Independent Directors in Bankruptcy-Remote SPEs: A 2026 Guide
Updated: Sep 8
If you have ever worked on a CMBS loan or debt fund loan above $20 million, you have seen the requirement buried in the term sheet: the borrower must be a bankruptcy-remote special purpose entity with at least one independent director.
For lenders, that line is non-negotiable. For borrowers and sponsors, it is often the least understood condition in the entire loan document, because a stranger is being added to their entity and they are not always sure why. For the attorneys papering the deal, it is a set of provisions that must be drafted precisely, since a defect discovered at closing can delay funding by weeks.
This guide explains the role from all three perspectives: what a bankruptcy-remote SPE actually is, why the independent director requirement exists, what these individuals are and are not empowered to do, how rating agencies evaluate them, and how to appoint one without holding up your closing.
Key Takeaways
An independent director is a person with no economic stake in the sponsor who must affirmatively consent before the entity takes certain material actions, principally a voluntary bankruptcy filing.
Their consent rights are narrow and enumerated. They do not approve leases, budgets, draws or hiring, and day-to-day control of the asset stays with the sponsor.
The requirement is effectively mandatory in CMBS, CRE CLO, syndicated loans, and debt fund transactions, and are common in life company and mezzanine deals.
Bankruptcy remote is not bankruptcy proof. Courts have enforced properly drafted consent requirements, and have refused to enforce provisions that stripped the independent party of any duty to consider the entity's interests.
Appointment happens just prior to closing on a loan.
What Is a Bankruptcy-Remote SPV or Special Purpose Entity?
A special purpose entity, or SPE, is a legal entity formed to do exactly one thing. In commercial real estate, that one thing is almost always to own and operate a single property that serves as collateral for a single loan. In structured finance, the same vehicle is usually called an SPV, or special purpose vehicle, but the concept is identical.
The entity becomes a bankruptcy-remote SPV when its structure and governing documents are designed to make a bankruptcy filing substantially less likely, and to make it substantially harder for a court to pull the entity's assets into a related company's bankruptcy estate.
The distinction that trips people up: bankruptcy remote is not bankruptcy proof. No structure can permanently strip an entity of its statutory right to seek bankruptcy protection, and provisions that attempt an outright waiver of that right are widely regarded as unenforceable on public policy grounds, a point we return to in the case law section below.
What bankruptcy remoteness does is make a filing procedurally difficult and structurally isolated. It raises the barrier rather than removing the door.
Why an SPV is not automatically bankruptcy remote
Forming a single-asset LLC is easy and inexpensive. Making that entity a bankruptcy-remote SPV is a separate exercise that requires a specific set of structural features. At a minimum, lenders expect:
A limited purpose. The entity may own, finance, and operate only the specific property, with no unrelated business activity.
A debt limitation. No indebtedness beyond the subject loan and limited ordinary-course trade payables.
Separateness covenants. Its own books, accounts, financial statements, and identity, held out separately and free of commingling. These are the practical defense against substantive consolidation.
An independent director. At least one person on the governing body with no economic stake in, and no prior relationship with, the borrower or its affiliates.
A springing member. For single-member LLCs, a designated party admitted automatically if the sole member ceases to be one, preventing an unintended dissolution.
A non-consolidation opinion. In larger and securitized deals, a reasoned opinion from outside counsel that a court would likely not consolidate the entity's assets with those of its parent.
Remove any one of these and the structure weakens. Each element is worth its own treatment, and we cover the underlying concept in more depth separately. The independent director is the piece most often misunderstood, so it gets the bulk of this guide. First, though, there is a terminology problem worth clearing up.
SPE vs. SPV vs. BRE: Sorting Out the Terminology
Three acronyms circulate in the same conversations, often interchangeably, and the imprecision causes real confusion in negotiations.
