A federal district court in New York has overturned a bankruptcy court decision that some say had threatened to disrupt the secondary market in claims against companies in bankruptcy. See Enron Corp. v. Springfield Associates, L.L.C., No. 01-16034 (S.D.N.Y., Aug. 27, 2007).

U.S. District Judge Shira Scheindlin said Bankruptcy Judge Arthur Gonzalez was wrong to have ruled last year that the wrongful acts of a previous holder of a claim may be used to disallow or equitably subordinate the claim held by an innocent purchaser. “The unnecessary breadth of the bankruptcy court’s decisions threatened to wreak havoc on the markets for distressed debt,” she wrote in her ruling. “That result has now been avoided.”