Partner Ron Meisler and associates Christopher Dressel, Zahed Haseeb and Matthew Lapata authored an article in the Norton Journal of Bankruptcy Law and Practice article analyzing the evolving doctrine of debt characterization, which allows bankruptcy courts to treat a transaction that substantively amounts to a capital contribution as in interest in, rather than a claim against, the debtor in bankruptcy.
The authors trace circuit splits over governing law and the application of federal- and state-law frameworks and note that regardless of the differing approaches taken by the courts to the issue of recharacterization, whereby some states use multifactor assessments similar to the federal test and some use a common law contractual approach, contracting parties can mitigate the risk of recharacterization by properly documenting their intent to create a borrower-lender relationship and conducting dealings accordingly.
Reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 29 No. 3 (June 2019), with permission of Thomson Reuters. Copyright © 2019. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.