Term | What it stands for | How it is typically used |
SPE | Special Purpose Entity | The standard term in U.S. commercial real estate finance. Refers to the single-purpose borrowing entity itself. Sometimes rendered as single-purpose entity. |
SPV | Special Purpose Vehicle | Functionally the same concept, but more common in structured finance, securitization, and cross-border transactions. An ABS or CLO issuer is more often called an SPV than an SPE. |
BRE | Bankruptcy Remote Entity | Emphasizes the characteristic rather than the entity type. A BRE is an SPE or SPV that has been given the full bankruptcy-remoteness treatment. |
The practical takeaway is that an entity can be a special purpose entity without being bankruptcy remote. When a lender's term sheet says SPE, or a securitization document says SPV, they almost always mean a bankruptcy-remote SPV carrying every structural feature listed above. Borrowers who form a plain single-asset LLC and assume the requirement is satisfied are usually surprised late in the closing process.
Does the SPE vs. SPV label change the requirements?
No. The independent director requirement, the separateness covenants, and the springing member provision apply the same way whether the documents call the borrower an SPE, an SPV, or a bankruptcy remote entity. What changes is the audience. Real estate lenders and their counsel tend to say SPE. Rating agencies, CLO managers, and securitization parties tend to say bankruptcy-remote SPV. Reading a term sheet, treat them as the same requirement and check the substance rather than the label.
Why Lenders Require an Independent Director
The requirement traces back to a specific risk that lenders learned about the hard way.
When a borrower is controlled entirely by its sponsor, nothing structurally prevents that sponsor from authorizing a voluntary bankruptcy filing for the property-owning entity once distress arrives. The filing triggers an automatic stay. The lender's foreclosure stops. The property enters a process that can take months or years, during which value erodes, and the sponsor gains leverage to renegotiate terms from a position the lender never agreed to underwrite.
The independent director exists to interpose a decision-maker who has no incentive to make that filing for tactical reasons.
What independence actually requires
The individual must have no material relationship with the borrower, the sponsor, their affiliates.
Specifically, an independent director generally cannot be, and cannot have recently been:
A direct or indirect equity holder in the entity or its affiliates
An officer, employee, or director of the borrower or its affiliates, other than in an independent capacity for other SPEs
A customer, supplier, or creditor of the borrower or its affiliates
A close family member of any of the above
What they must have instead is professional competence, meaning the judgment and reliability to evaluate a material corporate action on its merits. This is why the role is typically filled by professional service providers rather than by an accommodating acquaintance of the sponsor.
What Courts Have Held About Independent Director Consent Rights
The enforceability of provisions restricting a voluntary bankruptcy filing is not uniform, and the decisions are best read as a spectrum rather than a rule. Four are cited most often, and together they explain why the drafting details in your operating agreement matter more than the label on the role.
In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016), is the cautionary case. The governing document relieved the blocking party of any duty to consider the entity's interests, leaving it free to act purely in the lender's interest. The court held the provision void. The lesson is not that consent rights are unenforceable; it is that stripping the independent party of fiduciary obligation converts a governance provision into something closer to a waiver.
In re Intervention Energy Holdings, LLC, No. 16-11247 (KJC), 2016 WL 3185576 (Bankr. D. Del. June 3, 2016), addressed the golden share structure, in which a lender received a small equity interest carrying a veto over any filing. The court declined to enforce it, reasoning that a provision whose sole purpose is to give a creditor the power to block access to bankruptcy relief is contrary to federal public policy.
In re Franchise Services of North America, Inc., 891 F.3d 198 (5th Cir. 2018), is the leading appellate decision and points the other way on its facts. The Fifth Circuit held that a bona fide equity holder may exercise a voting right to prevent a filing, where state law does not impose a contrary fiduciary duty and the equity holder is not merely a creditor in disguise. Form and genuine equity status carried the day.
In re 301 W N. Ave., LLC, 666 B.R. 583 (Bankr. N.D. Ill. 2025), is the most recent and the most directly relevant to CRE practice. The court dismissed a Chapter 11 case filed without the consent of the independent manager that the loan documents required, holding the filing unauthorized. It is a reminder that these provisions are not decorative and that a filing made without the required consent can be undone. An appeal was filed in January 2025; readers relying on the decision should confirm its current posture.
