Ropes & Gray business restructuring partner James Wilton co-authored an article published by The Business Lawyer that examines the bankruptcy doctrine of debt recharacterization, a legal doctrine that is invoked in bankruptcy cases to challenge allowance of debt owed to private equity sponsors and other corporate insiders.
The article, titled “The Past and Future of Debt Recharacterization”, explains a circuit split on the issue and analyzes arguments for and against application of a federal or a state law rule of decision for debt recharacterization. Circuit court decisions applying a state law rule of decision arose after publication in 2007 of an article in The Business Lawyer, titled “Debt Recharacterization Under State Law”, authored by Ropes & Gray partner James Wilton. The Ninth Circuit Court of Appeals cited to this earlier article in adopting a state law rule of decision.
The article predicts that the debt recharacterization circuit split is likely to be resolved in favor of application of a state law rule of decision. In anticipation of such a ruling, the article provides an overview of choice of law issues and state law approaches to debt recharacterization. The article notes that, in conclusion, the adoption of a state law rule of decision “is a positive development that allows greater flexibility for financing distressed businesses outside of bankruptcy court.”
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