Grossman v. Lothian Oil Inc.
650 F.3d 539
| 5th Cir. | 2011Background
- Israel Grossman loaned Lothian Oil money in 2005 with a 1% royalty on Webb Properties and a repayment provision tied to equity placements.
- A second 2005 loan of $150,000 also carried a 1% royalty and repayment from equity placements, under a term that referenced a Sterling Bank Credit Agreement.
- Debtors filed Chapter 11 in 2007; a 2008 plan of liquidation was confirmed, and a 2008 settlement paid Grossman $1.025 million on most claims.
- Grossman pursued Undetermined Claims; in 2008–2009 the bankruptcy court rejected those claims as either equity interests or unrelated to the debtors.
- Only Grossman’s claim holdings remained at issue after settlements and rulings; the district court limited the appeal to his personally signed filing, dismissing others for unsigned notices.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May a bankruptcy court recharacterize a debt as equity? | Grossman contends recharacterization is improper or inapplicable to his claims. | Lothian asserts the court may recharacterize where appropriate under state law and §502. | Yes; recharacterization is proper under state law and §502. |
| Does recharacterization apply to non-insider creditors, not just insiders? | Insiders only should be subject to recharacterization per district court. | Recharacterization depends on state-law factors, not insider status alone. | Applicable to both insiders and non-insiders. |
| What legal standard governs debt-vs-equity characterization in this context? | Texas law multi-factor tests should determine debt vs equity. | Federal tax-derived multi-factor tests are appropriate and comprehensive. | Texas/State-law multi-factor approach governs; factors weighed per Mixon/Jones framework. |
| Did the district court properly dismiss appeals by non-Grossman appellants for unsigned notices? | Unsigned notices may be cured under Rule 11, preserving jurisdiction. | Unsigned notices were not cured; dismissal was proper. | Yes; dismissal of non-Grossman appellants was correct. |
| Was Grossman’s Undetermined Claim 174 properly disallowed as unsupported? | Claim 174 rests on implied-contract theory benefitting debtors. | Record lacks evidence that the debtors benefited; contract binding failed. | Disallowed; no contractual basis or implied-benefit shown. |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (Supreme Court, 1979) (state-law governs property rights in bankruptcy assets)
- In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir. 2006) (multi-factor approach to debt-vs-equity characterization)
- In re Dornier Aviation, Inc., 453 F.3d 225 (4th Cir. 2006) (recharacterization under equity notions; rights tied to state law)
- In re Hedged-Invs. Assocs., 380 F.3d 1292 (10th Cir. 2004) (recharacterization sometimes grounded in equitable authority)
- In re AutoStyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001) (distinguishing equity from debt in bankruptcy context)
- Jones v. United States, 659 F.2d 618 (5th Cir. 1981) (11-factor test for debt-vs-equity distinctions)
- Estate of Mixon v. United States, 464 F.2d 394 (5th Cir. 1972) (instructional 13-factor test for debt-vs-equity)
- Tex. Farm Bureau v. United States, 732 F.2d 437 (5th Cir. 1984) (equity-vs-debt distinction addressed in tax context)