The Second Circuit Court of Appeals, acting with unusual alacrity (oral argument was heard only one month ago), summarily reversed the district court decision in Longacre Master Fund v. ATS Automation Tooling Systems. The decision did not break any significant new ground, and the court did not take the opportunity to consider the controversial claims trading case of Enron v. Springfield Associates. However, the Second Circuit’s broad reading of the repurchase provisions of the claim purchase agreement will likely strengthen the hand of specialized firms that look to buy claims in large Chapter 11 cases. 

As recently noted here, Longacre bought a claim from ATS in the Delphi bankruptcy case. A provision in their agreement required ATS, as the seller, to take back the claim if Delphi objected to it. Delphi did in fact object to the ATS claim under Section 502(d) of the Bankruptcy Code on the basis that ATS had received potentially voidable preference payments prior to the bankruptcy case. When Longacre demanded that ATS take back the claim, ATS refused, and Longacre sued to enforce the agreement.    

The district court refused to enforce the repurchase provisions. Instead, it examined the merits of the claim objection itself, and determined that under the holding of Enron v. Springfield Associates, which held that a claim objection under Section 502(d) of the Bankruptcy Code based on the receipt of a voidable preference payment was valid only against the recipient of such payment, and could not be used to object to such claim in the hands of a good faith purchaser, Delphi’s objection lacked merit and therefore ATS should not have been required to repurchase the claim. 

The Second Circuit did not address the merits of Enron, but instead assumed that the district court was right in its assessment that the objection was baseless. “Contrary to the District Court’s reasoning, nothing in the language of [the claim purchase agreement] requires the objection to be meritorious.” Under the court’s straightforward analysis of New York contract law, the Delphi objection constituted an “Impairment” under the agreement, which in turn triggered ATS’s repurchase obligation in the event that the objection was not fully resolved by ATS within six months, or was not likely to be resolved within a reasonable time thereafter.  

The court remanded the case to so that the lower court could rule on whether ATS had met its requirement to resolve the claim within “a reasonable time” after the end of the six month period.