In a decision that is important to debt traders, claims purchasers, and others, District Judge Shira A. Scheindlin has reversed two controversial decisions by Bankruptcy Judge Arthur Gonzalez in connection with the Enron Corp. bankruptcy, in which he subordinated (under section 510(c) of the Bankruptcy Code) and disallowed (under section 502(d) of the Bankruptcy Code) the claims held by a "claims purchaser" qua transferee.

Bankruptcy Judge Arthur Gonzalez had ruled, in two separate and widely discussed opinions, that if the original claims were "tainted" in the hands of the transferor due to the misconduct of the transferor or the transferor's receipt of a preference, the taint traveled with the claims into the hands of the purchaser/transferee, thus enabling the debtor to equitably subordinate and/or disallow the claims held by the purchaser/transferee. In a fifty-three page opinion, Judge Scheindlin reversed the rulings of Judge Gonzalez, which had roiled the claims-trading markets, and held that the "defects" relied upon by Enron Corp. to disallow the claims held by the claims purchaser did not "inhere in the claim" that had been transferred to the purchaser. The defects, and likewise the debtor's remedies, were found by Judge Scheindlin to be personal to the transferor and did not infect the claim of the innocent transferee. Judge Scheindlin's decision raised, but did not decide, additional interesting issues that are likely to affect the terms of future claims-trading transactions as well as credit insurance transactions.

To read Friedman Kaplan's memorandum on the decision, click here.