Press Releases
Release Date: August 28, 2007
Contact:
SIFMA: Katrina Keller, 646-637-9281, kkeller@sifma.org
LSTA: Elliot Ganz, 212-880-3003, eganz@lsta.org
ISDA: Louise Marshall, 212-901-6013, lmarshall@isda.org
Industry Associations Applaud Victory In Enron Appeal
Three leading trade associations applaud
yesterday’s decision by Judge Shira A. Scheindlin of the U.S. District Court
for the Southern District of New York in Springfield Associates v. Enron
Corp. Her decision reverses a
Bankruptcy Court decision that threatened to disrupt the robust secondary
market in claims against companies in bankruptcy.
The case arose out of Springfield’s secondary
market purchase of $5 million of Enron bank debt originally held by
Citibank. Enron brought an adversary
proceeding against Springfield seeking to equitably subordinate its claim based
solely on Citibank’s alleged inequitable conduct and receipt of avoidable
transfers. There is no allegation that
Springfield itself engaged in any improper conduct or received any avoidable
transfer.
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.”
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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 New York, Washington D.C., and London
and its associated firm, the Asia Securities Industry and Financial Markets
Association, is based in Hong Kong.
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 800
member institutions from 54 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.