Redmond v. Cimarron Energy Co., LLC (In re Alternate Fuels, Inc.)
- BAP No. KS-12-110 (10th B.A.P. Mar. 18, 2014)
- The Tenth Circuit BAP affirmed the bankruptcy court’s decision to recharacterize as equity investments the approximately $4.3 million claims.
- Procedural context:
- Chapter 11 trustee objected to the allowance of $4.3 million in claims asserted by the indirect owner and manager of the debtor, seeking to have the claims recharacterized as an equity contribution, equitably subordinated, or disallowed entirely. The bankruptcy court, applying a 13-factor test employed in the Tenth Circuit (In re Hedged-Investments Assocs., Inc., 380 F.3d 1292 (10th Cir. 2004)), concluded that seven of the factors strongly supported recharacterization, three superficially supported treatment of the claims as loans, and two factors were inapposite. In affirming the decision, the BAP noted that, if anything, the bankruptcy court was generous to the claimant in its findings, and that more than seven of the factors weighed heavily in favor of recharacterization. The BAP also rejected the claimant’s contention that the Supreme Court’s decisions in Travelers or, more recently, Law v. Siegel served to prohibit a bankruptcy court from recharacterizing an alleged loan as equity upon a proper application of the relevant factors.
- Appellant advanced various funds to Alternate Fuels, Inc. (AFI), obtaining executed promissory notes in return for advances made to fund certain reclamation efforts. By doing so, Appellant hoped to obtain the proceeds from various certificates of deposits that secured reclamation bonds issued to assure AFI would reclaim the former mining sites. AFI had neither income nor business operations, nor any means to repay the notes or to pay interest on the notes. Rather, it was understood by all parties that the notes would be repaid, if at all, from the release of certain certificates of deposit following the completion of reclamation efforts on various former mining sites. Interest payments made to the Appellant were funded from interest on the certificates of deposit, too. The notes indicated a term of five years, but were payable only “upon reclamation bond release from the State of Missouri.” No contemporaneous records were maintained concerning advances made on the notes, nor any evidence of consideration paid for the notes.
- Thurman, Cornish, and Mosier.
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