Riley v. Tencara, LLC (In Re Wolverine, Proctor & Schwartz, LLC)
447 B.R. 1
Bankr. D. Mass.2011Background
- Trustee filed a Second Amended Complaint July 16, 2009 against Tencara seeking recharacterization of debt as equity or equitable subordination under 11 U.S.C. § 510(c).
- Debtor filed Chapter 7 on April 1, 2006; Tencara’s proof of claim asserted about $1.896 million as of petition, and the case involved large unsecured and secured claims (PBGC later settled).
- The 2005 Transaction funded by CapSource and Tencara created a secured loan to the Debtor; a Sales-Leaseback with NL Ventures followed when cash flow deteriorated, and the Debtor’s assets were later sold for about $8.2 million.
- The Trustee alleged close personal/business ties between Callan (Tencara) and Kulkarni (Debtor) to argue insider status and fraudulent/inequitable conduct, while the Court ultimately found no insider status for Tencara.
- The Court applied multi-factor recharacterization analysis (11 factors, with Hyperion considerations) and concluded the Debtor’s obligation to Tencara was properly characterized as debt, and it denied equitable subordination; judgment entered for Tencara on all counts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tencara is an insider of the Debtor | Trustee contends Callan's close ties render Tencara a non-statutory insider | Tencara is a separate entity; Delaware/Delaware LLC law prevents piercing to create insider status | Tencara not insider; no non-statutory insider status |
| Whether Tencara's $1.9 million loan should be recharacterized as equity | Abnormal facts (undercapitalization, related-party dealings) show debt should be equity | Instruments, fixed terms, and transaction context show a genuine debt | Debt characterization affirmed; loan not equity |
| Whether Tencara’s loan should be equitably subordinated under § 510(c) | Misconduct or inequitable circumstances justify subordination | No inequitable conduct or injury to creditors; conduct did not shock conscience | No equitable subordination warranted; claim not subordinated |
| Relation between recharacterization and equitable subordination | Court treated recharacterization and equitable subordination as distinct analyses; no basis for subordination |
Key Cases Cited
- In re SubMicron Sys. Corp., 432 F.3d 448 (3d Cir.2006) (multi-factor test for recharacterization; debt vs equity hinges on substance over form)
- Dornier Aviation (North America), Inc., 453 F.3d 225 (4th Cir.2006) (11-factor framework; insider status not dispositive; focus on behavior and overall transaction context)
- AutoStyle Plastics, Inc., 269 F.3d 726 (6th Cir.2001) (11 tax-like factors for debt vs equity characterization; no mechanistic scorecard)
- In re AtlanticRancher, Inc., 279 B.R. 411 (Bankr.D.Mass.2002) (recognizes inherent powers under §105; discusses debt vs equity and subordination distinctions)
- In re 604 Columbus Ave. Realty Trust, 968 F.2d 1332 (1st Cir.1992) (equitable subordination framework; insiders and misconduct scrutiny)
- Merrimac Paper Co., Inc., 420 F.3d 53 (1st Cir.2005) (case defining equitable subordination standards under First Circuit)