In re KB Toys, Inc., 470 B.R. 331 (Bankr. D. Del. 2012)

CASE SNAPSHOT

The trustee sought to disallow claims held by a claims purchaser under section 502(d) of the Bankruptcy Code because the original holders of the claims were liable to the debtor for preferences. The trustee argued that the claims purchaser purchased the claims subject to all rights and disabilities of the original claim holders, including section 502(d), which disallows claims held by creditors subject to preference liability if the creditor has not paid the amount or turned over the property subject to the preference. The claims purchaser asserted that the sold claims were not subject to 502(d), because this section only applied to the original holder of the claim and did not apply to a purchaser of a claim. The bankruptcy court, analyzing legislative history and case law, held that purchased claims are subject to section 502(d) and disallowed the claims purchased.

FACTUAL BACKGROUND

KB Toys and certain of its affiliates filed for bankruptcy early in 2004, and shortly thereafter filed the Statement of Financial Affairs. In the SOFA, the debtor listed creditors who received disbursements within the 90-day preference period preceding the chapter 11 filing. After the SOFA was filed, ASM Capital purchased nine claims from creditors who were among those listed as having received possible preference payments. The trustee filed preference actions against the original claim holders, and eventually obtained default judgments or summary judgments against each of them. The trustee then filed claim objections, seeking disallowance of the claims sold to ASM under section 502(d).

COURT ANALYSIS

The bankruptcy court considered the issue of whether the purchaser of a claim holds the purchased claim subject to the same rights and disabilities as the original claim holder, and is thus subject to section 502(d). Section 502(d) provides that the court shall disallow "any claim of any entity" that is a transferee of a transfer avoidable under section 547. ASM argued that the wording of the section meant it applied to the "claimant" only, while the trustee argued that it applied to "any claim," regardless of whether or not it was still held by the original claimant or transferred to a third party. The bankruptcy court reviewed the legislative history of this section, as well as cases construing its application, and was ultimately persuaded that the section applies to any "claim."

The bankruptcy court noted that ASM had constructive, if not actual, notice of the possibility that the sold claims could be subject to preference actions, since the original claim holders were listed in the SOFA as potential preference defendants. Additionally, the court noted that ASM had negotiated indemnity provisions in four of the purchase agreements, indicating that ASM was aware that the sold claims may very well be recovered in the bankruptcy case.

The bankruptcy court sustained the trustee’s objection and held that a claim purchaser holds that claim subject to the same rights and disabilities as the original holder, including section 502(d).

PRACTICAL CONSIDERATIONS

Claims purchasers should be aware that they take claims subject to section 502(d), and should structure their agreements and pricing accordingly.