Official Committee of Unsecured Creditors v. Hancock Park Capital II, L.P.

This case presents the question whether a debtor’s pre-bankruptcy transfer of funds to its sole shareholder, in repayment of a purported loan, may be a constructively fraudulent transfer under 11 U.S.C. § 548 (a)(1)(B). In order to answer this question, we must determine whether a bankruptcy court has the power to rechar-acterize the purported loan as an equity investment. We hold that a court has the authority to determine whether a transaction creates a debt or an equity interest for purposes of § 548, and that a transaction creates a debt if it creates a “right to payment” under state law. See 11 U.S.C. § 101 (5), (12); Butner v. United States, 440 U.S. 48, 54 , 99 S.Ct. 914 , 59 L.Ed.2d 136 (1979) (noting that “Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law”). Because the district court concluded that it lacked authority to make this determination, we vacate the decision below and remand for further proceedings.

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Fitness Holdings International, Inc., the debtor in this bankruptcy case, was a home fitness corporation. Before declaring bankruptcy, the company received significant funding from two…