How can an ostensible lending transaction be recharacterized later on as an equity investment?
When a client decides to extend debt funding to a struggling venture that finds itself in bankruptcy, this loan can later be â€śrecharacterizedâ€ť as equity, leaving your client to wait at the back of the line behind â€śtrueâ€ť lenders and lienholders.
On Tuesday (7/28), colleagues Victor Sahn and Jeff PomeranceÂ of SulmeyerKupetz Professional Corporation joined me and about 30 of our friends for a webinar discussion on debt-equity recharacterization and the related (but distinct) concept of claimÂ subordination in bankruptcy.
View it here.
Update: Â A 3-judge panel of the Tenth Circuit Court of Appeals has very recently issued a decision on this issue (available here), upholding prior authorityÂ and deciding a request for recharacterization in favor of the creditor. Â Along the way, the Tenth Circuit acknowledged a split in the Circuits over the basis for Bankruptcy Courts’ authority to recharacterize claims. Â Will we see a trip to the Supreme Court?