David Karp, Co-Head of Special Situations & Alternative Investments, examines the risks of claim impairment in distressed debt trading, focusing on a court ruling in the KB Toys bankruptcy that held certain claim disabilities, such as those under section 502(d), travel with the claim to the purchaser. He explains that the decision underscores the limitations of relying on legal distinctions like “sale versus assignment” and highlights how insufficient diligence can expose investors to unexpected disallowance risks. Karp emphasizes that market participants should prioritize thorough pre-trade diligence and robust contractual protections to mitigate risk and avoid costly litigation.