Transforming Debt To Equity

The ability of a bankruptcy court to reorder the priority of claims or interests by means of "equitable subordination" or "recharacterization" of debt as equity is generally recognized. Still, the Bankruptcy Code itself expressly authorizes only the former of these two remedies — even though common law uniformly acknowledges the power of a court to recast a claim asserted by a creditor as a shareholder interest in an appropriate case, the Bankruptcy Code is silent upon the availability of the remedy in a bankruptcy case. This has led to confusion among bankruptcy courts concerning their power to recharacterize claims and the interaction between these two equitable remedies. The Fourth Circuit Court of Appeals recently had an opportunity to weigh in on the issue in Fairchild Dornier GMBH v. Official Committee of Unsecured Creditors (In re Official Committee Of Unsecured Creditors for Dornier Aviation (North America), Inc.). In a matter of first impression, the Fourth Circuit affirmed a