For
Immediate Release Tuesday, August 28, 2007
Industry
Associations Applaud Victory In Enron Appeal: Purchasers Of Secondary Debt Not
Subject To Taint On Account Of Seller’s Alleged Improper Conduct
The case arose out of
The Enron bankruptcy court accepted Enron’s
argument, issuing a decision holding that improper conduct or receipt of an
avoidable transfer by a prior holder of a claim taints the claim itself,
rendering it worthless in the hands of a subsequent—and a wholly
innocent—purchaser.
The negative and dramatic adverse market
implications of the bankruptcy court’s decision were called to Judge
Scheindlin’s attention, on appeal, by a joint amicus submission by the Loan
Syndications and Trading Association (“LSTA”), the Securities Industry and
Financial Markets Association (“SIFMA”), and the International Swaps and
Derivatives Association (“ISDA”), all leading financial industry trade associations.
Yesterday’s decision by Judge Scheindlin vacates
the bankruptcy court’s decision. Judge
Scheindlin’s opinion describes the bankruptcy court’s opinion as
“overreaching,” and notes that it “resulted in [an] outcry from commentators
and amici curiae, who have expressed great concern that [the decision] will
wreak havoc in the markets for distressed debt.” Her opinion makes clear that equitable
subordination and disallowance are “personal disabilities” that do not transfer
with claims when they are sold. She
therefore holds that the purchasers of claims “are protected from being subject
to the personal disabilities of their sellers.
Judge Scheindlin’s decision does draw a distinction
between sales and “pure assignments” (such as when a surety that pays a claim
is subrogated by operation of law to the rights of the original obligee),
finding that a transferee that acquires a claim by “pure assignment” may take
it subject to the personal disabilities of the original transferor. Her opinion makes clear, however, that “sales
of claims on the open markets are indisputably sales” such that “[e]quitable
subordination and disallowance arising out of the conduct of the [transferor]
will not be applied to good faith open market purchasers of claims.”
As Judge Scheindlin aptly put it—relying expressly
on the amici submissions—“it is proper to consider the effect that the Court’s
interpretation would have on the markets.
The unnecessary breadth of the Bankruptcy Court’s decisions threatened
to wreak havoc on the markets for distressed debt. That result has now been avoided.”
Elliot Ganz, the General Counsel of the LSTA,
expressed satisfaction with that conclusion.
“Judge Scheindlin’s careful opinion is a tremendous victory for the
entire market. The decision lifts a
horrible cloud that hung over every purchase and sale of debt in the secondary
market—a cloud that threatened to choke off these otherwise vibrant
markets. Her opinion rejects each and
every one of Enron’s arguments. In
addition, I am very pleased that the Court considered and relied upon the
perspective that the amici brought to this question. While Enron will presumably appeal this
decision, I am confident that if and when this question reaches a higher court,
the conclusion that Judge Scheindlin reached—that a claim held by an innocent
purchaser may not be equitably subordinated or disallowed based on the wrongful
acts of a previous holder—will be affirmed.”
For further information, please contact:
LSTA: Elliot Ganz, 212-880-3003, eganz@lsta.org
SIFMA: Katrina Keller, 646-637-9281, kkeller@sifma.org
ISDA:
About LSTA
The
Loan Syndications and Trading Association, Inc. is a not-for-profit
organization dedicated to promoting the orderly development of a fair,
efficient, liquid and professional trading market for corporate loans
originated by commercial banks and other similar private debt.
About SIFMA
The Securities Industry and Financial
Markets Association brings together the shared interests of more than 650
securities firms, banks and asset managers. SIFMA's mission is to promote
policies and practices that work to expand and perfect markets, foster the development
of new products and services and create efficiencies for member firms, while
preserving and enhancing the public’s trust and confidence in the markets and
the industry. SIFMA works to represent its members’ interests locally and
globally. It has offices in
About ISDA
ISDA, which represents participants in
the privately negotiated derivatives industry, is among the world’s largest
global financial trade associations as measured by number of member firms. ISDA
was chartered in 1985, and today has approximately 820 member institutions from
55 countries on six continents. These members include most of the world’s major
institutions that deal in privately negotiated derivatives, as well as many of the
businesses, governmental entities and other end users that rely on
over-the-counter derivatives to manage efficiently the financial market risks
inherent in their core economic activities.
Information about ISDA and its activities is available on the Association's
web site: www.isda.org.