Delaware Bankruptcy Decision Upholds Loan By Private Equity Firm to Portfolio Company
This memorandum addresses a recent decision by the U.S. Bankruptcy Court for the District of Delaware holding that secured loans made by a minority equity investor in a distressed company were true debt transactions and should not be subordinated or recharacterized as equity in the company's bankruptcy. The Court also permitted the investor to credit-bid its loans to acquire the company's assets at a bankruptcy auction. Although the investor had been accused by the company's unsecured creditors' committee of engaging in a "loan to own" scheme, and of exercising control over the company, the court found that the investor had acted in "good faith" throughout its dealings with the company, "with a view to maximize [the company's] value to all constituents."