This case reaches us after extensive litigation in the bankruptcy and district courts. It also brings a host of motions in its wake. One of the disputes — whether the bankruptcy court may recharacterize a claim as equity rather than debt — raises a novel question of law on which this court has yet to speak. The other assertions of error are without merit.
I.
The parties to this bankruptcy appeal have a business history extending from at least April 27, 2005. On that date, Israel Grossman and the Secretary of Lothian Oil signed a handwritten document that states, in pertinent part:
I. Grossman loans $200,000 U.S. to Lothian Oil Inc under the following terms:
I) I. Grossman will receive a 1% royalty to the gross production Lothian Oil receives on the Webb Properties of New Mexico, without any further investment ii) I. Grossman will be repaid the $200,000 U.S. from the proceeds of the $0.75 placement or any other equity placements.
The following month, Grossman and the Secretary of Lothian, now identified as Bruce Ransom, signed another document. The May 12, 2005 document bore the title “Loan Agreement” and stated the terms as follows:
I. Grossman shall loan (the “Loan”) the sum of U.S. $150,000 to Lothian Oil;
II. In consideration for the Loan, Grossman shall receive a royalty of one percent of Lothian Oil’s share of gross production of oil and gas on the Webb properties in New Mexico without further investment to be made by Grossman;
III. Lothian Oil shall repay Grossman the Loan from the proceeds of a $0.75 per share equity placement made in Lothian Oil or from the proceeds, subject always to the Sterling Bank Credit Agreement, of any other equity placement in Lothian Oil, which is currently in compliance.
Two years later, these agreements would lead to proofs of claim 164 and 171, respectively.
Debtors filed their Chapter 11 petitions on June 13, 2007. Approximately one year later, on June 27, 2008, the bankruptcy court confirmed a plan of liquidation. The bankruptcy case elicited numerous proofs of claim from Appellees, many of which terminated in a settlement agreement dated October 30, 2008. The settlement awarded Grossman $1.025 million in full payment of most of his claims. Grossman remained free to seek court determination of the value of the remaining claims, called the “Undetermined Claims.” He did so, and on December 15, 2008, the bankruptcy court held a hearing on the Undetermined Claims. The court rejected all of them. In particular, it held that “proof of claim numbers 164, 171, 172, 175, and 178 assert common equity interests at best and that insufficient evidence of the value of the interests was presented.”
In re Lothian Oil, Inc.,
No. 07-7012, Doc # 1832 at 2 (Bankr.W.D.Tex. Dec. 17, 2008). As for the remaining Undetermined Claims, the bankruptcy court held that “proof of claim
Israel Grossman personally signed the notice of appeal to the district court. The claimants’ attorney, Jessica Sokol, did not sign the document, as she was not admitted to practice in the Western District of Texas and had not secured a pro hoe vice admission. The other claimants were aware of the deficiency in their notice of appeal on or before April 7, 2009, when the clerk of court sent a Notice of Filing Discrepancies to several of their lawyers. Approximately one month later, on April 5, 2009, Lothian moved to dismiss the appeal. Because Israel Grossman had no authority to sign the notice of appeal for anyone other than himself, the district court held that “the instant appeal must be limited to those claims, if any, asserted by Israel Grossman personally.” Following the district court’s decision, the so-called “Other Claimants” failed to file a notice of appeal.
The district court affirmed in part and reversed in part the bankruptcy court’s ruling. It reversed the recharacterization of claims 164 and 171 as equity, “declinfing] to extend the concept of debt recharacterization to a non-insider creditor.” The district court cited this Circuit’s 11-factor test for distinguishing between debt and equity.
See Jones v. United States,
Lothian filed this appeal, challenging the district court’s recharacterization decision; Grossman cross-appealed, contesting the remainder of the district court’s holdings. He argues for the first time on appeal that the settlement agreement cannot impose a cap on his recovery for the Undetermined Claims because Lothian has opposed Grossman’s efforts to recover from third parties, negating consideration for the settlement. We do not reach this newly raised argument, as it is waived.
French v. Allstate Indem. Co.,
II.
In reviewing a bankruptcy appeal from the district court, this court “applies] the same standard to the bankruptcy court’s findings of fact and conclusions of law that the district court applied.”
In re Morrison,
III.
A. Recharacterization
The district court applied a
per se
rule to prohibit bankruptcy courts from recharacterizing contributions from anyone but corporate insiders. The court therefore omitted any analysis on the merits of whether the agreements between Gross-man and Lothian represent debt or equity. We conclude that recharacterization extends beyond insiders and is part of the bankruptcy courts’ authority to allow and disallow claims under 11 U.S.C. § 502. On
When a creditor files a timely claim, the Code states that “the court, after notice and a hearing, shall determine the amount of such claim ... and shall allow such claim in such amount, except to the extent that — (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law....” 11 U.S.C. § 502(b). The Supreme Court has held that the “applicable law” is
state
law: “Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law.”
