The "State" of Federal Bankruptcy Law: The Ninth Circuit's Debt Recharacterization Analysis in In re Fitness Holdings International

Abstract

On April 30, 2013, the U.S. Court of Appeals for the Ninth Circuit in In re Fitness Holdings International, Inc. held that bankruptcy courts have the authority to recharacterize debt as equity when the obligation does not constitute a “right to payment” under state law. In so holding, the court adhered to a state law approach and declined to adopt a federal rule for debt recharacterization, thus creating a split amongst the federal appeals courts. This Comment argues that the Ninth Circuit’s state law approach is more desirable than promulgating a federal debt recharacterization rule because state law is more predictable and guarantees that a property interest will receive the same protections in federal bankruptcy courts as it would in state courts. This Comment also argues that a state law approach is preferable because it is rooted in precedent and avoids the risk that bankruptcy courts will infringe on substantive state policy.