Supreme Court Will Not Resolve Circuit Split on Recharacterization

August 14, 2017

There are now only two bankruptcy cases on the Supreme Court’s calendar for the upcoming term because the high court dismissed the petition for certiorari that it had granted in late June in PEM Entities LLC v. Levin, 16-492 (Sup. Ct.).

In PEM, the Supreme Court would have resolved a split of circuits by deciding whether bankruptcy courts must employ state or federal law in recharacterizing debt as equity.

All circuits empower bankruptcy courts to recharacterize debt. The Fifth and Ninth Circuits follow state law and Section 502, while the Third, Fourth, Sixth, Tenth and Eleventh Circuits invoke federal law, relying on Section 105(a).

The PEM certiorari petition was fully brief in mid-March and was first scheduled for conference on March 31. The conference was rescheduled several times until the Court ultimately considered and granted the petition on June 27.

In April, however, the parties settled. The debtor, who had not been a party to proceedings in the Supreme Court, filed papers in July seeking permission to be granted status as a party and defend the ruling from the Fourth Circuit.

Evidently, the justices concluded that the dispute had become moot, or perhaps it appeared there was insufficient adversariness. Although the reasons are not spelled out in the Aug. 10 order, the Court dismissed the petition for having been improvidently granted.

The split remains, so the Court well might grant certiorari when another case on recharacterization percolates through a circuit court.

Two bankruptcy cases remain on the high court’s docket for the term beginning in October. Of perhaps greater significance for the bankruptcy bar and the investment community, the Supreme Court will decide in Merit Management Group LP v. FTI Consulting Inc., 16-784 (Sup. Ct.), whether the “safe harbor” for securities transactions applies under Section 546(e) when a financial institution acts only as a “mere conduit.” The case should be argued before the year’s end. To read ABI’s discussion of Merit Management, click here.

In U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), the justices will decide whether the purchaser of a claim automatically takes on the seller’s insider status. Lakeridge also should be argued before the new year. To read ABI’s discussion of Lakeridge, click here

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