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Recharacterization may be available even if subordination or
disallowance is not. The bankruptcy court may recharacterize a
loan as an "equity security" under Section 101(16), and not a
"debt" under Section 101(12), where the appropriate facts and
circumstances are present. Cohen v. KB Mezzanine Fund II, LP
(In re SubMicron Sys. Corp.), 432 F.3d 448 (3d Cir. 2006). Thus,
recharacterization could significantly reduce, or even eliminate, the
probability of a recovery for such a claim.
Bankruptcy courts use the following eleven factors to assess
whether recharacterization is warranted:
(iv) the names given to the instruments, if any, evidencing
the indebtedness;
(v) the presence or absence of a fixed maturity date and
schedule of payments;
(vi) the presence or absence of a fixed rate of interest and
interest payments;
(vii) the source of repayments;
(viii) the adequacy or inadequacy of capitalization;
(ix) the identity of interest between the creditor and the
stockholder;
(x) the security, if any, for the advances;
(xi) the corporation's ability to obtain financing from
outside lending institutions;
(xii) the extent to which the advances were subordinated to
the claims of outside creditors;
(xiii) the extent to which the advances were used to acquire
capital assets; and
(xiv) the presence or absence of a sinking fund to provide
repayments.
