Grossman v. Lothian Oil: The Fifth Circuit Takes a Fresh Look at Debt Recharacterization

21 September 2011
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Key takeaways 

  • The Fifth Circuit has taken a fresh look at the controversial bankruptcy doctrine of debt recharacterization and, unlike other circuits that have approved recharacterization, has grounded its use in applicable state law. 
  • In this instance, the Fifth Circuit approved recharacterizing an asserted "loan" as equity because it had certain characteristics associated with equity and lacked others associated with debt. 
  • In the Fifth Circuit, or any other jurisdiction where the Lothian analysis is adopted, debt recharacterization may become less readily available in bankruptcy proceedings, because state law on debt recharacterization is often scarce, or derivative of federal tax law, or simply nonexistent.