Bankruptcy Claims Trading: Allocating Buyer and Seller Risks, Blocking and Other Strategic Maneuvers

Recording of a 90-minute CLE video webinar with Q&A

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Conducted on Wednesday, April 21, 2021

Recorded event now available

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Course Materials

This CLE course will review what creditors holding claims in bankruptcy need to know when an investor offers to "buy" that claim from them. It will equip attorneys to understand and negotiate the typical claims transfer agreement, spot claims trading strategies in action, interpret how they may affect the case and the claims in question, and why someone might want to purchase a particular claim. The program will also explore the motives of claim "buyers" and the business of investing in distressed claims.

Description

A creditor with a right to payment (claim) from the bankrupt debtor can transfer that right to a third party for whatever consideration the parties decide. Parties are interested in acquiring claims to derive some benefit, which may be control or leverage in the case of a long term investment return. From the purchaser's perspective, some claims are straightforward, but others may require extensive due diligence, market analysis, and review of complex financial documents, especially those of significant secured lenders.

Entities that seek to acquire claims are often specialist investor hedge funds that some critics contend are self-interested and disruptive to the reorganization process and its goals. Courts have developed ways of addressing perceived risks of abuses from claims trading to circumvent Bankruptcy Code formalities.

For trade creditors, a potential trader's typical claim assignment can be daunting and could contain onerous conditions. The panel will review, among other things, typical terms offered and the critical issues to be negotiated, the actual rights and duties that are or are not conveyed, the timing of the transfer and payment, and required disclosures and filings under the Bankruptcy Code. Holders of claims must fully understand the risks they are taking and the potential for indemnity claims down the road.

Listen as the panel discusses the claims trading industry and what creditors seek to benefit from transactions.

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Outline

  1. Claims trading market, policy considerations, hedge funds
    1. Claims trading as a form of investing
    2. DIP financing
    3. Control
    4. Blocking
  2. Laws governing claims trading
  3. Judicial responses to perceived sharp practices
  4. Critical provisions of the claims trading agreement
    1. Representations and warranties
    2. Timing and confirmation
    3. Indemnity issues
    4. Anti-assignment clauses
  5. Risks for transferors
  6. Risks for transferees

Benefits

The panel will review these and other key issues:

  • Does the disability follow the claim, and how does the Third Circuit come down on this issue?
  • What are the red flags to watch for in a claims trading deal?
  • What will the "seller" be required to warrant?
  • What is the "no bad acts" representation?
  • What additional rights are transferred in the deal?

Faculty

O'Neal, Sean
Sean A. O'Neal
Partner
Cleary Gottlieb Steen & Hamilton

Mr. O’Neal’s practice focuses on corporate restructuring, insolvency, bankruptcy, corporate governance and...  |  Read More

Lu, Julia
Julia Lu
Partner
Crowell & Moring

Ms. Lu is a partner in the New York office of Crowell & Moring. Drawing on her background in securities offerings...  |  Read More

VanLare, Jane
Jane VanLare
Partner
Cleary Gottlieb Steen & Hamilton

Ms. VanLare’s practice focuses on restructuring, insolvency, and bankruptcy litigation.

 |  Read More

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