Justices Reverse Course on Bankruptcy Issue Granted Cert

WASHINGTON (CN) – Thinking better of a bankruptcy case involving the characterization of debt claims, the Supreme Court dismissed a case as improvidently granted.

Among the last cases that the justices had taken up on June 27, the case PEM Entities LLC v. Levin came to the court from the Fourth Circuit.

With little explanation on Aug. 10, the court issued an order dismissing the writ of certiorari as improvidently granted. 

As described in its underlying petition, PEM said it purchased a loan taken out by an entity called Province Grande Olde Liberty and secured on the Olde Liberty Club development.

When PEM Entities bought the loan, it was in default and the real estate was in foreclosure. Without PEM’s intervention Province Grande Olde Liberty would have lost the property. The loan purchase allowed the real estate company to state in business and successfully file a Chapter 11 bankruptcy plan.

At this point, however, other creditors sought to recharacterize PEM’s loan as capital, invoking a federal multifactor test for doing so.

As adopted by the Fourth Circuit, the federal rule of decision allowed petitioner’s secured, third-party loan to be recharacterized as a capital contribution.

PEM had emphasized in its petition that there is a circuit split, with the Fourth Circuit highlighting the differences between applying, as the rule of decision, a federal, court-created doctrine of debt recharacterization, as five circuits do, and state law, as two circuits do.

Although the law of North Carolina, where the debtor was incorporated and where the loan was made, would recognize petitioner’s loan as a valid and enforceable debt, the bankruptcy court recharacterized the debt as a capital contribution under the Fourth Circuit’s federal multifactor test.

“The Bankruptcy Code provides no basis to recharacterize petitioner’s loan using a federal rule of decision,” the petition says. “Petitioner asks this Court to grant a writ of certiorari in order to resolve the circuit split and to establish that state law governs the recharacterization of debt claims as capital contributions in bankruptcy.”


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