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Overview In a recent decision, In re Live Primary, LLC, 626 B.R. 171, 178 (Bankr. S.D.N.Y. 2021), the Bankruptcy Court for the Southern District of New York found that a $6 million debt claim arising from purported loans to a debtor from one of its members should be recharacterized as an equity interest.  Although debt held by insiders and shareholders is often closely scrutinized when a debtor files for chapter 11 protection, recharacterization of this nature remains a rare form of relief so long as the lender has adhered to basic loan formalities.  However, when dealing with unique facts...

In This Issue: In In re Orexigen Therapeutics, Inc., 990 F.3d 748 (3d Cir. 2021), the U.S. Court of Appeals for the Third Circuit ruled as a matter of first impression that "triangular setoff" does not satisfy the Bankruptcy Code's "mutuality" requirement. Should Equitable Mootness Bar Appeals Only of Chapter 11 Plan Confirmation Orders? As demonstrated by a ruling recently handed down by the U.S. District Court for the Northern District of Texas, courts disagree on whether equitable mootness should apply only to appeals of plan confirmation orders. In Harden Healthcare LLC v. OLP Wyoming ...

To embed, copy and paste the code into your website or blog: It is generally recognized that a bankruptcy court has the power—either equitable or statutory—to recharacterize a purported debt as equity if the substance of the transaction belies the labels the parties have given it. A ruling handed down by the U.S. Bankruptcy Court for the Southern District of New York provides a textbook example of such a recharacterization. In In re Live Primary, LLC, 2021 WL 772248 (Bankr. S.D.N.Y. Mar. 1, 2021), the court held that a purported loan made to a startup limited liability company by one of ...

In This Issue: In  In re Orexigen Therapeutics, Inc., 990 F.3d 748 (3d Cir. 2021), the U.S. Court of Appeals for the Third Circuit ruled as a matter of first impression that "triangular setoff" does not satisfy the Bankruptcy Code's "mutuality" requirement.  Should Equitable Mootness Bar Appeals Only of Chapter 11 Plan Confirmation Orders? As demonstrated by a ruling recently handed down by the U.S. District Court for the Northern District of Texas, courts disagree on whether equitable mootness should apply only to appeals of plan confirmation orders. In  Harden Healthcare LLC v. OLP Wyomi...

When is a loan not a loan? The SDNY Bankruptcy Court in In Re: Live Primary, LLC held that a $6 million start-up loan was actually an equity contribution after analyzing the terms of the transaction and the intent of the parties. The court recharacterized the loan as equity given the alleged loan functioned as an equity investment would be expected to function. As a result, the insider investor's claim was subordinated to the claims of creditors of the company. The Risks of Recharacterization Shareholders, sponsors, and third-party lenders should be aware of the risks of recharacterization....