Section 345B of the bankruptcy code provides for an undertaking to guarantee the deposits in bank accounts outside of FDIC insurance. It’s essentially a depository bond related to bankruptcy, and the guarantee is that the monies will be accounted for and returned in the event of insolvency of the bank where held. In the event it is not returned, the surety would be liable.
When clients approach my office, it can be hard to obtain the bond because sometimes the only indemnity available is the actual debtor in possession. If the company recently filed bankruptcy, and they are the only party available to indemnify or execute an indemnification to the surety, there isn’t much value to that indemnity. Now let’s say that there’s a plan to exit bankruptcy, or they are a little bit farther into the process, and there is a clear direction on where the matter is heading, there are other options.
At times there could be a company that is about to acquire the entity in bankruptcy, the acquiring entity can step in as an indemnitor on their behalf and help the bankrupt company obtain the bond. If there are other parties or vested interests, they can do the same thing through an indemnification to the surety that would not be disclosed to the court.
One of the things to note with these types of guarantees is that if the surety needs to obtain indemnity and payment from the bankrupt entity, a motion would need to be made to the bankruptcy court requesting the approval of payments and execution of agreements. Once court approved, everything can move forward.
The other option is that sometimes there are companies that need overseas bank accounts or domestic accounts of non-FDIC insured banks, and the bankrupt entity — with the approval of the bankruptcy court — can deposit collateral equal to the bond amount in the form of cash or a letter of credit to secure the obligation. Since we’re possibly taking collateral from an entity in bankruptcy, everything would need to be approved by the court as well.
I’m Neil Pedersen. If you have a situation you want to talk about, bounce some ideas, or brainstorm how things would work, give me a call, and let’s have a chat.
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