Loan Groups Protest Enron Equitable Subordination Ruling

A bankruptcy judge for the U.S. District Court for the Southern District of New York has issued a troubling and controversial ruling holding that claims held by innocent parties who purchased in good faith may be subject to equitable subordination if the previous holder engaged in inequitable conduct.

The holding in Enron Corp. v. Avenue Special Situations Fund II, LP (In re Enron Corp., et al.), Case No. 05-01029 (Bankr. S.D.N.Y. Nov. 17, 2005), has prompted the Loan Syndications and Trading Association (LSTA) and other trade groups to file an amicus brief seeking interlocutory review.

The decision "could negatively impact the market for bankruptcy claims," stated the LSTA in a statement statement [link: http://www.lsta.org/story.asp?id=1653]. Such impacts include added costs to conduct due diligence on claim holders, as well as increased litigation costs for lenders seeking indemnification for subordinated claims.