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Debt or Equity? SDNY Bankruptcy Court Says "Debt" in a Recent Case Involving Recharacterization of a Party's Debt Claim as Equity | Weil, Gotshal & Manges LLP


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 and circumstances such as those presented in ....

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Bankruptcy Court Recharacterizes Purported Loan as Equity | Jones Day


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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 its members should be treated as a capital contribution because, among other things, the company was inadequately capitalized and the unsecured loan was not properly documented, bore a ....

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