Bankruptcy Judge James L. Garrity, Jr., of New York wrote a devilishly complex opinion standing for the proposition that a claims and noticing agent is not a junior judge acting as a gatekeeper to rule initially on the validity of the transfer of a claim.
Rather, Judge Garrity said in his September 13 opinion that a claims agent must record a transfer if the transfer was made before the proof of claim was filed. After a claim has been filed, the claims agent must record the transfer on the claims docket if there was no objection by the transferor. The transferee has no right to lodge an objection to the transfer of a claim allegedly transferred to it.
The dispute arose in the chapter 11 reorganization of a large company. With the court’s authorization, the debtor engaged a claims and noticing agent. The claims agent was tasked with maintaining the claims docket and recording transfers of claims in the manner a court clerk would record claims and transfers under Bankruptcy Rule 3001.
A subsidiary of another large company held a claim for more than $15 million. Before the subsidiary-creditor filed the claim, it sold the claim for about $10 million to an entity that we shall refer to as Transferee I.
The next day, Transferee I sold the claim for the same price plus a $100,000 brokerage commission to an entity that we shall refer to as Transferee II. Transferees I and II both quickly filed appropriate notices of the transfers with the claims agent.
Later, Transferee II evidently had buyer’s remorse and attempted to undo the purchase of the claim on grounds we shall discuss below.
When both transfers took place, the subsidiary-creditor had not filed a proof of claim. Then, the bankruptcy court entered an order allowing the claim for $15 million. The allowance order did not require the subsidiary-creditor to file a proof of claim. The claims agent learned that the bankruptcy court would enter an order somehow amending the order allowing the claim.
The claims agent “paused” the processing of the two transfers. The subsequently amended order allowed the claim in the same amount but gave the subsidiary-creditor 30 days to file a proof of claim. The subsidiary-creditor did not file a claim. With no claim on file, the claims agent did not process the transfers. Instead, it served notices of defective transfers with respect to both transfers. All of this was occurring before any proof of claim had been filed.
Months after the 30-day deadline, the subsidiary-creditor’s parent filed the claim, but the parent was not the holder of the allowed claim. (Just goes to show, anything that can go wrong, will go wrong.)
The claims agent still refused to process both transfers because the parent that filed the proof of claim was not the holder of the claim allowed by court order. The claims agent said it would record the transfers if the subsidiary-plaintiff filed the claim. Around that time, Transferee II decided it no longer wanted the claim. Pointing to the notices of defective transfers and provisions in the agreement under which it bought the claim, Transferee II demanded that the subsidiary-creditor repay the purchase price, with interest.
Aiming to clean up the mess, the subsidiary-creditor filed the proof of claim, and the parent withdrew the claim it had filed. The claims agent then sent the subsidiary-creditor and Transferee I notices of the transfer under Bankruptcy Rule 3001(e)(2). (We’re getting ahead of ourselves, but note that Rule 3001(e)(2) lays out the procedure for transfers after a claim has been filed, but these transfers were before the claim was filed.)
Transferee II reacted by telling the claims agent that it did not consent to recording the transfers. The claims agent responded by reversing the processing of both transfers. Transferee II also filed a lawsuit in state court against the subsidiary-creditor, demanding return of the purchase price.
The subsidiary-creditor filed a motion asking Judge Garrity for a direction that the claims agent record the transfers. Transferee II objected to the motion, contending that the bankruptcy court had no right or jurisdiction to decide who owned the claim. Judge Garrity said in his opinion that he was not ruling on ownership of the claim, only deciding narrow issues regarding the transfer of the claim. Rather, he said that the motion called on him to decide whether the transfer to Transferee I should be recognized on the claims docket.
Unraveling the mess, Judge Garrity began by saying that the claims agent “is acting as an agent of the Clerk of the Court under section 156(c).” He said there was “no dispute” that there had been an unconditional transfer to Transferee I and that the transfer “conformed with nonbankruptcy law and Bankruptcy Rule 3001(e).”
Judge Garrity said that the claims agent erred by refusing to record the first transfer “since [the claims agent] misapplied Bankruptcy Rule 3001(e)(1) — the rule under which the [claim] was transferred.”
Other minor errors aside, Judge Garrity said that transfers were of a claim before the filing of a proof of claim. For transfers before the filing of a claim, he cited Bankruptcy Rule 3001(e)(1) and the Collier treatise to say that the rule “does not mandate the filing of a proof of claim in order to fully effectuate such a transfer.” Therefore, the fact that the claim had not been filed when the transfers occurred was not grounds for the claims agent to issue the notice of defective transfer.
Judge Garrity held that the retention of the claims agent “does not authorize [the claims agent] to adjudge the validity of the transfer of claims under Bankruptcy Rule 3001(e)(1).” The claims agent therefore erred when it “paused” the processing of the first transfer because “it misapplied Bankruptcy Rule 3001(e)(2) to a claim that was transferred under Bankruptcy Rule 3001(e)(1).”
Judge Garrity had an alternative ground for his decision. Even if the claims agent properly issued the notice of defective transfer, he said that the transfer to Transferee I “should be recognized and recorded on the claims register under Bankruptcy Rule 3001(e)(2)” because the transferor [the subsidiary-creditor] did not object to the transfer.
Judge Garrity explained:
[U]nder the plain language of the statute, only the transferor has standing to object to the transfer of a filed proof of claim under Bankruptcy Rule 3001(e)(2). Third parties, like [Transferee II], do not have standing to object to a claim assignment itself.
Judge Garrity granted the motion and directed the claims agent to recognize the transfer to Transferee I and recognize Transferee I as the holder of the claim.
Bankruptcy Judge James L. Garrity, Jr., of New York wrote a devilishly complex opinion standing for the proposition that a claims and noticing agent is not a junior judge acting as a gatekeeper to rule initially on the validity of the transfer of a claim.
Rather, Judge Garrity said in his September 13 opinion that a claims agent must record a transfer if the transfer was made before the proof of claim was filed. After a claim has been filed, the claims agent must record the transfer on the claims docket if there was no objection by the transferor. The transferee has no right to lodge an objection to the transfer of a claim allegedly transferred to it.