615 B.R. 161
Bankr. S.D.N.Y.2020Background
- Debtors (Firestar Diamond, Fantasy, A. Jaffe) filed Chapter 11 amid allegations that Nirav Modi and related entities perpetrated large-scale fraud using fraudulent Letters of Understanding; an Examiner found the Debtors’ senior officers likely involved.
- A Chapter 11 Trustee (Richard Levin) was appointed; Trustee alleges non-debtor affiliates (FDIPL, BVBA, FZE) received millions in avoidable fraudulent transfers or preferences from the Debtors.
- Four banks (BOI-B, UBI, BOI-A via BVBA’s receivers, BOI-L) filed proofs of claim based on receivables those non-debtor affiliates had pledged or sold to the banks.
- Trustee objected under 11 U.S.C. § 502(d), and avoidance provisions (§§ 544, 547, 548 and NY DCL § 276), arguing claims should be disallowed because the original transferees received avoidable transfers that remain unpaid.
- Banks argued § 502(d) is a personal disability that attaches to the claimant (relying on Enron II), or that they purchased/sold claims and thus are not subject to disallowance; they also invoked equitable considerations as innocent victims.
- The Bankruptcy Court rejected Enron II, adopted the reasoning of courts like the Third Circuit in KB Toys II, found the transactions resembled secured financing/pledges, and granted the Trustee’s objections, disallowing the five asserted claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does § 502(d) disallowance follow the claim or remain a personal disability of the claimant? | § 502(d) targets claims; disallowance travels with the claim regardless who holds it. | § 502(d) is personal to the claimant; a purchaser who never received the avoidable transfer should not be disallowed (Enron II). | Court follows KB Toys II line: § 502(d) follows the claim; claims disallowed here. |
| Do claim transfers here qualify as "sales" shielding buyers from § 502(d) (assignment vs sale distinction)? | The transactions are economically secured loans/pledges; not true sales that would insulate purchasers. | Banks: structures were sales/purchases that should not carry assignor’s disabilities. | Court did not rest on sale/assignment labels; noted transactions resemble secured financing and therefore are not protected. |
| Can equitable considerations (innocent purchasers, market impact) save the banks’ claims? | Banks: they are innocent victims; disallowance would harm markets and be inequitable. | Trustee: equity favors the estate and equality of distribution; purchasers assume trading risk and can mitigate it. | Court rejects equitable rescue of claims; purchasers bear the risk; no equitable basis to allow claims. |
| Is the district-court Enron II decision binding or persuasive here? | Banks: rely on Enron II to argue for claimant-based disallowance. | Trustee: Enron II is unpersuasive; other courts (including the Third Circuit) reject it. | Court declines to follow Enron II and adopts the view that § 502(d) follows the claim. |
Key Cases Cited
- In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013) (holds § 502(d) focuses on claims, not claimants; disallowance travels with claim)
- In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) (district court decision distinguishing sales from assignments and treating § 502(d) as personal to claimant)
- In re Enron Corp., 340 B.R. 180 (Bankr. S.D.N.Y. 2006) (earlier bankruptcy-court decision addressing claim transfers and trustee rights)
- In re Metiom, Inc., 301 B.R. 634 (Bankr. S.D.N.Y. 2003) (holds disqualification from preference follows the claim despite assignment)
- Swarts v. Siegel, 117 F. 13 (8th Cir. 1902) (historic rule that preference disqualification inheres in the claim and follows any transfer)