Seller Beware: Yet Another Cautionary Tale For Distressed-Debt Traders

Participants in the multibillion-dollar market for distressed claims and securities had ample reason to keep a watchful eye on developments in the bankruptcy courts during each of the last three years. Controversial rulings handed down in 2005 and 2006 by the bankruptcy court overseeing the chapter 11 cases of failed energy broker Enron Corporation and its affiliates had traders scrambling for cover due to the potential that acquired claims/debt could be equitably subordinated or even disallowed, based upon the seller's misconduct. Although the severity of the cautionary tale writ large in the bankruptcy court's Enron decisions was ultimately ameliorated on appeal in the late summer of 2007 by district court judge Shira A. Scheindlin, the 20-month ordeal (and the uncertainty it spawned) left a bad taste in the mouths of market participants. 2008 has so far proved to be little better in providing traders