Three practical points emerge, subject to the caveat that outcomes are fact-specific and vary by jurisdiction:
Form matters less than substance. A provision framed as a governance requirement is more likely to be respected than one that functions as a contractual waiver of the right to seek relief.
Preserving fiduciary obligation is central. Where the independent person retains ordinary obligations in the role, the requirement has been enforced. Where the document removed those obligations, it failed.
Independence should be genuine. A person who serves only to register the secured creditor's preference has been described by a court as misunderstanding the role, and that characterization is exactly what a challenging party will quote.
Independent Directors in Commercial Real Estate Finance
Independent directors appear across essentially every institutional lending channel in finance, but are highly focused on commercial real estate, due to the SPE nature of most ownership and financing.
CMBS
Conduit lending is where the requirement is most rigid. Because the loan will be securitized and rated, the borrower entity must satisfy published rating agency criteria, and independent director provisions are a baseline element of those criteria. Historically, per CREFC, rating agencies required SPE borrowers on CMBS loans above roughly $20 million to include an independent party whose approval was necessary before a voluntary bankruptcy filing. Larger loans frequently require two independent directors and a non-consolidation opinion. There is little room to negotiate here, because while the requirement is the lender's, it matters more how the rating agency will review such transactions and perceived risks. Rating agencies review the independent director as a standard, so deviations from it are a credit negative.
CRE CLO and debt funds
Bridge lenders and debt funds that may contribute loans to CRE CLO vehicles apply substantially similar requirements, because their exit depends on the loan being eligible for the CLO. Requirements can be somewhat more flexible on smaller loans, but the core structure is the same.
Life insurance companies
Life company lenders are typically balance-sheet holders and can set their own terms, but they are conservative underwriters and generally require full SPE structuring with independent governance on institutional-size loans.
Banks and balance-sheet lenders
This is the most variable channel. A bank holding a loan on its balance sheet has discretion, and requirements often scale with loan size, property type, and sponsor relationship. Many banks that will broadly syndicate a loan will often require an independent director structure.
Preferred equity and mezzanine
Mezzanine lenders often require independent governance at the mezzanine borrower level as well, creating a structure with independent directors at multiple tiers.
The underlying logic: real estate collateral isolation
Across all of these channels, the purpose of the independent director in a real estate transaction is the same. Isolating a single property in a single entity with restricted powers and independent governance means that if the sponsor's other real estate assets fail, this property's collateral value is protected. That isolation is what makes the loan ratable, marketable, and, for the borrower, cheaper. Sponsors sometimes resist the requirement without recognizing that the pricing they were quoted already assumes it.
Independent Directors in Other Deals
Commercial real estate is where most people first encounter the role, but the same structure is used across the wider structured finance market. Anywhere a lender or investor needs a defined pool of assets isolated from an operating company's credit risk, a bankruptcy-remote SPV with independent governance is the standard answer. The sectors below all rely on it.
Infrastructure and project finance. Toll roads, ports, pipelines, transmission lines, and public-private partnerships are typically financed at a project-level SPV that owns the concession and the assets. Lenders in these deals often hold exposure for twenty years or more, so independent governance protecting against a sponsor-driven filing matters even more than in a five-year mortgage.
Asset-backed financing and securitization. ABS issuers across auto loans, credit card receivables, equipment leases, franchise royalties, and whole business securitizations are formed as bankruptcy-remote SPVs. The independent director requirement here comes directly from rating agency criteria, and the true sale and non-consolidation analysis depends on it.
Aviation and airports. Aircraft and engine portfolios are commonly held in orphan SPVs with independent directors, and airport financings, including terminal concessions and passenger facility charge deals, use the same project-level structure. Cross-border aircraft leasing adds further layers, with independent governance often required at each tier.
