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Inequitable Subordination?
In an article in last month's issue, we questioned the desirability of equitably subordinating or disallowing claims transferred post-petition, and explored the implications that a decision pending in the Enron bankruptcy court might have on distressed debt markets. Now, in an expansively reasoned opinion, the Enron court partially answered those questions. The court denied a motion to dismiss certain counts seeking to equitably subordinate certain bank claims in the hands of post-petition assignees on the basis of allegedly inequitable prepetition conduct engaged in by Enron's pre-petition lenders.
Alarming Decision
The Enron court's decision is alarming not only because the court wrongly finds that claims transferred post-petition may be subordinated based on the transferor's pre-petition conduct, but also because the decision may foreshadow the court's position on Enron's related allegations still under advisement in the adversary proceeding ' that claims transferred post-petition remain subject to disallowance under ' 502(d) in the hands of the transferee as a result of avoidable pre-petition transfers made to the transferor. Disallowing and subordinating claims transferred post-petition on the basis of the transferor's pre-petition conduct could create vast uncertainties and incalculable risk in distressed debt markets. This article describes some of the flawed reasoning underlying the court's opinion that could lead to disturbances in the market.
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