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The Bankruptcy StrategistLJN NewslettersNewsSections

Can the Enron Claims Trading Issues Be Avoided?

By Andrew H. Sherman
February 26, 2007

Claims trading has become a part of the bankruptcy fabric as a short-term investment vehicle and a long-term opportunity with the intention of obtaining a strategic position in the confirmation process. It is now clear that the acquisition of a claim carries certain baggage, including the opportunity to be sued for actions that relate to the claim or other types of avoidance actions which can significantly delay the distribution on the claim. The baggage associated with a transferred claim has been articulated by Bankruptcy Judge Arthur Gonzalez in the Enron cases, where he held that a transferee's claim against a bankrupt's estate can be subordinated or disallowed solely because of the transferor's misconduct or failure to return avoidable transfers even when there is no finding of wrongdoing or receipt of avoidable transfers by the transferee. Enron Corp. v. Avenue Special Situations Fund, II, LP (In re Enron Corp.), 340 B.R. 180 (Bankr. S.D.N.Y. 2006); In re Enron Corp., 333 B.R. 205 (Bankr. S.D.N.Y. 2005). Under these rulings, a purchaser of a claim is subject to later attack and subordination of the claim, regardless of whether that transferee had any knowledge of the transferor's inequitable conduct or purchased the claim in good faith for value.

However, an investor may not need all the rights associated with the claim and simply wants to purchase the income stream from the claim without the other rights associated with the claim. Further, an investor may have concerns due to the greater uncertainty in the claims trading industry because of the Enron decisions. In these instances, an investor should consider acquiring a distribution right ' the right to receive the distribution on the claim ' nothing more and nothing less.

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