In re KB Toys, Inc.: “Disabilities Attach To and Travel With the Claim”
17 May 2012
Mayer Brown Legal Update
The Delaware bankruptcy court has ruled that the legislative intent of Section 502(d) of the Bankruptcy Code was to ensure that the claims of creditors who received avoidable transfers (preferential or otherwise) were not allowed until such creditors returned such transfers to the estate. As a result, the court found that the legislative history of Section 502(d) supports the finding that an original claimant’s disabilities travel with the claim. This decision is noteworthy because it directly disagrees with certain holdings made in Enron Corp. v. Springfield Associates, LLC (In re Enron Corp.), 379 B.R. 425 (S.D.N.Y. 2007) (Enron II). Rather than shaking the claims market, this decision should strongly reaffirm that the doctrine of caveat emptor should be the guiding principle of buyers of claims.