627 B.R. 804
S.D.N.Y.2021Background
- Firestar Diamond, Inc. (Debtor) and affiliates filed Chapter 11 after fraud investigations tied to their principal disrupted operations; a trustee and examiner were appointed.
- Three Firestar affiliates (FDIPL, BVBA, FZE) sold/traded merchandise with Firestar; banks (BOI-L, BOI-A receivers, UBI, BOIBDB) extended financing to those affiliates using receivables/invoices as collateral.
- Some invoices were endorsed or made payable directly to the Banks; others were sold at a discount. Unpaid invoices at the time of the petition underpin the Banks’ claims against Firestar.
- The trustee alleges Firestar made avoidable fraudulent/preferential transfers to the affiliates under §§ 544, 547, 548; any claim by the affiliates would be disallowed under § 502(d) unless the affiliates returned avoidable transfers.
- The bankruptcy court concluded § 502(d) “follows the claim” and disallowed the Banks’ claims without making factual findings about whether the Banks obtained their claims from the affiliates (sale, assignment, pledge, or direct-pay invoices).
- The District Court vacated and remanded because the record lacks findings on the nature of the Banks’ rights (whether they are transferees of claims subject to § 502(d) or holders of direct claims against Firestar), which is dispositive for § 502(d) application.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 502(d) disallows claim transferees when the original holder received avoidable transfers | Banks: § 502(d) is a personal disability of the claimant and does not attach to claims sold; sales of claims are protected (Enron II). | Trustee: Disallowance follows the claim; transferees of claims are subject to § 502(d) (KB Toys). | The court agrees with the statutory/textual and policy reasoning of KB Toys that § 502(d) can apply to transferees, but the factual predicate must be established. |
| Whether the Banks actually acquired their asserted claims from the affiliates (sale, assignment, pledge) | Banks: They hold invoices/direct-pay claims against Firestar and did not acquire disallowed claims from affiliates. | Trustee: Transactions were transfers (sales/pledges) that made the Banks transferees of affiliates’ claims. | The bankruptcy court failed to make necessary factual findings about the nature of the Banks’ rights; remand required. |
| Whether the Enron II assignment/sale distinction controls | Banks: Rely on Enron II to argue sales of claims are not subject to § 502(d). | Trustee: Enron II’s sale/assignment distinction is unsound and inconsistent with statute and market practice. | The District Court found Enron II’s distinction unpersuasive as a matter of statutory interpretation and practice, but did not decide outcome absent factfinding. |
| Appropriate remedy now (disallowance vs. further proceedings) | Banks: Claims should not be disallowed without proof they are transferees of disallowed claims. | Trustee: Claims should be disallowed under § 502(d) if traceable to affiliates’ disallowed claims. | The District Court vacated the bankruptcy court’s order and remanded for findings on how the Banks’ claims arose before applying § 502(d). |
Key Cases Cited
- In re McLean Indus., 30 F.3d 385 (2d Cir. 1994) (§ 502(d) disallows claims where estate can recover property from claimant).
- In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) (bankruptcy decision treating § 502(d) disabilities as personal to claimant and distinguishing sales from assignments).
- In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013) (holds § 502(d) burdens can follow claims to transferees; disallowance persists until avoidable transfers are returned).
- Nat'l Union Fire Ins. Co. v. Bonnanzio, 91 F.3d 296 (2d Cir. 1996) (standard of review: factual findings for clear error; legal conclusions de novo).
- In re Firestar Diamond, Inc., 615 B.R. 161 (Bankr. S.D.N.Y. 2020) (bankruptcy court opinion disallowing Banks’ claims under § 502(d) that was vacated and remanded).