Revisiting Limitations on Claims Trading

Kelley Drye’s Bankruptcy and Restructuring Practice Group has prepared a client advisory concerning a recent appellate decision by the District Court for the Southern District of New York, addressing a decision in the Enron bankruptcy case, that may have far reaching implications for all creditors, particularly parties to claims transfers. If the decision is followed, creditors could see a reduction in recoveries on their claims because more claims will be allowed in bankruptcy, thereby diluting overall creditor recoveries. Lenders may be able to ​“wash” claims tainted by their conduct in bankruptcy by transferring them to a third party. Parties to claims transfers may be insulated from liability against challenges to transferred claims based on the transferor’s conduct, and should consider structuring claims transfers to take advantage of the potential protections afforded by the decision. If such efforts are successful, the decision has the potential to significantly expand the secondary market for bankruptcy claims.