Official Committee of Unsecured Creditors v. Hancock Park Capital II, L.P.
714 F.3d 1141
9th Cir.2013Background
- Fitness Holdings International, Inc. was a home fitness company that sought bankruptcy protection after failing to restructure its debts.
- Before filing, Hancock Park (its sole shareholder) and Pacific Western Bank provided funding to Fitness Holdings.
- Fitness Holdings issued eleven subordinated promissory notes to Hancock Park totaling $24,276,065 with stated interest and maturities.
- Pacific Western Bank made a $7 million revolving loan and a $5 million secured term loan in 2004, secured by all assets and guaranteed by Hancock Park.
- In 2007, Fitness Holdings refinanced with a $17 million term loan and an $8 million revolving line, paying off prior secured debt and partially paying Hancock Park’s unsecured notes; Fitness Holdings filed Chapter 11 on October 20, 2008.
- The trustee asserted claims to recharacterize Hancock Park’s advances as equity and avoid the $11,995,500 transfer to Hancock Park under § 548(a)(1)(B); the district court dismissed, and the trustee appealed to the Ninth Circuit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court may recharacterize a pre-petition loan as equity | Trustee argues recharacterization is permitted to determine claim status | Hancock Park argues courts cannot recharacterize debt as equity as a matter of law | Yes; court authority to recharacterize exists |
| Whether the transfer to Hancock Park was made for reasonably equivalent value | Trustee contends the payment was not reasonably equivalent value if debt is recharacterized | Defendants contend value was adequately provided under the terms | Remanded for state-law-based analysis of value and recharacterization (not decided on the record) |
| What law governs whether a claim exists and the right to payment | State-law determines the right to payment and hence the claim | Federal rules cannot override state law on property rights | State law governs the right to payment; Butner principle applied; remand for state-law assessment |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (Supreme Court 1979) (property interests defined by state law; right to payment analyzed by state law)
- Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (Supreme Court 2007) (state law governs substance of claims in bankruptcy unless federal interest requires otherwise)
- In re Pacific Express, Inc., 69 B.R. 112 (B.A.P. 9th Cir. 1986) (holding on nonauthorizing recharacterization; contrasted with later authority)
- In re Lothian Oil, 650 F.3d 539 (5th Cir. 2011) ( adopts state-law-based recharacterization framework per Butner)
- In re SubMicron Sys., 432 F.3d 448 (3d Cir. 2006) (recognizes equitable recharacterization authority)
- In re Autostyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001) (eleven-factor test for debt-vs-equity characterization (distinguishable from state-law approach))
- In re United Energy Corp., 944 F.2d 589 (9th Cir. 1991) (definition of value includes satisfaction of a debt)