736 F.3d 247
3rd Cir.2013Background
- KB Toys' Chapter 11 liquidation; Residual Trustee seeks §502(d) disallowance of ASM’s nine traded claims.
- §502(d) disallows a claim where property is recoverable by the estate; issue is whether this disallowance applies to a transferee.
- ASM purchased nine claims from Original Claimants; 90-day payments preceding petition led to avoidance actions; judgments against Original Claimants were uncollectable.
- Assignment Agreements included indemnity/restitution provisions shifting risk of disallowance back to the Original Claimants and noted bankruptcy risks.
- Bankruptcy Court and District Court held disallowance travels with the claim to the transferee; ASM challenged on good-faith purchaser grounds under §550(b).
- Court concludes §502(d) disallows claims in transferee hands when transfer is avoidable and unreturned, maintaining the “disability” on the claim regardless of possession.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does §502(d) disallow a claim held by a transferee when the transfer was avoidable? | Trustee: disallowance runs with the claim. | ASM: disallowance is personal to the original claimant. | Yes; disallowance travels with the claim. |
| Is §502(d) a personal disability of the claimant or an attribute of the claim? | Trustee: language shows an attribute of the claim that remains disallowable. | ASM: should be analyzed as personal to the claimant. | Attribute of the claim; transfers do not preserve disability for the transferee. |
| Does §550(b) good-faith purchaser protection apply to ASM? | Trustee: §550(b) not applicable to transfers of claims, only property of the estate. | ASM: good-faith purchaser should shield from §550(b). | No; §550(b) does not apply to claim purchasers. |
Key Cases Cited
- Enron Corp. v. Avenue Special Situations Fund II, L.P. (In re Enron Corp.), 379 B.R. 425 (S.D.N.Y. 2007) (supports that §502(d) aims for equality of distribution and travels with the claim)
- In re Enron Corp. (Enron I), 340 B.R. 180 (Bankr. S.D.N.Y. 2006) (recognizes risk of disallowance in claim purchases)
- Katchen v. Landy, 382 U.S. 323 (1966) (history of §57(g) informing §502(d) interpretation)
- Swarts v. Siegel, 117 F. (8th Cir. 1902) (disqualification of a preference follows the claim)
- In re LaRoche Indus., Inc., 284 B.R. 406 (Bankr. D. Del. 2002) (applies §57(g) understanding to §502(d))
- In re Mid Atl. Fund, Inc., 60 B.R. 604 (Bankr. S.D.N.Y. 1986) (treats disallowance as attribute of the claim)