May 10, 2012
Section 502(d) Challenges to Trade Claims: Purchasers Hold Claims Subject to Rights and Disabilities Held by Original Claimants
On May 4, 2012, Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) sustained a trustee’s claim objection pursuant to Bankruptcy Code § 502(d) seeking disallowance of trade claims purchased from their original holders because of judgments obtained by the trustee against the original claimants. The Court disallowed the claims that were transferred to trade claim purchasers holding that a purchaser holds the claim subject to the same rights and disabilities held by the original trade claimant.
Prior to filing the omnibus claims objection, the Trustee had obtained default or summary judgments in preference actions against the original holders of certain trade claims. The original claimants had previously sold their claims to two related trade claim purchasers, ASM Capital, L.P. and ASM Capital II, LLP (collectively, “ASM”). The Trustee sought to disallow the claims pursuant to § 502(d), although the preference action judgments were against the original claim holders, not the purchasers.
Section 502(d) provides in pertinent part: “… the court shall disallow any claim of any entity … that is a transferee of a transfer avoidable under section … 547 … of this title, unless such entity or transferee has paid the amount or turned over such property for which such entity or transferee is liable …“ The crux of the Court’s analysis was the interpretation of the phrase “any claim of any entity” contained in § 502(d). The Trustee argued that § 502(d) should be interpreted to mean a disability accompanies the claim into the control of another party. ASM argued that “any claim of any entity” means only the “claimant,” and, consequently, the disability rests with the original claimant and that the claims at issue were transferred by sales, not assignments so it was a good faith purchaser.
The Court rejected ASM’s arguments. Relying on the plain language of § 502(d), legislative history and decisional law from outside the District of Delaware, the Court held that a “claim in the hands of a transferee has the same rights and disabilities as the claim had in the hands of the original claimant. Disabilities attach to and travel with the claim.” The Court also noted that ASM had constructive, if not actual, notice of the potential of an avoidance action because the Debtors’ statement of financial affairs listed all the potential preference defendants.
Prior to filing the omnibus claims objection, the Trustee had obtained default or summary judgments in preference actions against the original holders of certain trade claims. The original claimants had previously sold their claims to two related trade claim purchasers, ASM Capital, L.P. and ASM Capital II, LLP (collectively, “ASM”). The Trustee sought to disallow the claims pursuant to § 502(d), although the preference action judgments were against the original claim holders, not the purchasers.
Section 502(d) provides in pertinent part: “… the court shall disallow any claim of any entity … that is a transferee of a transfer avoidable under section … 547 … of this title, unless such entity or transferee has paid the amount or turned over such property for which such entity or transferee is liable …“ The crux of the Court’s analysis was the interpretation of the phrase “any claim of any entity” contained in § 502(d). The Trustee argued that § 502(d) should be interpreted to mean a disability accompanies the claim into the control of another party. ASM argued that “any claim of any entity” means only the “claimant,” and, consequently, the disability rests with the original claimant and that the claims at issue were transferred by sales, not assignments so it was a good faith purchaser.
The Court rejected ASM’s arguments. Relying on the plain language of § 502(d), legislative history and decisional law from outside the District of Delaware, the Court held that a “claim in the hands of a transferee has the same rights and disabilities as the claim had in the hands of the original claimant. Disabilities attach to and travel with the claim.” The Court also noted that ASM had constructive, if not actual, notice of the potential of an avoidance action because the Debtors’ statement of financial affairs listed all the potential preference defendants.