Second Circuit Decision Reassures Bankruptcy Claim Purchasers on Enforceability of Recourse Against Sellers

David Karp, Co-Head of Special Situations & Alternative Investments, discusses a Second Circuit decision that reinforces the enforceability of contractual recourse provisions in bankruptcy claims trading, particularly a buyer’s right to require a seller to repurchase a claim following an objection. The court vacated a lower court ruling and held that, based on the plain language of the agreement, even a non-substantive objection was sufficient to trigger the seller’s repurchase obligation. The decision provides reassurance to market participants that commonly used risk allocation provisions—such as put rights—will be upheld, while also underscoring the importance of clear drafting and careful negotiation of claims trading agreements.

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