A loan-to-own investment strategy is sometimes seen in a debtor's bankruptcy proceeding as a mechanism pursued by activist distressed investors to take ownership of all or some of a debtor's assets or stock by determining where the fulcrum security lies in the debtor's capital structure. Recent case law suggests that courts will carefully scrutinize the actions of overzealous investors to ensure that they do not chill the auction process or to prevent them from unfairly pursuing a loan-to-own strategy by purchasing claims at significant discounts. If the court suspects an investor's motives, it may limit the investor's credit bidding rights or designate its votes on a plan, thereby preventing it from successfully pursuing its strategy.

To learn about various loan-to-own techniques and the risks and benefits of executing a loan-to-own strategy, see Practical Law's Practice Note, Loan-to-Own Strategies in Bankruptcy.