Many participants in the multibillion-dollar distressed-debt trading markets were hoping that Federal District Court Judge Shira A. Scheindlin would permit expedited review of her ruling immunizing a purchaser of a claim against a debtor in bankruptcy from objections to the claim based upon the conduct of a prior holder of the claim. In an opinion that will no doubt generate discussion, debate and angst among such market participants, Judge Scheindlin dashed their hopes by refusing to permit an interlocutory appeal of her earlier decision that created a disturbance in the force that surrounds the unregulated industry of claims trading.1

The earlier decision held that equitable subordination and disallowance of a claim pursuant to sections 510(c) and 502(d) of the Bankruptcy Code based on the conduct of a holder of a claim are "personal disabilities that are not fixed as of the petition date and do not inhere in the claim." Perhaps more significantly, the court held that whether a claim transferred to an innocent transferee can be equitably subordinated or disallowed based on the conduct of a prior holder depends on the nature of the transfer and, in particular, on whether the transfer is a sale or an assignment. The district court remanded the case to the bankruptcy court to determine the nature of the transfer.

Concerned with the uncertainty surrounding the "sale v. assignment" distinction and its effect upon the markets, the transferee, joined by certain trade associations, sought permission to file an interlocutory appeal of the district court's ruling. In a decision denying such permission, the district court stated that, based upon the court's narrow holdings, which "significantly scaled back the bankruptcy court's ruling," the concerns raised "with respect to the effects of the Bankruptcy Court's rulings on the markets for distressed debt are no longer present."2 In support of this view, the district court repeated the following "pointed statement" made in its prior decision:

Equitable subordination and disallowance arising out of conduct of the transferee (sic) will not be applied to good-faith open-market purchasers of claims…[S]ales of claim on the open markets are indisputably sales.

Although the district court believes its decision "ensure[d] that the markets would not be disturbed," practitioners and academics alike continue to debate the reasoning of the bankruptcy court's and district court's rulings. Thus, it will be important to see how, on remand, the bankruptcy court determines the nature of the transfer and whether, after the bankruptcy court enters judgment, a party in interest appeals the district court's decision. Until that time, however, it appears that uncertainty will continue to disturb the claims trading markets.