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Claims Trading Restrictions Dealt Setback

By Todd A. Feinsmith and John C. Elstad

In recent years, debtors in large corporate bankruptcies have sometimes sought and obtained, in varying degrees, authority at the outset of bankruptcy cases for severe restrictions on trading in claims against the debtors by substantial claimholders. These restrictions have included prohibitions against trading absent consent of the debtor, forced consent to a debtor-ordered 'sell down' of debt securities later in the case and deprivation of the right to participate meaningfully in plan formulation and negotiation (no matter how large one's holdings might be). The purported purpose of these restrictions has been to preserve the debtor's ability to deduct its past net operating losses (NOLs) from future revenues. In practice, however, these debt-trading orders have chilled the market for trading in debt securities and served to entrench existing management by effectively precluding substantial investors from acquiring meaningful positions in the debtor's debt securities.

Recently, in the Dana Corp. et al. case (Case No. 06-10354 Bankr. S.D.N.Y.), creditors fought back and won a substantial victory. The claims trading order entered in the Dana case dramatically limited the debtors' interference in claims trading. In the future, creditors should rely on the example set in the Dana case to resist any attempt to impose claims trading restrictions at the outset of bankruptcy cases.

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