Supreme Court Won’t Hear Bankruptcy Debt-Equity Case After All

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By Daniel Gill

The U.S. Supreme Court Aug 10 dismissed an appeal it had previously agreed to hear on whether bankruptcy courts should apply state or federal law when deciding to recharacterize debt as equity ( PEM Entities LLC v. Levin , U.S., No. 16-492, 8/10/17 ).

In the order, the court didn’t explain the dismissal other than to state that “the petition for a writ of certiorari is dismissed as improvidently granted.”

But a motion filed July 21 by the petitioner, together with the debtor in the bankruptcy case from which the case arose, suggests that the matter was dismissed because of a settlement which left the respondent without an interest in the case.

The case involved debtor Province Grande Old Liberty, LLC (PGOL); a group of PGOL insiders known as PEM Entities that purchased senior debt against PGOL to stop a foreclosure; and Eric M. Levin and Howard Shareff. Levin and Sheriff were also creditors of PGOL, with a disputed claim junior to the claim PEM purported to purchase.

The Fourth Circuit Court of Appeals upheld the bankruptcy court’s decision to recharacterize PEM’s purchased debt claim as equity, which had the effect of voiding a claim of roughly $7 million.

But for that recharacterization, that claim would have been senior to that of Levin and Shareff. Instead, as equity, those interests would not receive any payment until all other creditors were paid in full in the bankruptcy.

Recharacterization is important because it affects how much other creditors can recover.

No Active Interest

PEM sought review of that decision by the Supreme Court.

After the petition was filed but before the court granted review June 27 to take up the case in the term beginning Oct. 2, Levin and Shareff settled out of the dispute. As part of the settlement, they agreed to assign their right to defend the appeal to PGOL, even though they no longer had an active interest in its outcome.

PEM and PGOL filed a joint motion to replace PGOL as respondent in the appeal, even though it wasn’t a party to the dispute in the courts below. They argued that PGOL had a “considerable, concrete interest in the outcome of the appeal,” because how the court rules would affect the confirmed plan of reorganization and payments to creditors under the plan.

Apparently the Supreme Court wasn’t moved by the motion. It dismissed the appeal as improvidently granted and dismissed the motion as moot.

Douglas Hallward-Driemeier, Washington, represented PEM Entities. Christopher Bartolomucci, Washington, represented PGOL.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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