In re Alternate Fuels Inc. (Redmond v Jenkins)

Redmond, trustee in Fuels’ bankruptcy, filed suit in the bankruptcy court asking that monies transferred from Jenkins to Fuels were equity and not loans. The bankruptcy court ruled the monies were equity and moved Jenkins claim down the priority list. The panel, 2-1, reversed. The majority held that 10th Circuit precedent adopting a 13 factor test on recharacterizing loans as equity remained good law as the United States Supreme Court precedent cited by Jenkins involve whether a claim exists not how it should be characterized. The majority held that, applying the factors, the monies were loans as there was a promissory note, a date when the loans were due, and Jenkins did not increase his participation after the loan. The majority held the documentation and testimony was sufficient to prove the amount of the claim. It finally held equitable subordination was inappropriate as Jenkins did not engage in fraud, breach any fiduciary duties and the fact he was the sole shareholder does not mean Fuels was an alter ego. The dissent argued that while there was documentary evidence of debt, most factors support recharacterization as Jenkins put money into funds in a gamble that he would spend less on the reclamation project than he would receive from certificates of deposit he already owned and Fuels had no ability to repay and the monies are thus best understood as equity investments. The dissent also argued that there was no secured interest in proceeds of a lawsuit as none of the documents relied upon by Jenkins adequately describe the property allegedly securing the debt.