On August 9, 2011, the United States Court of Appeals for the Fifth Circuit held that a non-insider's debt claim can be recharacterized as equity in Grossman v. Lothian Oil Inc. (In re Lothian Oil, Inc.).2 The Fifth Circuit, in reversing the district court, held that: (i) there is no per se rule limiting to insiders the recharacterization of debt claims as equity and (ii) non-insider debt claims may be recharacterized as equity under section 502(b) of the Bankruptcy Code.

In a decision that is expected to have wide-ranging implications for secured lenders and reorganization plan sales nationwide, the Seventh Circuit’s June 28, 2011 opinion in In re River Road1 marks a jurisdictional split on the contours of credit bidding in bankruptcy. While this decision is squarely at odds with decisions of the Courts of Appeals for the Third and Fifth Circuits, its holding is in many respects a validation of Judge Ambro’s robust dissent in Philadelphia News,2 and is arguably more aligned with mainstream bankruptcy thinking on credit bidding issues.

The FDIC is currently responding to one of the worst financial crises in the history of the nation’s banking system. Sheila Bair, Chairman of the FDIC, expects that 2010 “will be the high water mark for the banking crisis.”1 Just over the last two years, 268 banks have failed in the United States, which is nearly ten times the number of failed banks during the prior eight-year period.2