Redmond v. Jenkins and Cimarron Energy Co., LLC (In re Alternate Fuels, Inc.)

Redmond v. Jenkins, et al. v. Pommier, et al. (In re Alternate Fuels, Inc.), Case No. 14-3086 (10th Cir. June 12, 2015). Published.
Recharacterization is essential to a court’s ability to properly implement the priority scheme of the Bankruptcy Code and is determined under § 105(a) and not § 502(b); thus, the 10th Circuit’s 13-factor recharacterization test enunciated in In re Hedged-Investments Assocs., Inc., was not overruled by two recent US Supreme Court cases. A party seeking equitable subordination involving an insider or fiduciary need only show some unfair conduct, and degree of culpability, on the part of the insider.
Procedural context:
The Bankruptcy Appellate Panel affirmed the Bankruptcy Court’s decision that (i) recharacterized debtor’s insider’s loan as equity, (ii) found that the insider failed to attach sufficient documentation to his claim, and (iii) equitably subordinated the insider’s claim. The 10th Circuit reversed all three decisions of the Bankruptcy Court. Justice Phillips dissented. Bankruptcy Court’s factual findings reviewed for clear error and questions of law reviewed de novo.
Debtor engaged in surface coal mining and filed bankruptcy in 1992. After operating under a confirmed Plan, debtor ceased operations and debtor’s majority owner provided new reclamation bonds secured by 24 letters of credit valued at $1.4 million. Defendant Jenkins acquired 100% ownership in debtor through a straw man and personally took assignment of the 24 letters of credit. Jenkins funded reclamation operations and Debtor executed several promissory notes payable to a fictitious business name registered by Jenkins which notes Jenkins knew debtor had no present ability to repay. Jenkins was granted a security interest in $3 million from an approximate $5.0 million judgment debtor obtained in a lawsuit. Jenkins filed a secured claim attaching the promissory notes plus a list of the assigned letters of credit. Despite some factors supporting recharacterization, the Court stressed its caution against discouraging owners from trying to salvage a business.
Kelly, Baldock, Phillips; Phillips Dissenting

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