A Circuit Court Definitively Addresses Claims Trading

This disparity can be understood, as Enron and KB Toys addressed very different types of claims. Enron addressed bank loans, which together with bonds (collectively, Financial Claims) generally comprise the largest portion of pre-petition debt. In contrast, KB Toys addressed trade claims (Trade Claims), which generally comprise a much smaller portion of that debt. “Some purchasers [of Trade Claims] are simply arbitraging. ' [O]ther purchasers [of Financial Claims] have more sophisticated motives. ' [seeking ] 'fulcrum securities.'” Tally M. Wiener & Nicholas B. Malito, On the Nature of the Transferred Bankruptcy Claim, 12 U. Penn. J. Bus. Law 35 (2009). The Third Circuit noted that the transferee belonged to the former category and its holding “only concerns trade claims.” KB Toys , 736 at 247. This distinction provides a basis to limit KB Toys to Trade Claims and reconcile these cases.

In addition to being the highest court decision to address this issue, KB Toys provides bankruptcy courts in the Southern District of New York (SDNY) a basis for re-embracing Enron I. While bankruptcy courts in the SDNY may treat Enron II, a district court decision, as persuasive, “only decisions of the Second Circuit Court of Appeals are controlling.” See In re 400 Madison Avenue Ltd. Partnership, 213 B.R. 888, 890 n.2 (Bankr. S.D.N.Y. 1997)). A decision by the Third Circuit may provide a basis for bankruptcy courts in the SDNY to re-embrace Enron I.