In part one of our series on recharacterization, we discussed the elements of judicial recharacterization of loans as equity interests.[i]  In part two of the series, we considered how debtors can “claw back” putative “loans” that they may have repaid years earlier because the “loans” were in fact equity investments and their repayment was invalid.[ii]  In this finale of the series, we contrast recharacterization with equitable subordination, which is another means by which some creditors can seek to push ahead of others. Equitable subordination resembles recharacterization in that it permits […]

In our last article[i], we discussed the judicial recharacterization of loans as equity interests.  As we described, a court will recharacterize a lender’s debt claim as equity if it determines the “loan” actually was intended to be, and was treated by the parties as, an equity investment.  Recharacterization is a powerful tool for creditors and trustees because, under the Bankruptcy Code’s priority scheme, debt claims (and all general unsecured claims) must be repaid in full before equityholders can receive any distribution on account of their (equity) interests.  Because many, if […]