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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Open Questions Regarding Disallowance Under Section 502(d)

By Paul A. Rubin and Hanh V. Huynh
June 01, 2020

The intra-district divide in the Southern District of New York continued to deepen on the issue of whether claims disallowance under section 502(d) of the Bankruptcy Code applies to the claim or to the claimant, with the recent decision from a S.D.N.Y. bankruptcy court disagreeing with the S.D.N.Y. district court decision in In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) (Enron II). See, In re Firestar Diamond, Inc., 2020 WL 1934896, — B.R. — (Bankr. S.D.N.Y. Apr. 22, 2020) (Firestar).

Under Section 502(d) of the Bankruptcy Code, any claim of an entity that received an avoidable transfer and that has not repaid the amount of the avoidable transfer shall be disallowed. 11 U.S.C. §502(d). If, however, the claim was transferred by the original creditor so that the entity holding the claim is not the entity that received an avoidable transfer, can the claim still be disallowed under Section 502(d) of the Bankruptcy Code? The district court in Enron II held that the answer depends on whether the claim was acquired through a sale or an assignment. Enron II reasoned that, because disallowance under Section 502(d) is a disability applicable to the claimant and is not an attribute of the claim, a sale of the claim cleanses the disability. Enron II, 379 B.R. at 443-45. According to Enron II, an assignment of the claim, however, does not purge the disability because the assignee stands in the shoes of the assignor. Id. at 439.

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