June 8, 2020

In the world of bankruptcy claims trading there has long remained an open question as to whether a debtors’ defenses against proofs of claim in a bankruptcy can be enforced against third party claims purchasers. This was particularly true in New York where until recently the Southern District of New York (SDNY) had taken a different approach from many other Courts on this issue.

The SDNY followed Enron II, where the Southern District Court held that an impairment of a claim is personal to the claimant rather than to the claim, and that liabilities will only travel with the assignment of a claim but not with the sale of a claim. This difference between “assignment” and “sale” was never well articulated; definitions of such terms do not appear in the Bankruptcy Code, and the two words are often used interchangeably among claims traders. As such it should be no surprise that most other courts, including the Third Circuit in KB Toys, have held that a disallowance travels with the claim, regardless of whether it is transferred via a sale or an assignment.

View the full update