The Insolvency Blog

When is a Loan Not a Loan ...?

When is a loan document not evidence of a loan, but rather of an equity investment? In their article, “Ninth Circuit Favors Substance Over Form in Fitness Holdings" Thompson & Knight Partner Ira L. Herman and Associate Evelyn Breithaupt discuss the nuances of the Ninth Circuit decision in In re Fitness Holdings International Inc. (2013 U.S. App. LEXIS 8729). This ruling and similar decisions permit the recharacterization of an obligation labeled as debt, as equity. This decision is an important reminder that although parties may structure a transaction to look like a loan, courts have the inherent authority to determine what the transaction really is and are not bound by what it is called. The decision warns that payments made on account of a recharacterized loan may constitute a distribution on account of an equity interest, subject to “clawback” as a fraudulent transfer. The article was published by Law360 on May 6, 2013.  Download Article.

For further information, please contact Ira Herman or Evelyn Breithaupt.

Enforceability of New York Choice of Law and Venue Provisions

The New York Court of Appeals (New York’s highest court) recently upheld the New York choice of law and venue provisions in a guaranty in the case of IRB-Brasil Resseguros, S.A. v. Inepur Invs., S. A., 2012 NY Slip Op 08669 (Ct.App. December 18, 2012).  The unanimous decision written by the chief judge held that the provisions of the guaranty allowed use of NY Gen. Obl. Law 5-1402 providing access to New York courts for actions in excess of $1 million, and that a New York choice of law clause be given mandatory effect pursuant to NY Gen. Obl. Law 5-1401(1) for transactions in excess of $250,000.

The Court, in holding mandatory application of both Sections 5-1401 and 5-1402 of the General Obligations Law, reasoned that the goal of these two sections was to “promote and preserve New York status as a commercial center and to maintain predictability for the parties.”

 The Court also held that the provision designating choice of law need not contain the language “without regard to conflict of law principals.”  Thus, guaranties and other contracts designating New York law will be applicable without a conflict of laws analysis. 

Although the Court noted the statutes permit parties to select New York law and avail themselves of New York courts despite lacking New York contacts (an issue raised some years ago in the Federal Courts in dictum in the Lehman Bros. v. Minmetals case), the fiscal agent for the note was Chase Manhattan Bank and the notes were to be paid in New York, which would be a sufficient tie for the New York statutes to apply.  Although maybe not necessary, to be assured of the enforceability of the NY choice of law and venue provisions, a loan should be paid or booked in a New York branch.

 For further information, please contact a Thompson & Knight, LLP Bankruptcy and Restructuring Attorney.