Debt Recharacterization Under State Law

摘要

The doctrine of debt recharacterization, as developed in the federal courts, imposes inconsistent and sometimes irrational standards on insiders who wish to support their business enterprises through periods of financial distress. Three conflicting lines of cases have evolved in the federal jurisprudence of debt recharacterization, two holding that debt recharacterization is a viable separate cause of action under the Bankruptcy Code and one holding that any such action has no statutory basis at all. This Article examines the flaws in these approaches and analyzes state law as a rational basis for developing a principled doctrine of debt recharacterization. Under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy cases. Drawing examples from Massachusetts and Wisconsin law, this Article shows that state law offers a higher degree of predictability concerning the enforcement of insider debt and may serve as a means for reconciling the conflicting and inconsistent tests applied by the federal courts.