Equitable Subordination and Recharacterization of Loans: Avoiding Pitfalls for Lenders, Creditors and PE Sponsors

Navigating Differing Court Standards in Bringing or Defending Bankruptcy Preference Actions

Recording of a 90-minute CLE webinar with Q&A


Conducted on Thursday, April 13, 2017

Recorded event now available

or call 1-800-926-7926
Program Materials

This CLE webinar will offer best practices for counsel to lenders, creditors and private equity sponsors to structure transactions and lending practices to protect their claims and maintain preference status against junior and unsecured creditors or borrowers facing insolvency or bankruptcy.

Description

Equitable subordination and recharacterization claims are asserted against secured creditors by junior or unsecured creditors to obtain recovery from highly leveraged debtors. When addressing liquidity of their portfolio companies, PE sponsors are vulnerable to attacks on their claims.

Recharacterization claims usually involve insiders like stockholders, directors and officers. However, the doctrine is not limited to corporate insiders, and courts will scrutinize both the debt instrument and the creditor’s status.

Both doctrines have been heavily litigated with many recent cases that reflect the continued inconsistency among circuit courts and differing standards used among courts to scrutinize various loan transactions.

Listen as our authoritative panel of bankruptcy attorneys discusses the looming threats of equitable subordination and recharacterization in bankruptcy, and how lenders, creditors and PE sponsors can minimize exposure and protect their claims.

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Outline

  1. Overview of equitable subordination and recharacterization
    1. Equitable subordination
    2. Recharacterization
    3. Recent case law
    4. Litigation considerations
  2. Minimizing attacks on the claim
    1. Secured lenders:
      1. Underwriting
      2. Collateral review
    2. PE sponsors
      1. Anticipating liquidity problems
      2. Internal governance procedures
      3. Arm's length transactions
      4. Management rights or other control of business operations
    3. Creditors
      1. Non-statutory insiders
      2. Earmarking defense

Benefits

The panel will review these and other key issues:

  • How have the courts defined “inequitable conduct” to justify equitable subordination?
  • What factors do the courts use to distinguish a loan transaction from an equity investment to justify recharacterization?
  • How can PE sponsors loaning money to their portfolio companies protect themselves from attack?

Faculty

Lawrence V. Gelber
Lawrence V. Gelber

Partner
Schulte Roth & Zabel

Mr. Gelber concentrates his practice in the areas of distressed mergers & acquisitions, debtor-in-possession...  |  Read More

James T. Bentley
James T. Bentley

Special Counsel
Schulte Roth & Zabel

Mr. Bentley represents financial institutions, private equity firms and others in reorganizations and out-of-court...  |  Read More

Gabrielle Glemann
Gabrielle Glemann

Counsel
Hughes Hubbard & Reed

Ms. Glemann is a member of her Firm's corporate reorganization department. She focuses her practice on banking...  |  Read More

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