Solar and renewable energy projects. Solar, wind, and battery storage projects are financed at the project company level, and tax equity investors and construction lenders both look for bankruptcy remoteness. Independent director consent rights are frequently required at the project company, the holdco, and, in portfolio financings, the aggregator entity.
Receivables and trade finance. Factoring facilities, supply chain finance programs, and receivables securitizations move the receivables to a purchaser SPV precisely so that the originator's insolvency does not reach them. Independent governance is what keeps that separation credible.
Fund finance, Note on Note, and NAV facilities. Subscription lines, NAV loans, and rated feeder structures increasingly use SPVs with independent managers, particularly where a rating is sought or where the borrower sits beneath a fund with its own leverage.
Data centers, digital infrastructure, and net lease. Fiber networks, cell towers, and data center portfolios are financed through securitizations that borrow the CMBS playbook wholesale, including the independent director requirement.
What an Independent Director Actually Votes On
This is the section to send to any sponsor who is anxious about giving up control.
An independent director is not a manager of the business. They do not approve leases, sign construction draws, hire property managers, set budgets, or participate in operations. Their consent rights are limited to a defined and narrow set of material actions, enumerated in the organizational documents.
The list typically includes:
Filing a voluntary bankruptcy petition, or consenting to an involuntary petition. This is the central provision.
Consenting to the appointment of a receiver, trustee, or liquidator for the entity or its property.
Making an assignment for the benefit of creditors.
Dissolving, liquidating, or winding up the entity.
Merging or consolidating with another entity.
Selling all or substantially all of the entity's assets.
Amending the organizational documents, particularly the separateness and bankruptcy-remoteness provisions.
Admitting the entity's inability to pay its debts generally as they become due.
Two structural safeguards usually accompany the list:
Affirmative consent. Where the documents require independent director consent, that consent is required affirmatively. A material action cannot proceed over the independent director's objection.
No removal without replacement. The sponsor cannot remove an independent director unless a qualified successor is simultaneously appointed. Without this, the entire protection could be defeated in an afternoon.
That is the complete scope. Day-to-day control of the asset remains fully with the sponsor. Broader governance design, including how these provisions interact with the rest of the structure, is addressed separately.
How Rating Agencies Evaluate Independent Directors
In rated transactions, the independent director is a ratings input.
Rating agencies publish criteria for bankruptcy-remote entities, and while the details differ among S&P, Moody's, Fitch, KBRA, Morningstar DBRS, and others, the analytical concerns converge:
Genuine independence. Not just formal qualification, but the absence of any relationship that would compromise judgment in practice.
Provider institutional capacity. Agencies look at whether the independent director is backed by a firm with knowledge, insurance, continuity planning, and the ability to respond within required timeframes.
Enforceability of the consent right. Whether the governing documents actually make the consent right effective, including the no-removal-without-replacement provision.
Consistency with the non-consolidation opinion. The opinion's factual assumptions must match the entity's actual governance and operations. A mismatch undermines both.
Track record. Whether the provider has served in prior transactions without governance failures.
The practical point for borrowers and counsel is that the choice of independent director provider is a diligence item, not a commodity purchase. A provider that cannot satisfy agency criteria will need to be replaced, and replacement mid-transaction costs time you probably do not have.
Independent Directors, Springing Members, and Special Members
These roles are frequently conflated, sometimes within the same operating agreement. They are distinct, and a structure can be defective if one is provided and another is assumed.
Role | Trigger | Function | Equity interest |
Independent Director or Manager | Active from appointment | Votes on enumerated material actions, principally bankruptcy | None |
Springing Member | Springs into place only if the sole member ceases to be a member | Prevents dissolution of a single-member LLC, preserving entity continuity | None |
The reason springing members matter is that under Delaware law a limited liability company is dissolved at any time there are no members, subject to a cure. Under 6 Del. C. section 18-801(a)(4), the company is not dissolved if the personal representative of the last remaining member agrees within 90 days to continue it and to admit itself or its nominee as a member, or if a member is admitted within 90 days in the manner provided in the LLC agreement. The statute also permits the LLC agreement to specify a different period.
