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In the recent case of In re Dornier Aviation (North America), Inc., 453 F.3d 225 (4th Cir. 2006) the United States Court of Appeals for the Fourth Circuit held that
' 105(a) of the Bankruptcy Code provides the bankruptcy court with authority to recharacterize a claim from debt to equity. In upholding the recharacterization of a parent's $84 million claim against its wholly owned subsidiary, the Fourth Circuit made clear that form will not prevail over substance in the context of inter-company transactions. The Fourth Circuit failed, however, to provide any guidance on how inter-company transactions might be structured to avoid recharacterization under ' 105(a). This article presents one obvious, albeit not often utilized, solution: Parent corporations should collect debts due and owing from their subsidiaries to avoid the possibility of being relegated to the unenviable position of an equity investor in the event of a bankruptcy proceeding.
The Case
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There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.
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