Ninth Circuit Allows Bankruptcy Courts to Recharacterize Loans as Equity, Applying State Law

The U.S. Court of Appeals for the Ninth Circuit recently held in In re Fitness Holdings International, Inc. that a bankruptcy court “has the authority to determine whether a transaction creates a debt or an equityinterest for purposes of [Bankruptcy Code] § 548, and that a transaction createsa debt if it creates a ‘right to payment’ under state law.” The court agreed withfive other circuits, but explicitly followed the reasoning of the Fifth Circuit’srecent In re Lothian Oil, Inc. decision. In this article, SRZ business reorganization partner Michael L. Cook discusses the Ninth Circuit's decision.