Can the Enron Claims Trading Issues Be Avoided?

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.