As first discussed in my previous column, “Gulf Fleet a Lexicon for Sponsors, Affiliate Transfers and Failed LBOs,” NYLJ (April 25, 2013), insider loans continue to be a source of litigation in recent bankruptcy cases, providing guidance on the possibility for re-characterization of such loans.
Similar to the bankruptcy court in Gulf Fleet,1 the Ninth Circuit recently joined the reasoning of the Fifth Circuit in Lothian Oil in holding that a bankruptcy court may re-characterize debt as equity.2 Resolving a split within the circuit, the court of appeals held in Fitness Holdings that a bankruptcy court has the authority to re-characterize debt for purposes of ruling on claims of fraudulent transfer pursuant to §548 of the Bankruptcy Code where the debt at issue does not constitute a right to payment, and thus does not constitute a claim, under state law.3
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