Background

• KB Toys, Inc. and affiliated debtors filed Chapter 11 petitions on January 14, 2004 and liquidated substantially all assets.
• The Plan confirmed August 18, 2005 created the KBTI Trust; the Trustee was appointed to liquidate assets and pursue avoidance actions for creditors.
• ASM Capital purchased eight Sold Claims from Original Holders between 2004 and 2007, with several assignments including indemnity clauses.
• The Trustee filed a Tenth Omnibus Substantive Claim Objection alleging disallowance of Sold Claims under § 502(d).
• The Trustee contends that § 502(d) disallows transferred claims where the transferor received an avoidable transfer, and the disability travels with the claim; ASM contends the buyer acquired merely a sale and thus does not inherit the disability.
• The court agrees that the disability under § 502(d) travels with the claim, applying the rule that a transferee of a claim has the same rights and disabilities as the original holder, and sustains the Trustee’s objection against ASM.

Issues

Key Cases Cited

• In re Enron Corp., 340 B.R. 180 (Bankr.S.D.N.Y. 2006) (disallowance of transferred claims under § 502(d) can apply to purchasers/ transferees)
• In re Metiom, Inc., 301 B.R. 634 (Bankr.S.D.N.Y. 2003) (assignment vs. sale distinctions are material; 502(d) disallows claims of transferees where transferor received an avoidable transfer)
• In re Enron Corp. II, 379 B.R. 425 (S.D.N.Y. 2007) (plain language focuses on claimant; sales vs. assignments affect whether 502(d) applies to transferees)
• Swarts v. Siegel, 117 F.3d 13 (8th Cir. 1902) (disqualification of a claim inherits with the claim and may follow transferors)
• Goldie v. Cox, 130 F.2d 695 (8th Cir. 1942) (an assignee stands in the shoes of the assignor and is subject to the assignor's equities)
• Dorr Pump & Mfg. Co. v. Heath, 125 F.2d 610 (7th Cir. 1942) (stockholders’ rights transferred are subject to burdens of the assignor)