing for “springing recourse” (full personal liability) if a bankruptcy occurs.
See also Exploding Guaranty, Nonrecourse, Recourse, Springing Guaranty, Springing Recourse, Substantive Consolidation.