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Recharacterization: The Debate

By James B. Sowka and Steven Schwartz
October 28, 2013

In recent years, bankruptcy courts have come closer to reaching a consensus regarding their ability to recharacterize debt into equity. Yet, beneath this consensus lies a deepening divide that lenders should be aware of. Recharacterization challenges “the assertion of a debt against the bankruptcy estate on the ground that the 'loaned' capital was actually an equity investment.” In re Insilco Techs., Inc., 480 F.3d 212, 217 (3d Cir. 2007) (internal citations omitted).

Historically, courts were divided as to whether bankruptcy courts had the power to recharacterize purported debt as equity. That debate has essentially ended and the general consensus is that bankruptcy courts can recharacterize purported debt as equity.

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