Bwtner v. United States,
Taken together,
Bwtner
and § 502(b) support the bankruptcy courts’ authority to recharacterize claims. If a claim asserts a debt that is contrary to state law, the bankruptcy court may not allow the claim. Moreover, where the reason for such disallowance is that state law classifies the interest as equity rather than debt, then implementing state law as envisioned in
Butner
requires different treatment than simply disallowing the claim. The Fourth Circuit identified the inadequacy of traditional disallowance in noting that “[w]hen a bankruptcy court disallows a claim, the claim is completely discharged. By contrast, recharacterization is appropriate when the claimant has
some
rights via-a-vis the bankrupt.”
In re Domier Aviation, Inc.,
Other circuits to have considered this issue have approved recharacterization, but they have generally grounded it in the bankruptcy courts’ equitable authority under 11 U.S.C. § 105(a).
In re Sub-Micron Sys. Corp.,
In the present case, the district court reversed the bankruptcy court’s recharacterization on the basis of its legal conclusion that recharacterization applies only to
Consequently, Texas law controls the agreements underlying Grossman’s claims in this case. To distinguish between debt and equity, Texas courts have imported a multi-factor test from federal tax law.
Arch Petroleum, Inc. v. Sharp, 958
S.W.2d 475, 477 n. 3 (Tex.Ct.App.1997) (“For an oft-cited discussion of the distinction between debt and equity, including a list of sixteen distinguishing factors,
see Fin Hay Realty Co. v. United States,
Although the district court did not review the bankruptcy court’s findings, it did not suggest that the facts here oppose a recharacterization. We conclude that under the multi-factor tests, the bankruptcy court committed no error in finding that five of Grossman’s claims “assert common equity interests at best.” The bankruptcy court’s written order incorporated by reference the findings of fact and conclusions of law announced at a hearing two days earlier. Among the topics discussed at that hearing were the factors listed in Jones, in particular the fact that Grossman would be paid from royalties and “equity placements” as well as the lack of a specified interest rate, term of repayment, and maturity date. The court ruled that despite language referring to a “loan,” the investments underlying claims 164, 171, and 178 were equity. The main factor behind this ruling was the inclusion of a royalty payment, which depended on the success of Lothian’s business, instead of a prescribed interest rate.
Because Texas law would not have recognized Grossman’s claims as asserting a debt interest, the bankruptcy court correctly disallowed them as debt and recharacterized the claims as equity interests. Moreover, because insiders and non-insiders alike can mischaracterize their claims in contravention of state law, we decline to limit recharacterization to insider claims.
B. Appellants Other than Grossman
The district court dismissed appeals by all appellants other than Israel Grossman, as only Grossman signed the notice of appeal to the district court. The Federal Rules of Civil Procedure require that “[e]very pleading, written motion, and other paper must be signed by at least one attorney of record in the attorney’s name&emdash;or by a party personally if the party is unrepresented.” Fed.R.Civ.P. 11(a);
see also
Bankr.R. 9011(a). Rule 9011(a) requires a court to strike an unsigned document “unless the omission is promptly corrected after being called to the attorney’s or party’s attention.”
Id.
The nonGrossman appellants cite a number of cases for the proposition that the signature requirement is not jurisdictional and may be cured.
Becker v. Montgomery,
C. Grossman’s Other Undetermined Claims
After eliminating the claims that are properly characterized as equity rather than debt and the claims by parties other than Grossman, only a single claim remains. That claim, 174, concerns a contractual obligation, which the bankruptcy court found to exist between Grossman and an entity that is not part of this bankruptcy. The bankruptcy court dismissed the claim, and the district court affirmed. On appeal, Grossman concedes that the contract does not bind any of the debtor entities. Instead, he seeks payment on “an implied contract” because “Debtors benefitted from such financing efforts” even though they were not parties to the agreements. The record does not support Grossman’s claim that his services redounded to the debtors’ benefit. He cites no evidence to support this claim and apparently failed to do so in the courts below. The bankruptcy and district courts were therefore correct to disallow claim 174.
IV.
For the foregoing reasons, we affirm the bankruptcy court’s judgment, and in doing so, necessarily reverse the district court’s ruling on recharacterization and affirm the judgment of the district court in all other respects.
We also GRANT appellants’ Motion to Strike Appellee’s/Cross-Appellant’s Record Excerpts and GRANT Jessica Sokol’s motion to withdraw as counsel; all other motions are DENIED.
AFFIRMED IN PART AND REVERSED IN PART.