By Rick Antonoff, Mark Pesso, Timothy Bennett and Leah Edelboim, Clifford Chance US LLP
Recent decisions on claims trading in bankruptcy cases further develop the Second Circuit’s seminal ruling in Dish Network Corp. v. DBSD North America, Inc. that if the primary motive for a secondary market purchase of bankruptcy claims is control of the Chapter 11 process, cause may exist to “designate,” or not count, the votes cast by the purchasers in connection with a Chapter 11 plan. Read together, these decisions demonstrate the willingness of courts to scrutinize secondary market claim transactions when determining disputes over classification, treatment and, ultimately, the value claims purchasers realize on account of purchased claims.
In our Client Memorandum we discuss four decisions issued in the last year as additional examples of courts examining claims transfers under a microscope. A Third Circuit Court of Appeals decision affirmed that the purchaser of trade claims is subject to the defenses that a debtor would have against the original creditor. In another case, the bankruptcy court permitted the debtor to treat a claim differently solely because the claim was assigned to a secondary market purchaser. A Ninth Circuit appellate panel ruled that insider status does not travel with a claim that is assigned. And finally, a court sustained a debtor’s objection to an assigned claim because the assignee was unable to produce sufficient evidence of its right to assert the claim.
These cases show that courts increasingly look into relationships between the parties and their respective motives when deciding how purchased claims are treated. The full Client Memorandum is available for download here.