## Facts

- Hoffinger Industries, Inc., a closely held pool manufacturer controlled by the Hoffinger family, faced a $13.5 million California tort judgment in favor of Leesa Bunch.
- Hoffinger filed Chapter 11 shortly after entry of the judgment.
- In 1993, Hoffinger purportedly incurred an $8.25 million secured “loan” from Clinton Pool Company, Inc., an entity owned by family members, allegedly to fund a shareholder distribution; the transaction lacked credible proof of a genuine loan and functioned to insulate assets from outside creditors.
- In 1999, Hoffinger entered a $10 million transaction with J.M. Capital Finance, Ltd., a company funded by and owned through Hoffinger’s products-liability insurer, Arrowhead Insurance Co., which was also tied to the family’s control.
- The 1999 funds were used to retire the 1993 CPC obligation and to distribute an additional $1.75 million to shareholders; Hoffinger granted J.M. Capital liens and treated J.M. Capital as a fully secured creditor in Chapter 11.
- Bunch and another creditor brought an adversary proceeding seeking to disallow or reconsider J.M. Capital’s claim, recharacterize it as equity, and equitably subordinate any allowable claim; Arrowhead sought allowance of post-petition insurance premiums as an administrative expense.
- The court tried the adversary proceeding and Arrowhead’s administrative-expense request together.

## Issues

1. Whether J.M. Capital’s asserted $10 million secured “loan” should be recharacterized or reclassified as an equity contribution rather than debt.
2. Whether J.M. Capital’s claim should be disallowed or reconsidered under 11 U.S.C. § 502(j) because it did not reflect a bona fide debt obligation.
3. If a claim existed, whether J.M. Capital’s claim should be equitably subordinated under 11 U.S.C. § 510(c) due to insider status and inequitable conduct harming other creditors.
4. Whether, and to what extent, Arrowhead’s post-petition insurance premiums qualified as administrative expenses under 11 U.S.C. § 503(b).

## Decision

- The court disallowed J.M. Capital’s asserted secured claim and recharacterized/reclassified the transaction as an equity contribution.
- Alternatively, the court held that any allowable J.M. Capital claim would be equitably subordinated to all other creditor claims.
- The court granted Arrowhead’s administrative-expense request in part and denied it in part, allowing only the portion of premiums shown to be actual, necessary costs benefiting the estate post-petition.

## Legal Principles

- Bankruptcy courts may recharacterize a purported insider loan as equity based on the economic substance of the transaction rather than its labels.
- Recharacterization analysis considers indicia of genuine debt and arm’s-length dealing, including documentation and enforcement, the parties’ conduct, the insider relationship, the use of proceeds, and whether the transaction resembles a shareholder distribution or capital infusion.
- Under § 510(c), a claim may be equitably subordinated where (1) the claimant engaged in inequitable conduct, (2) the conduct injured creditors or conferred an unfair advantage, and (3) subordination is consistent with the Bankruptcy Code; insider transactions receive heightened scrutiny.
- Administrative expense priority under § 503(b) is limited to post-petition obligations that are actual and necessary to preserve the estate; the claimant bears the burden to prove the benefit and necessity.

## Conclusion

The court treated the insider-linked financing as a device to protect family interests and disadvantage outside creditors, recharacterizing and disallowing J.M. Capital’s secured claim as equity and, in the alternative, subordinating any claim to all other creditors, while limiting Arrowhead’s administrative expense recovery to premiums proven to benefit the estate after the petition.


Bunch v. J.M. Cap. Fin., Ltd. (In re Hoffinger Indus., Inc.), 327 B.R. 389 (Bankr. E.D. Ark. 2005)