In an important decision for private equity sponsors and other insiders who advance loans to their businesses, on April 30, 2013, the Ninth Circuit Court of Appeals in In re Fitness Holdings International confirmed that bankruptcy courts may recharacterize debt as equity, but held that recharacterization is determined by state law. In its ruling, the Ninth Circuit joins the U.S. Court of Appeals for the Fifth Circuit in deferring to state law on this issue and explicitly rejects the various federal law based tests that have been adopted by a majority of U.S.

The United States Bankruptcy Court for the District of Delaware recently upheld a secured lender’s claim for a $23.5 million “makewhole” premium (the “Makewhole Claim”) over the heavily litigated objection raised by the unsecured creditors’ committee in In re School Specialty, Inc., No. 13-10125 (KJC) (Apr. 22, 2013).

On April 16, 2013, in Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.),¹ the US Court of Appeals for the Second Circuit issued an important decision informing fundamental concepts of cross-border insolvency law as implemented pursuant to Chapter 15 of the Bankruptcy Code.

On September 13, 2011, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware granted standing for an equity committee in In re Washington Mutual, Inc. (“WaMu”) to seek “equitable disallowance” of claims held by noteholders that had traded claims after engaging in negotiations with WaMu over the terms of a global restructuring.

In chapter 11 bankruptcy cases, creditors and equity holders with common interests often find it advantageous to pool resources and form an ad hoc group or committee. Because the committee represents a larger amount of claims or interests, it speaks with more authority in the bankruptcy case, and the members are able to save money by sharing the cost of legal and financial advisors.