The treatment by a court of a transaction or document according to its “true” substance rather than the form used by the parties.

A court may order that a loan to an entity be treated as an equity contribution if the “loan” bears the characteristics of an equity contribution rather than a true loan (as where the loan was made by an insider, there is no maturity date, there are no scheduled payments on the loan, and/or the borrower is undercapitalized).

A transaction characterized by the parties as a sale may be recharacterized as a secured transaction if, for example, the seller retains possession of the property sold, with the buyer being entitled to the property only if the seller defaults on a debt to the “buyer.”

An “absolute” assignment of rents will often be treated as creating merely a lien in favor of the lender assignee.

A lease is also subject to recharacterization if its terms resemble the terms of a secured transaction rather than a true lease.

See also Absolute Assignment of Rents, Assignment of Rents for Security, Disguised Financing, Equitable Subordination, True Lease, True Sale.

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