Can a Claim Transferor that Received an Avoidable Transfer Wash Away Claim Disallowance Risk?
The market for the purchase and sale of bankruptcy claims has grown exponentially into a largely unregulated multibillion-dollar industry over the last several decades. A body of case law has developed surrounding the limitations on trading bankruptcy claims, especially focused on whether transferred claims can be disallowed based on the transferor’s prior acts or omissions.
For nearly two decades, practitioners in the U.S. Bankruptcy Court for the Southern District of New York (SDNY) lacked guidance concerning the circumstances under which a transferred claim could be disallowed. Given the significant number of commercial bankruptcy filings in this jurisdiction, the lack of controlling precedent has created material uncertainties for market participants. In a series of decisions issued between April 2020 and May 2024 in the In re Firestar Diamond Inc. chapter 11 cases, both the SDNY Bankruptcy Court and, through appeals, the U.S. District Court for the Southern District of New York have provided some much-needed guidance.
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