On April 9, 2008, in the M. Fabrikant & Sons, Inc. bankruptcy case pending in the Southern District of New York, Chief Judge Stuart M. Bernstein held that a seller of bank debt under the standard LSTA claims transfer documents transfers all of its rights except for those explicitly retained, including unmatured contingent claims, thus giving broad construction to the term “Transferred Rights” under the standard LSTA trade documents. The decision explicitly rejects a narrower approach advocated by eight bank debt sellers that would have allowed them to retain certain indemnity rights associated with their secured bank claims after the transfer of their claims.

At the commencement of the bankruptcy case, the Bankruptcy Court entered a cash collateral order that granted the original holders of the debtor’s prepetition secured bank debt certain adequate protection rights, including the right to be reimbursed for legal fees. Subsequently, the original holders sold all of their secured claims pursuant to standard LSTA transfer documents. After the sale, the original holders were sued by the official committee of unsecured creditors. The original holders incurred (and are incurring) legal fees in connection with this lawsuit and asserted a claim against the debtor seeking reimbursement of their legal fees. The original lenders argued that they had retained the indemnity rights granted to them under the cash collateral order because, among other reasons, those rights were not included among the “Transferred Rights” assigned to the buyers of the secured claims under the LSTA transfer documents.

Judge Bernstein rejected this argument and held that, under the LSTA transfer documents, “Transferred Rights” include all rights associated in any way with the underlying secured claims, except for the narrow set of rights specifically identified under the term “Retained Interest.” Given this broad reading of “Transferred Rights,” Judge Bernstein held that the indemnity rights granted to the original holders under the cash collateral order, even though contingent in nature at the time of the claims were transferred, were captured by the broad definition accorded to “claims” under the LSTA transfer documents, and, therefore, were assigned to the subsequent buyers of the secured claims.

Notably, Judge Bernstein explicitly rejected the argument that “claims” are limited to non-contingent prepetition rights to payment – a narrow definition that would have excluded the indemnity rights, as they did not arise until the postpetition period. Further, Judge Bernstein held that the indemnity rights contained in the cash collateral order were “related to,” and arose “in connection with” the credit documents that gave rise to the secured claim.

Judge Bernstein’s opinion represents a positive development for claims purchasers because it provides clarity in confirming that the bundle of rights assigned to a purchaser under LSTA transfer documents is extremely broad, and includes both claims that are contingent on future events (like indemnity rights) and claims that arise postpetition.