Amid the explosion of trading in claims against distressed and bankrupt entities, courts in recent years have issued numerous rulings of interest to both buyers and sellers. Notable decisions have addressed, among other things, "loan to own" acquisition strategies resulting in vote disqualification or claim amount limits; buying claims to block confirmation of a chapter 11 plan; equitable subordination, disallowance, and other lender liability exposure based upon the seller's misconduct; the adequacy of standardized claims trading agreements; claim-filing requirements in the era of computerized records; and buying claims for the purpose of creating appellate standing.
One of the latest developments in the growing body of bankruptcy jurisprudence affecting this area was contributed recently by the U.S. Bankruptcy Court for the District of Delaware in In re Woodbridge Group of Companies, LLC, 2018 WL 3131127 (Bankr. D. Del. June 20, 2018). The court ruled that, because an anti-assignment clause in a promissory note was enforceable under state law, the associated claim asserted in bankruptcy by the purchaser of the note must be disallowed. Among other things, the court noted that "[t]he evidence does not support the claims trader's argument that enforcing the anti-assignment clause would disrupt the market."
Bankruptcy Claims Trading
The proliferation of trading in distressed debt, other claims, and stock and other interests provides a ready market for creditors and shareholders who want to obtain current recoveries without waiting until the end of a bankruptcy case. Although trading in public securities is regulated by disclosure and other requirements contained in federal securities laws, transfers of some types of claims are not subject to such regulation. Astute claims traders with information and expertise that other creditors may not have or may not be willing to develop can profit considerably if claims acquired at a steep discount later reap significant recoveries. For a variety of potential reasons, bankruptcy courts have sometimes played a role in monitoring or regulating such claims trading.
Bankruptcy Rule 3001
Neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") expressly give the bankruptcy courts the power to regulate claims trading once a debtor files for bankruptcy. Bankruptcy Rule 3001(e) includes certain notification requirements which vary according to when a claim is transferred and for what purpose (i.e., for security or otherwise) to ensure that the court has an accurate record of the identity of the holder of the claim and, in a chapter 11 case, to ensure that the actual holder of the claim has an opportunity to vote to accept or reject a plan. It does not provide for any court involvement in the trading process.
Bankruptcy Rule 3001 was amended in 1991 to significantly curtail court oversight of claims transfers. See Preston Trucking Co. v. Liquidity Solutions, Inc. (In re Preston Trucking Co.), 333 B.R. 315 (Bankr. D. Md. 2005); see generally Collier on Bankruptcy ¶ 3001.08 (16th ed. 2018). Prior to 1991, Bankruptcy Rule 3001(e)(2) required court approval of all claims transfers after notice and a hearing. As a result, prior to 1991, courts frequently used Rule 3001(e) to place significant restrictions on the claims trading process. See, e.g., In re Allegheny International Inc., 100 B.R. 241 (Bankr. W.D. Pa. 1988) (establishing a procedure for claims trading in addition to the requirements of Bankruptcy Rule 3001(e) and requiring the debtor to provide the potential assignor with its best estimate of the value of the claim until a plan and disclosure statement were filed); In re Revere Copper and Brass, Inc., 58 B.R. 1 (Bankr. S.D.N.Y. 1985) (refusing to approve assignments of claims until the creditors had been given a period of approximately 30 days in which to revoke assignments, where the assignee failed to show that the creditors had received sufficient information to make an informed judgment about the purchase offer).
The Advisory Committee Note accompanying the 1991 amendment states that, in the event the transferor makes a timely objection, the "court's role is to determine whether a transfer has been made that is enforceable under nonbankruptcy law."
Under amended Bankruptcy Rule 3001(e), if a claim has been transferred for purposes other than security prior to the filing of a proof of claim, there is no need to submit evidence of the transfer. If a claim has been transferred for purposes other than security after the original claimant files a proof of claim, the transferee is substituted for the transferor in the court's records in the...