The practical risk, then, is not that the entity instantly vanishes. It is that continuity depends on someone taking affirmative action inside a fixed window, at exactly the moment when the member entity may itself be in bankruptcy and the people who would normally act are unavailable or adverse. A springing member provision removes that dependency by providing for automatic admission of a replacement member, without capital contribution, economic interest, or voting rights.
For a single-member SPE, that is a live risk. If the member entity files for bankruptcy or dissolves, the property-owning LLC's continuity is in question, disrupting the lender's collateral position at the worst possible moment.
In many structures, the same individual serves as both independent manager and springing member. That is efficient, but it should be explicit in the documents rather than assumed.
How and When to Appoint an Independent Director
The most common practical failure in this area is not choosing the wrong provider. It is waiting too long.
The timing problem
Independent director appointment is routinely treated as a closing checklist item and pushed to the final days of a transaction. That is a mistake, because appointment is not a single action. It requires:
Provider engagement and conflict clearance
Review of the organizational documents and the specific independence and material-action provisions
Execution of the amended operating agreement or certificate
Delivery of lender certificates, consents, and any required certifications to the lender and, in rated deals, to the agencies
Any one of these can surface an issue. A provider who cannot satisfy the specific independence language, an operating agreement that names an independent director of an LLC, or an opinion assumption that does not match the actual structure will each take time to fix.
A workable timeline
When | What |
Term sheet | Identify that an independent director is required. Confirm how many, and that the transaction is at arm's length amongst non-affiliated entities. |
30 or more days before closing | Engage the provider. Share draft organizational documents for review. |
2 to 3 weeks before closing | Provider comments incorporated into service agreement and operating agreement. Independence and material-action provisions finalized. SPE Specialists signs the signature page well in advance of closing. |
Closing | SPE Specialists has already completed its process and often has no action to take at closing. |
What to look for in a provider
Responsiveness. Can they turn documents around in hours rather than days when the closing schedule compresses?
Experience. Do they understand commercial real estate, distress, and capital markets?
Rating agency acceptance. Have they served in rated transactions without issue?
Institutional continuity. Is there a firm behind the individual, with succession planning and insurance?
Genuine independence. No affiliation that could be challenged.
Transparent, flat-rate pricing. Surprise fees at closing help no one.
Substantive review, not just a signature. A provider who actually reads the documents catches problems that would otherwise surface in the opinion or at the agency.
Common Mistakes
Appointing an insider. A friend, a former colleague, or a family member of the sponsor. It defeats the purpose, and it can be challenged in exactly the moment the structure is supposed to protect the lender.
Treating separateness covenants as boilerplate. Substantive consolidation arguments are built on commingled accounts, shared stationery, and consolidated financial statements. The independent director cannot cure operational disregard for separateness.
Forgetting the springing member. Independent governance without entity continuity leaves a real gap.
Drafting away the fiduciary obligation. A provision that relieves the independent party of any duty to consider the entity's interests is the fact pattern that produced Lake Michigan Beach.
Waiting until just before closing. SPE Specialists can provide independent director services the same day, but we prefer to do it well in advance of closing so we’re not a factor on closing day.
Frequently Asked Questions
Is a bankruptcy-remote SPE the same as a bankruptcy-proof entity?
No. Bankruptcy remoteness reduces the probability of a filing and of consolidation with an affiliate; it does not eliminate either. Any entity that qualifies as a debtor under the Bankruptcy Code retains access to it. What a well-drafted structure changes is who must consent before the entity seeks relief.
What does an independent director actually vote on?
Only the material actions enumerated in the organizational documents. That list typically covers a voluntary bankruptcy filing, consenting to an involuntary petition, appointment of a receiver or trustee, assignment for the benefit of creditors, dissolution, merger, sale of substantially all assets, and amendment of the separateness provisions. They have no role in leases, budgets, draws, hiring or operations.
Can a sponsor remove an independent director?
