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In reviewing an old exam, I came across two bankruptcy problems I'm not entirely sure I know the answer to, and which I'm not sure were covered by Barbri. Any help is greatly appreciated, thanks.

In the first and more confusing question, the creditor gives the undercapitalized (assumed for this question only, not the next) debtor a loan and fails to collect payments. The question ask if the debtor is subject to loan recharacterization. I made up a rule and said yes his waiver hurt his priority, but what's the analysis here?

In the second problem a creditor, who could be characterized as an insider, waives certain late fees for a debtor who continues to pay the creditor's obligation while defaulting on other loans. The question ask if the loan is subject to equitable subordination, a term not covered in our Barbri lectures. I would think I would just do an avoidable preference analysis, but the problem does not give any dates.

Thanks!

mvpforme wrote:In reviewing an old exam, I came across two bankruptcy problems I'm not entirely sure I know the answer to, and which I'm not sure were covered by Barbri. Any help is greatly appreciated, thanks.

In the first and more confusing question, the creditor gives the undercapitalized (assumed for this question only, not the next) debtor a loan and fails to collect payments. The question ask if the debtor is subject to loan recharacterization. I made up a rule and said yes his waiver hurt his priority, but what's the analysis here?

In the second problem a creditor, who could be characterized as an insider, waives certain late fees for a debtor who continues to pay the creditor's obligation while defaulting on other loans. The question ask if the loan is subject to equitable subordination, a term not covered in our Barbri lectures. I would think I would just do an avoidable preference analysis, but the problem does not give any dates.

Thanks!

For the first question, it's trying to get at whether that loan would be recharacterized as equity -- basically, would that "loan" count as capital contribution or debt. There are a bunch of situations where it would be considered a capital contribution (and therefore equity under the regular priority scheme), and three relevant ones are when there's undercollateralization, an insider, and no interest payments. This makes sense right? Because this paints a picture of someone who's management on board a young corporation who is injecting capital into the company without a whole lot of guarantee that it'll be repaid. If there are no interest payments, then that operates more like equity than a loan, which typically requires interest payments (you could argue on the other side that it's deferred interest). So it's basically a factual analysis. Just state the general rule (first sentence) and list three factors. I think there are a few more factors, but the three I mentioned are probably the most important.

I think the second question can be addressed with avoidable preferences, and if I were writing it, I would probably put a section for that doctrine. Equitable subordination is basically a non-punitive action where under specific circumstances (inequitable conduct), a court can subordinate a creditor's claim. They can't void it altogether. Here there are a few situations that courts take into consideration as well--fraud (would probably be sufficient alone), undercapitalization, control by the creditor (e.g. if this is a member of management giving the loan to Co.). And then you need to show that other creditors are being harmed by this misconduct. So...2 step analysis: what's the misconduct, and does it hurt other creditors.

igo2northwestern wrote:

mvpforme wrote:In reviewing an old exam, I came across two bankruptcy problems I'm not entirely sure I know the answer to, and which I'm not sure were covered by Barbri. Any help is greatly appreciated, thanks.

In the first and more confusing question, the creditor gives the undercapitalized (assumed for this question only, not the next) debtor a loan and fails to collect payments. The question ask if the debtor is subject to loan recharacterization. I made up a rule and said yes his waiver hurt his priority, but what's the analysis here?

In the second problem a creditor, who could be characterized as an insider, waives certain late fees for a debtor who continues to pay the creditor's obligation while defaulting on other loans. The question ask if the loan is subject to equitable subordination, a term not covered in our Barbri lectures. I would think I would just do an avoidable preference analysis, but the problem does not give any dates.

Thanks!

For the first question, it's trying to get at whether that loan would be recharacterized as equity -- basically, would that "loan" count as capital contribution or debt. There are a bunch of situations where it would be considered a capital contribution (and therefore equity under the regular priority scheme), and three relevant ones are when there's undercollateralization, an insider, and no interest payments. This makes sense right? Because this paints a picture of someone who's management on board a young corporation who is injecting capital into the company without a whole lot of guarantee that it'll be repaid. If there are no interest payments, then that operates more like equity than a loan, which typically requires interest payments (you could argue on the other side that it's deferred interest). So it's basically a factual analysis. Just state the general rule (first sentence) and list three factors. I think there are a few more factors, but the three I mentioned are probably the most important.

I think the second question can be addressed with avoidable preferences, and if I were writing it, I would probably put a section for that doctrine. Equitable subordination is basically a non-punitive action where under specific circumstances (inequitable conduct), a court can subordinate a creditor's claim. They can't void it altogether. Here there are a few situations that courts take into consideration as well--fraud (would probably be sufficient alone), undercapitalization, control by the creditor (e.g. if this is a member of management giving the loan to Co.). And then you need to show that other creditors are being harmed by this misconduct. So...2 step analysis: what's the misconduct, and does it hurt other creditors.

You're a lifesaver. Thank you!

mvpforme wrote:

igo2northwestern wrote:

mvpforme wrote:In reviewing an old exam, I came across two bankruptcy problems I'm not entirely sure I know the answer to, and which I'm not sure were covered by Barbri. Any help is greatly appreciated, thanks.

In the first and more confusing question, the creditor gives the undercapitalized (assumed for this question only, not the next) debtor a loan and fails to collect payments. The question ask if the debtor is subject to loan recharacterization. I made up a rule and said yes his waiver hurt his priority, but what's the analysis here?

In the second problem a creditor, who could be characterized as an insider, waives certain late fees for a debtor who continues to pay the creditor's obligation while defaulting on other loans. The question ask if the loan is subject to equitable subordination, a term not covered in our Barbri lectures. I would think I would just do an avoidable preference analysis, but the problem does not give any dates.

Thanks!

For the first question, it's trying to get at whether that loan would be recharacterized as equity -- basically, would that "loan" count as capital contribution or debt. There are a bunch of situations where it would be considered a capital contribution (and therefore equity under the regular priority scheme), and three relevant ones are when there's undercollateralization, an insider, and no interest payments. This makes sense right? Because this paints a picture of someone who's management on board a young corporation who is injecting capital into the company without a whole lot of guarantee that it'll be repaid. If there are no interest payments, then that operates more like equity than a loan, which typically requires interest payments (you could argue on the other side that it's deferred interest). So it's basically a factual analysis. Just state the general rule (first sentence) and list three factors. I think there are a few more factors, but the three I mentioned are probably the most important.

I think the second question can be addressed with avoidable preferences, and if I were writing it, I would probably put a section for that doctrine. Equitable subordination is basically a non-punitive action where under specific circumstances (inequitable conduct), a court can subordinate a creditor's claim. They can't void it altogether. Here there are a few situations that courts take into consideration as well--fraud (would probably be sufficient alone), undercapitalization, control by the creditor (e.g. if this is a member of management giving the loan to Co.). And then you need to show that other creditors are being harmed by this misconduct. So...2 step analysis: what's the misconduct, and does it hurt other creditors.

You're a lifesaver. Thank you!

Np, I'm pretty surprised this would come up on the bar though. GL!