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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

PEM Entities LLC v. Province Grande Olde Liberty, LLC, et al. (In re Province Grande Olde Liberty, LLC)

Case No. 15-1669 (4th Cir., Aug. 12, 2016)
Fourth Circuit reviewed bankruptcy court's analysis of the eleven factors adopted in In re Dornier Aviation (North America), Inc., 453 F.3d 225 (4th Cir. 2006) and, in a per curiam decision, affirmed and upheld lower court judgments which re-characterized debt purchased by appellant PEM Entities, LLC, into equity.
Procedural context:
Plaintiffs initiated an adversary proceeding to have a note purchase transaction re-classified as an equity interest in the Chapter 11 debtor. All parties moved for summary judgment, which the bankruptcy court granted in favor of plaintiffs. The entity that acquired the note appealed.
The Debtor acquired its principal assets with proceeds from two loans: one from Lakebound Fixed Retirement Fund, LLC, an entity controlled by an insider of the Debtor but funded by the plaintiffs, and an arm's length loan from Paragon Commercial Bank. The Debtor defaulted on the Paragon loan . The Debtor and its principals negotiated a settlement agreement with Paragon, and Paragon agreed to sell its $6.5 million loan for approximately $1.2 million to PEM, an entity formed by insiders of the Debtor. PEM funded the purchase price for the Paragon loan with $300,000 in equity contributions by its members, plus “outside debt” of $650,000 from two individuals and a $292,000 loan from Paragon. Both loans were secured by senior liens on assets of the Debtor. Despite various cash transactions between the Debtor and PEM after the note purchase, the Debtor scheduled PEM’s claim in the amount of $7,000,000, which included the full amount of principal and accrued interest allegedly due on the Paragon loan. Plaintiffs each filed proofs of claim of $500,000 for recovery of funds they claimed were misappropriated from Lakebound and sought to re-characterize and equitably subordinate PEM’s $7 million secured claim as equity. The bankruptcy court concluded that PEM’s $1.2 million note purchase was a settlement and satisfaction of the Paragon loan, voided PEM’s $7 million claim and re-characterized the funds PEM paid to Paragon from its equity as an equity investment in the Debtor.
Chief Judge Roger L. Gregory, Circuit Judge William B. Traxler, Jr., and Senior U.S. District Judge Joseph F. Anderson, sitting by designation

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