A Sale or a Loan? The Plain Language is not always Dispositive

By Daniel Mosayov

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

In In re Shoot the Moon, LLC, the United States Bankruptcy Court for the District of Montana held that a transaction between a restaurant business and a lender was a loan with a security interest in receivables as opposed to a sale with an ownership interest in receivables.[i] The lender argued that the transaction was a sale of receivables instead of a loan to obtain a more favorable recovery relative to the debtor’s other creditors.[ii] The bankruptcy court did not agree and held that the transaction was a loan as opposed to a sale.

In early 2000, Kenneth Hatzenbeller and two investors opened “Shoot the Moon” a restaurant business.[iii] The business grew and over time became nineteen LLCs that operated sixteen restaurants in three states.[iv] The Shoot the Moon restaurants encountered financial pressure and needed to obtain additional cash flow.[v] After exhausting all options, the Shoot the Moon entities sought financing from CapCall.[vi] Ultimately, CapCall provided cash in return for an interest in certain receivables from the restaurants’ operations.[vii] On October 20, 2015, the Shoot the Moon LLCs merged into one entity (“Shoot the Moon”) and filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Montana.[viii] Thereafter, the Bankruptcy Court appointed a trustee to liquidate Shoot the Moon’s assets.[ix] The net proceeds from Shoot the Moon’s liquidation were used to pay creditors that held senior preferences relative to CapCall.[x] CapCall asserted the transaction was a sale that transferred ownership of Shoot the Moon’s receivables.[xi] According to CapCall, it owned the receivables, and the trustee and creditors had no interest therein.  The trustee and Shoot the Moon disagreed and argued that the transaction was a loan evidenced from the agreements that called for a one-time transfer of cash in exchange for daily transfers on receivables from the restaurants.[xii] The Court, in contrast with the plain language of the agreement, held that CapCall’s ability to claim a security interest in the restaurants’ inventory and equipment was impermissible because the assets were too distant and unrelated to the core of the transaction.[xiii] The Court noted the broad scope of collateral obligations from the contract were characteristics indicative of a loan.[xiv]

The Court adopted the following multi-factor test to determine whether the signed contract was a loan or a sale. Further, the Court emphasized that none of the factors are dispositive.[xv]

(1) whether the buyer has a right of recourse against the seller;

(2) whether the seller continues to service the accounts and commingles receipts with its operating funds;

(3) whether there was an independent investigation by the buyer of the account debtor;

(4) whether the seller has a right to excess collections;

(5) whether the seller retains an option to repurchase accounts;

(6) whether the buyer can unilaterally alter the pricing terms;

(7) whether the seller has the absolute power to alter or compromise the terms of the underlying asset; and

(8) the language of the agreement and the conduct of the parties.[xvi]

 

The Court acknowledged that the evidence was not entirely one-sided. [xvii] The Court noted the lengthy provision in the contract stating “central transaction is not intended to be, nor shall it be construed as a loan” favored CapCall’s position.[xviii] But the other factors also served as evidence that the transaction was as a loan with a debt interest in receivables. [xix]

First, the Court found that CapCall retained a definite right of recourse against the Shoot the Moon entities. [xx] Second, Shoot the Moon acted with the belief the transaction was a loan as they commingled receivables with other accounts to operate the restaurants. [xxi] Third, the financing statements referred to each individual Shoot the Moon entity as a “debtor.” [xxii] Fourth, the contract provided CapCall with conditional recourse commonly used in loans.[xxiii] Fifth, the coalition of transaction documents allocated severe risk to Shoot the Moon while fully protecting CapCall, which is uncommon for a sale.[xxiv] Further, the transaction did not resemble a sale of simply receivables, in part because of an overly broad clause that potentially granted managerial control of Shoot the Moon to CapCall. [xxv] The colloquial language used in email communications between parties included reference to the transaction as “loans with terms and balances.”[xxvi]

The Court found overwhelming evidence the transaction was a loan including the actions by both parties that showed intent to transact via a loan. [xxvii] In addition, the transaction had all the characteristics of a loan. [xxviii] Therefore, the Court agreed with Shoot the Moon’s position and held the transaction between the parties was a loan and not a sale. [xxix]




[i] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 1 (Bankr. D. Mont. Sept. 10, 2021).

[ii] See id.

[iii] See id.

[iv] See id.

[v] Id.

[vi]  Id.

[vii] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 6 (Bankr. D. Mont. Sept. 10, 2021).

[viii] Id.

[ix] Id.

[x] Id.

[xi] Id.

[xii] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 7 (Bankr. D. Mont. Sept. 10, 2021).

[xiii] Id.

[xiv] Id.

[xv] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 1 (Bankr. D. Mont. Sept. 10, 2021).

[xvi] Id. at 8.

[xvii] Id.

[xviii] Id.

[xix] Id.

[xx] Id.

[xxi] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 8 (Bankr. D. Mont. Sept. 10, 2021).

[xxii] Id.

[xxiii] Id.

[xxiv] Id.

[xxv] Id.

[xxvi] Id. at 12.

[xxvii] In re Shoot the Moon, LLC, No. 2:15-BK-60979-WLH, 2021 WL 4144933, at 13 (Bankr. D. Mont. Sept. 10, 2021).

[xxviii] Id.

[xxix] Id.