Well-drafted documents prohibit removal without the simultaneous appointment of a qualified successor. Without that provision, the protection could be defeated in an afternoon, which is why rating agencies examine it specifically. Confirm the language in the operating agreement rather than assuming it is present.
Does every commercial real estate loan require an independent director?
No, but most institutional-scale loans do. It is effectively mandatory in CMBS and CRE CLO transactions because the requirement belongs to the securitization rather than the lender. Life companies generally require it on institutional-size loans. Balance-sheet banks have discretion and vary by loan size, property type, and sponsor relationship.
How much does an independent director cost?
Fees are typically charged as a flat annual amount per entity, with the range driven by the number of entities, whether the transaction is rated, and whether a non-consolidation opinion requires additional review. The cost is small relative to the transaction and materially lower than replacing a provider mid-closing. Ask for flat-rate pricing so that closing-day surprises are off the table.
How long before closing should an independent director be appointed?
Engage the provider 30 or more days before closing and share draft organizational documents at that point. Independence language and material-action assumptions all need to line up, and each can surface an issue that takes time to resolve.
Can the same person serve as both independent manager and springing member?
Yes, and in many structures the same provider fills both roles. The documents should say so explicitly. Problems arise where an agreement refers to a springing member without naming one, or assumes the independent manager will be admitted as a member on the triggering event without any provision actually admitting them.
Closing
The independent director requirement is one of the most consequential provisions in a commercial real estate loan, and one of the least understood. Handled well, it is a routine appointment that costs little and delays nothing. Handled as an afterthought, it becomes the item that holds up a closing.
SPE Specialists provides independent director, independent manager, and springing member services to special purpose entities in commercial real estate and structured finance transactions. We review the documents substantively, are accepted by rating agencies, and can execute the same day with electronic signatures when a closing schedule demands it.
Contact us to discuss an upcoming transaction: https://www.spespecialists.com/intake-form
Explore more on bankruptcy remoteness and SPE governance: https://www.spespecialists.com/learn
Note on Sources and Scope
Jurisdiction and facts control. Entity formation, fiduciary obligation, and the authority to commence a bankruptcy case are governed primarily by the law of the state of organization, and outcomes turn on the specific organizational and financing documents.
The law is unsettled. Courts have reached differing conclusions on the enforceability of provisions restricting a voluntary filing. The decisions above are the ones most frequently cited, not an exhaustive survey, and several are trial-level rather than binding appellate authority.
Procedural posture. In re 301 W N. Ave., LLC is a bankruptcy court decision, and an appeal was filed in January 2025. Its current posture has not been confirmed for this article.
No conclusions about any specific structure. Nothing here evaluates the adequacy of any particular entity, document, or transaction.
This article is provided for general informational and educational purposes. It is not legal advice, and it does not create an attorney-client or advisory relationship. SPE Specialists provides governance services and does not practice law. Readers evaluating a specific structure should consult qualified counsel.
Sources
In re Lake Michigan Beach Pottawattamie Resort LLC, 547 B.R. 899 (Bankr. N.D. Ill. 2016)
In re Intervention Energy Holdings, LLC, No. 16-11247 (KJC), 2016 WL 3185576 (Bankr. D. Del. June 3, 2016)
In re Franchise Services of North America, Inc., 891 F.3d 198 (5th Cir. 2018)
In re 301 W N. Ave., LLC, 666 B.R. 583 (Bankr. N.D. Ill. 2025)
6 Del. C. section 18-801 (Delaware Limited Liability Company Act, Dissolution)
Jones Day, Chapter 11 Filing Without Consent of Independent Director Dismissed as Unauthorized (May 2025)
Dechert LLP, Bankruptcy Remote Special Purpose Entities in Commercial Mortgage Lending: Characteristics, Enforcement and Limitations (October 2020)
American Bar Association, Bankruptcy Remote Special Purpose Entities in Commercial Mortgage Lending, eReport
CREFC, independent director requirements for CMBS SPE borrowers
