There is a dearth of case law with respect to the issue of post-petition transfers of claims and the filing requirements relating to such transfers. However, a recent decision in the chapter 11 case of Celotex Corp. (Celotex)¹ has shed some light on problems that may be encountered by claims traders who purchase claims at a discount with the expectation that the ultimate distribution by the disbursing agent relating to such claims will be substantially higher than the amount paid for such claims.

In Celotex, three trade creditor claims were purchased by both the Debt Acquisition Company of America (DACA) and Newstart Factors Inc., although the claims were purchased on different dates. Both DACA and Newstart memorialized the purchases by means of contractual assignments. Although Newstart was admittedly the first purchaser of the claims at issue, Newstart filed evidence of the transfers of the claims in the bankruptcy court pursuant to Bankruptcy Rule 3001(e)(2) of the Federal Rules of Bankruptcy Procedure subsequent to DACA. DACA maintained that because it filed its notices of transfer of the claims at issue before Newstart, it was entitled to the distribution to be paid by the debtor with respect to such claims. Newstart countered that it first purchased the claims for value, and accordingly, regardless of the timing of the filing of notices of transfer pursuant to Rule 3001 (with which Newstart eventually complied), it was the rightful owner of the claims. Subsequent to the confirmation of Celotex's plan of reorganization, when distributions on allowed claims were made, Celotex refused to make payment with respect to the claims at issue to either DACA or Newstart until the bankruptcy court determined the proper owner of such claims. No recourse was available to either DACA or Newstart because the original claimants had ceased doing business.

In considering the issue, the bankruptcy court first reviewed Rule 3001(e)(2), which provides the method by which a transferee is substituted for a transferor of a claim after a proof of claim is filed. That rule provides, in pertinent part, the following:

If a claim...has been transferred other than for security after the proof of claim has been filed, evidence of the transfer shall be filed by the transferee. The clerk shall immediately notify the alleged transferor by mail of the filing of the evidence of transfer and that objection thereto, if any, must be filed with 20 days of the mailing of the notice or within any additional time allowed by the court. If the alleged transferor files a timely objection and the court finds, after notice and a hearing, that the claim has been transferred other than for security, it shall enter an order substituting the transferee for the transferor. If a timely objection is not filed by the alleged transferor, the transferee shall be substituted for the transferor.

The bankruptcy court noted that the 1991 Advisory Committee Note to Rule 3001 states that the rule was amended in 1991 to "limit the court's role to the adjudication of disputes regarding transfers of claims." The Committee Note also states that "(i)f a timely objection is filed, the court's role is to determine whether a transfer has been made that is enforceable under non-bankruptcy law. This rule is not intended to encourage or discourage post-petition transfers of claims or to affect any remedies otherwise available under non-bankruptcy law to a transferor or transferee such as for misrepresentation in connection with the transfer of a claim."

After noting the limited role of the bankruptcy court in the claims transfer/trading process (i.e., solely relating to the enforceability of an assignment), the Celotex court determined that the claims register authorized pursuant to Rule 5003(b), which lists all claims filed in cases in which it appears there will be a distribution to unsecured creditors, should not be used to create a form of race-notice priority system or a grantor-grantee index. The court concluded that "(o)therwise, the bankruptcy setting would be ripe for creation of all forms of per se rules to deal with on a case-by-case basis." Further, the court noted that, as set forth in 28 U.S.C. §2075² and as also noted in other cases³ with respect to the assignments of claims, the Bankruptcy Rules cannot modify any substantive right otherwise provided by law. Accordingly, if an assignment is valid under state or federal law, then a procedural bankruptcy rule cannot alter the rights created by such assignment. Therefore, the bankruptcy court determined that "absent a statutory requirement, the law is unequivocal that, as to the assignment of competing claims, the first in time is first in right." Accordingly, the bankruptcy court held that Newstart, which had purchased the claims at issue first, was entitled to a distribution relating to such claims, even though DACA had first filed notices of transfer pursuant to Rule 3001(e).

DACA is currently appealing the Celotex decision, and there are no other reported decisions on point. However, one should be aware that there is at least one case in this context in which a court has asserted, although not necessarily held, that a transferee must file a notice of transfer of a claim within a "reasonable time," and that a transferred claim may be disallowed if the debtor or a party in interest is prejudiced by the delay in the filing of such notice.⁴ In Wilson, the debtors brought suit post-petition in state court against an individual, Mr. Venhaus, as a result of alleged fraud relating to the pre-petition sale of a business by Mr. Venhaus and his wife to the debtors. One day after the jury in the state court action returned a verdict for the debtors, a petition for dissolution of the Venhaus' marriage was filed. On that same date, Mr. Venhaus assigned to his wife his claim against the debtors (which claim was based on an alleged default by the debtors in connection with the debtors' purchase of the Venhaus' business). Subsequently, as part of the settlement of the state court action, Mr. Venhaus released his claim against the debtors.

