When is a loan not a loan? The SDNY Bankruptcy Court in
In
Re: Live Primary, LLC held that a $6 million start-up loan was
actually an equity contribution after analyzing the terms of the
transaction and the intent of the parties. The court
recharacterized the loan as equity given the alleged loan
functioned as an equity investment would be expected to function.
As a result, the insider investor s claim was subordinated to
the claims of creditors of the company.
The Risks of Recharacterization
Shareholders, sponsors, and third-party lenders should be aware
of the risks of recharacterization. Many debt instruments held by
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