According to a recent decision by the United States District Court for the Southern District of New York,1 a claim sold post-petition is not subject to equitable subordination based solely on the original claimholder's conduct. Likewise, a claim sold post-petition cannot be disallowed based on the original claimholder's receipt of (and failure to repay) an avoidable transfer.

Background

In Official Committee of Unsecured Creditors v. Whalen (In re Enron Corp.), the Bankruptcy Court for the Southern District of New York considered whether the debtor’s pre-bankruptcy payment of an employment bonus one day before it became due was “for or on account of an antecedent debt owed by the debtor before such transfer was made” for purposes of determining whether section 547(b) of the Bankruptcy Code made the payment avoidable as a preferential transfer.

The Bottom Line:

The Bottom Line:

On August 27, 2007, United States District Judge Shira Scheindlin held that Springfield Associates, an innocent transferee of a claim from Citigroup against Enron, was not subject to certain counterclaims and defenses so long as Springfield was a “purchaser” and not an “assignee” of the claim. See In re Enron Corp. v. Springfield Assocs. L.L.C., No. 07 Civ. 1957, 2007 U.S. Dist. LEXIS 63129 (S.D.N.Y. Aug. 27, 2007).

The United States Bankruptcy Court for the Southern District of New York has held that a severance payment made to an executive who worked for both Enron Corp. (“Enron”) and various affiliates of Enron prior to Enron’s filing for bankruptcy was a preferential transfer that could be avoided by the Official Committee of Unsecured Creditors (the “Committee”).1 In reaching this conclusion, the Bankruptcy Court rejected the argument that the severance payment was an “ordinary course” transaction that was protected from avoidance.

A recent federal district court appellate decision issued in the Enron chapter 11 case1 has ruled that the postpetition transfer of a prepetition bankruptcy claim from one party to another may insulate the transferred claim against certain types of attack based solely on conduct by a prior holder of the same claim. Whether a particular claim is protected depends upon how the claim was transferred.

The U.S. Court of Appeals for the Second Circuit, on Dec. 2, 2011, ruled in favor of SRZ client Alfa, S.A.B. de C.V., denying Enron’s petition for rehearing in Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011). The court had previously ruled against Enron more than five months ago, holding that its redemptions of commercial paper were “settlement payments” and thus not voidable as preferential or fraudulent transfers under Bankruptcy Code § 546(e), one of the code’s so-called “safe harbor” provisions.

The U.S. Court of Appeals, in a 2-1 decision on June 28, 2011, held that Bankruptcy Code § 546(e), which exempts a “Settlement Payment” from a bankruptcy trustee’s avoiding powers, insulated two sellers of Enron Corporation’s commercial paper from suit despite Enron’s early pre- bankruptcy redemption. Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., ___F.3d ___, 2011 WL 2536101 (2d Cir. June 28, 2011) (2-1).

Federal Rule of Bankruptcy Procedure 2004(a) states that "[o]n motion of any party in interest, the court may order the examination of any entity."  Courts construing Rule 2004(a) have found its scope "unfettered and broad."  In re Washington Mutual, Inc., 408 B.R. 45, 49 (Bankr. D. Del. 2009), citing In re Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N. D. N.Y. 1996).  Federal Rule of Bankruptcy Procedure 2004(b) establishes some of the parameters of what is commonly referred to as a "Rule 2004 Examination":