Mrs. Venhaus waited to file a proof of claim four months after Mr. Venhaus transferred his claim to her and two months after Mr. Venhaus entered into the settlement with the debtors, although she apparently did not comply with Rule 3001(e) by filing evidence of the transfer. The debtors objected to the claim of Mrs. Venhaus, asserting that it had been released when Mr. Venhaus released his claim. The Ninth Circuit Bankruptcy Appellate Panel (BAP) determined that, due to the that fact no notice of transfer was filed, the debtors were prejudiced because they accepted a waiver of Mr. Venhaus' claim without the knowledge that he no longer had a claim to transfer. Accordingly, without determining whether Mrs. Venhaus' claim was properly transferred from her husband, the court held that the claim was barred as a result of her delay in filing the claim, and the resulting prejudice to the debtors.⁵

The Wilson case can be distinguished because, while ostensibly based in part on the lateness of the filings of both the claim at issue and the notice of transfer (which apparently was never filed), the decision can be viewed as one that actually addresses the validity of the transfer itself. The transfer by Mr. Venhaus in Wilson was in the nature of a fraudulent transfer, and there was discussion of collusion between Mr. Venhaus and his wife, i.e., the claim may have been transferred for no value and solely as a means to circumvent the release later provided to the debtors. Therefore, the Wilson court was not necessarily as concerned with the lateness of the filings of the claim and notice of transfer as it was with the validity of the transfer and the prejudicial effect on the debtors.⁶ According to the committee note, the enforceability of a transfer is the one area in which bankruptcy courts remain involved.

Clearly, bankruptcy courts have become significantly less involved in claims transfers. As stated by the court in Celotex, "the difference between the previous Rule 3001(e) and the current Rule is the prior one arguably embodied the bankruptcy court's involvement with every claims transfer while the current Rule does no such thing."

In summary, claims traders who are wary of accepting an assignment of a claim because such claim may have been previously transferred to another entity cannot rely on the claims register for protection. As stated in Celotex, the main purpose of Rule 3001 is to protect both the claims transferor (who can object to the validity of the transfer) and the debtor (to ensure that it has notice of the proper claimant to pay), and not necessarily to protect a subsequent transferee of the same claim. There is certainly nothing in the language of Rule 3001 or in any of the case law developed thereunder from which one may infer that the rule contemplates that it was intended to modify substantive rights. In fact, 28 U.S.C. §2075 would indicate that Rule 3001 cannot affect otherwise valid transfers.

While it is still prudent for an entity trading claims to review the claims register before purchasing a claim, there can be no certainty achieved as to the ownership of a claim at issue in doing so. Accordingly, claims traders and plan drafters should not rely on the claims register as a type of grantor-grantee index because there appears to be no definitive time limit with respect to the filing of notices of transfer. As long as such a notice is filed prior to confirmation, the debtor or disbursing agent will have knowledge of the proper entity to whom it should make a distribution. Therefore, an entity that trades claims can only protect itself by the terms of the contract pursuant to which it purchases a claim, e.g., by requiring standard representations and warranties relating to the sale, while concomitantly bearing the risk of insolvency of the transferor. Whether the Celotex opinion will be reversed remains to be seen. Nevertheless, the present rule regarding assignments remains "first in time, first in right."

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Footnotes

¹ In re Celotex Corp., 224 B.R. 853 (Bankr. M.D. Fla. 1998). Return to article

² 28 U.S.C. 2075 provides, in part, that the Bankruptcy Rules "should not abridge, enlarge or modify any substantive right." Return to article

³ See, e.g., Roost v. General Motors Acceptance Corp. (In re Boyer), 212 B.R. 975 (Bankr. D. Or. 1997). Return to article

⁴ See Venhaus v. Wilson (In re Wilson), 96 B.R. 257 (9th Cir. BAP 1988). Return to article

⁵ Id. But see In re Crosscreek Apartment Ltd., 211 B.R. 641 (Bankr. E.D. Tenn. 1997). (While noting the Wilson decision, the court stated that failure to comply with Rule 3001 does not affect the enforceability of an otherwise valid transfer, and further, that compliance with Rule 3001 is designed primarily to meet the due process requirement that a creditor be given notice and the opportunity to object to a purported transfer of its claim.) Return to article

⁶ Moreover, in Wilson, there was a complete failure to comply with Rule 3001, which was not the case in Celotex. Return to article