Given the relevant facts and circumstances, the findings of the two insolvency courts are not surprising. However, both decisions are a good reminder of the important considerations when structuring a transaction to get true sales processing. After examining the factors identified in the table, it is not surprising that in R&J Pizza Corp, the court found that the transaction was a bona fide sale, while the court in Shoot The Moon concluded that this transaction was financing in disguise. While each of the six factors in the chart speaks in favor of a true determination of the sale in R&J Pizza Corp, the first four factors in the chart speak in favor of recharacterizing the transaction as a secured loan in Shoot The Moon. Characterizing a transaction as a genuine sale or disguised financing has significant implications for tax, accounting and insolvency purposes. In bankruptcy proceedings, the characterization of a transaction determines whether the assets in question are properly included in a debtor`s bankruptcy estate and are subject to automatic stay. In particular, if a transaction is designated as a bona fide sale, the assets acquired would not be owned by the bankruptcy estate of the debtor/seller and would not be subject to an automatic stay. However, if a transaction is characterized as a secured loan, the assets in question would be pledged by the debtor/seller, would belong to the bankruptcy estate of the debtor/seller and would be automatically suspended. This is exactly the question with which the bankruptcy courts in Cap Call, LLC v. Foster, Case No. 15-60979 (Bankr. D.
Mont. 10 sept. 2021) („Shoot The Moon”) and In re R&J Pizza Corp., Case No. 14-43066 (Bankr. E.D.N.Y. October 14, 2020) („R&J Pizza Corp”). Courts have often identified the following eight factors as potentially relevant to an analysis of the recharacterization of genuine sales: The „actual sale” analysis carried out by these two insolvency courts, described in more detail below, reminds practitioners of the following key structuring considerations: In general, to determine whether a transaction is a genuine sale or collateral of assets, Most courts claim to be guided by the applicable state law. While courts often emphasize the importance of enforceable state law, courts have developed a multifactorial test and apply it in federal common law.
Due to the factual nature of the investigation, no single factor in the test is determinative, and the relative importance attributed to a particular factor varies considerably from case to case. However, if most of the relevant factors are met, it is likely that there will be a reclassification of a transfer of pledged assets and the related inclusion of those assets in the seller`s bankruptcy estate and the application of obligations under article 9. In the past 18 months, two bankruptcy courts have used the same factors, but have reached opposite conclusions on whether to characterize two broker cash advance financing transactions as an „actual sale” or not as an „actual sale” – and rather as a disguised financing. Thus, court decisions confirm the importance of proper structuring in order to achieve true sales processing. By using this website, you consent to security monitoring and auditing. For security reasons and to ensure that the public service remains accessible to users, this government computer system uses network traffic monitoring programs to identify unauthorized attempts, upload or modify information, or otherwise cause damage, including attempts to deny service to users. The bankruptcy courts of R&J Pizza Corp and Shoot The Moon applied these factors, each focusing on the same six factors (out of eight) identified in the table below, which includes the facts that the courts discussed in analyzing these six factors: unauthorized attempts to upload information and/or change information on any part of this website, are strictly prohibited and liable to prosecution under the Computer Fraud and Abuse Act of 1986 and the National Information Infrastructure Protection Act of 1996 (see 18 U.S.C. §§ 1001 and 1030). Note that this policy may change as the SEC maintains SEC.gov to ensure that the site works efficiently and remains available to all users.
For more information, see the SEC`s website privacy and security policy. Thank you for your interest in the United States. Securities and Exchange Commission. If a user or application sends more than 10 requests per second, other requests from the IP address may be restricted for a short period of time. Once the request rate drops below the threshold for 10 minutes, the user can continue to access the content on SEC.gov. This SEC practice is designed to limit excessive automated searches to SEC.gov and is not intended or should not affect individuals who visit the SEC.gov site. Please report your traffic by updating your user agent to include company-specific information. Although no single factor is controlled, both bankruptcy courts have placed great weight on factors 1 (language and conduct), 2 (recourse to the seller) and 5 (seller`s right to exaggeration), focusing on the overall nature of the transaction in determining the actual intention of the parties rather than the intention of the parties as set out in the documents.