## Facts

- AutoStyle Plastics, Inc. obtained a revolving credit facility from CIT Group/Credit Finance, Inc., which held a perfected first-priority security interest in substantially all of AutoStyle’s assets.
- CIT entered participation/subordination agreements with MascoTech-related entities, including Citicorp Venture Capital, Ltd. (CVC) and the Treasurer of the State of Michigan (SMRS), under which participants advanced funds to CIT (not AutoStyle) and received rights to share in payments CIT received from AutoStyle.
- The participation agreements generally provided that participants were paid only after CIT and other senior participants were paid in full, and participants had no direct legal recourse against AutoStyle for nonpayment.
- AutoStyle also issued a separate demand note to CVC and granted equity-linked consideration (e.g., warrants) in connection with the overall financing relationship.
- After several participation agreements, Bayer Corporation extended credit to AutoStyle and perfected a junior security interest (junior to CIT by filing priority).
- Additional participation/subordination agreements were executed after Bayer’s lien attached, and the participants asserted they shared CIT’s first-priority position as to proceeds from AutoStyle’s collateral.
- AutoStyle filed Chapter 11, the bankruptcy court authorized a lease/sale of certain assets to Venture Industries, and the case later converted to Chapter 7.
- By consent order, Venture’s monthly lease payments were directed to CIT; although CIT’s own advances had been repaid, participant-funded obligations under the facility remained unpaid.
- Bayer brought an adversary proceeding disputing the participants’ priority to the lease proceeds.

## Issues

1. Whether the CIT–participant agreements were “true participation” agreements (derivative of CIT’s secured loan) or instead created independent creditor interests that could not share CIT’s perfected lien priority.
2. Whether treating participants as sharing CIT’s priority improperly created “floating secured parties” inconsistent with UCC Article 9 perfection and notice principles.
3. What standard governs recharacterizing a purported debt claim as an equity contribution in bankruptcy.

## Decision

- The Sixth Circuit affirmed summary judgment for MascoTech, CVC, and SMRS.
- The court held the agreements satisfied the elements of true loan participations: funds were paid to CIT; participant repayment depended on CIT being repaid; only CIT had recourse against AutoStyle; and the documents reflected the parties’ intent to create participations.
- Because the participants’ rights were derivative of CIT’s already-perfected first-priority security interest, they shared CIT’s priority and were senior to Bayer’s junior lien as to the disputed proceeds.
- The court rejected the “floating secured parties” argument, reasoning the transactions allocated economic interests in a single perfected secured claim rather than creating new, separately perfected security interests requiring additional UCC filings.
- The court found no genuine dispute of material fact on the relevant terms, perfection, or priority, making summary judgment appropriate.

## Legal Principles

- A transaction is a “true participation” when (1) the participant pays the original lender, (2) the participant is repaid only when the lender is repaid, (3) only the lender has recourse against the borrower, and (4) the documentation reflects the parties’ intent; true participants do not become independent secured creditors of the debtor.
- Under UCC Article 9 concepts, allocating payment rights in an already-perfected secured loan to participants does not, by itself, create new secured parties whose interests must be separately perfected, so long as the perfected secured creditor’s lien remains the source of the rights asserted.
- Bankruptcy courts may recharacterize “purported debt” as equity when the facts show the advance functioned as an equity contribution from inception; the inquiry is guided by an eleven-factor, nonexclusive test examining debt-like formalities (e.g., maturity, interest, repayment source) and capital-structure realities (e.g., capitalization, subordination, ability to obtain outside financing).

## Conclusion

The court held that properly structured loan participations in a secured credit facility give participants derivative rights that share the original lender’s perfected priority without violating UCC notice rules, and it articulated an influential multi-factor framework for recharacterizing purported debt as equity in bankruptcy.


In re AutoStyle Plastics, Inc., 269 F.3d 726 (6th Cir. 2001)