In re Enron Corp.

• Decision Date: 31 March 2006
• Docket Number: Bankruptcy No. 01-16034 (AJG).,Adversary No. 05-01029.
• Citation: 340 B.R. 180
• Parties: In re ENRON CORP., et al., Reorganized Debtors. Enron Corp., Plaintiff, v. Avenue Special Situations Fund II, LP, DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

340 B.R. 180

In re ENRON CORP., et al., Reorganized Debtors Enron Corp., Plaintiff, v. Avenue Special Situations Fund II, LP, DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C., Defendants.

Bankruptcy No. 01-16034 (AJG).

Adversary No. 05-01029.

United States Bankruptcy Court, S.D. New York.

March 31, 2006.

COPYRIGHT MATERIAL OMITTED

Susman Godfrey L.L.P., H. Lee Godfrey, Kenneth S. Marks, Mary Kathryn Sammons, James T. Southwich, of Counsel, Houston, TX, Special Litigation Counsel to the Reorganized Debtors.

Togut, Segal & Segal LLP, Albert Togut, Scott E. Ratner, Richard K. Milin, of Counsel, New York, NY, for Reorganized Debtors.

Ropes & Gray LLP, David Elkind, Marc Skapof, of Counsel, New York, NY, Matthew M. Burke, Stephen Moeller-Sally, of Counsel, Boston, MA, for DK Acquisition Partners, LP, RCG Carpathia Master Fund, Ltd., Rushmore Capital-I, L.L.C., and Rushmore Capital-II, L.L.C.

Allen & Overy LLP, Hugh McDonald, of Counsel, New York, NY, for Barclays Bank PLC, and its Affiliates.

Sullivan & Cromwell LLP, David H. Braff, Michael T. Tomaino, Jr., Jeffrey T. Scott, of Counsel, New York, NY, for Barclays Bank PLC, and its Affiliates.

Cravath, Swaine & Moore LLP, Richard W. Clary, Julie A. North, Darin P. McAtee, of Counsel, New York, NY, for Credit Suisse First Boston LLC, and its Affiliates.

Mayer, Brown, Rowe & Maw LLP, Robert J. Ward, Andrew D. Shaffer, of Counsel, New York, NY, for Canadian Imperial Bank of Commerce, CIBC Capital Corporation, CIBC World Markets Corp., CIBC Capital Corporation, CIBC World Markets plc, and CIBC, Inc. Paul, Weiss, Rifkind, Wharton & Garrison LLP, Stephen J. Shimshak, Douglas R. Davis, of Counsel, New York, NY, for Citibank, N.A.

Shearman & Sterling LLP, Herbert Washer, William J.F. Roll III, Kristin Fitzmaurice, of Counsel, New York, NY, for Merrill Lynch & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Merrill Lynch Capital Services, Inc.

Seward & Kissel LLP, Michael J. McNamara, John R. Ashmead, Mark D. Kotwick, of Counsel, New York, NY, for Royal Bank of Canada.

Seward & Kissel LLP, Ronald L. Cohen, John J. Galban, of Counsel, New York, NY, for The Bank of New York, as Indenture Trustee and Collateral Agent, and Yosemite/CLN Trust.

Kasowitz, Benson, Torres & Friedman LLP, David M. Friedman, Richard F. Casher, Robert M. Novick, Daniel N. Zinman, of Counsel, New York, NY, for The Bank of New York, as Indenture Trustee and Collateral Agent, and Yosemite/CLN Trust.

McGuirewoods LLP, John H. Maddock, III, of Counsel, New York, NY, Robert Plotkin, Dion W. Hayes, of Counsel, Washington, DC, for The Toronto-Dominion Bank.

OPINION DENYING DEFENDANTS' MOTION¹ TO DISMISS SECOND CAUSE OF ACTION REGARDING DISALLOWANCE OF CLAIMS HELD BY DEFENDANTS

ARTHUR J. GONZALEZ, Bankruptcy Judge.

The matter before the Court concerns claims asserted against a bankruptcy estate that arose out of certain bank loans. The bank, that was the original holder of the bank-loan claims in issue, is alleged to have received avoidable transfers in unrelated transactions. The issue presented is whether the bank-loan claims, which were transferred by the original holder of the claims, would be subject to disallowance under section 502(d) of the Bankruptcy Code in the hands of a transferee.

In order to make the determination, the Court considers two inquiries. The first inquiry is whether the assertion of a section 502(d) disallowance should be dismissed on the ground that an avoidance action concerning the unrelated transactions has not yet been adjudicated. The second inquiry is to what extent, if any, a claim subject to a section 502(d) disallowance in the hands of a transferor remains subject to disallowance in the hands of a transferee.

The Court concludes that a cause of action based on section 502(d) should not be dismissed even though the court has not yet adjudicated an avoidance action concerning the unrelated transactions because a debtor may, in the form of either an objection to a proof of claim or commencement of an adversary proceeding, use section 502(d) as a defense to the assertion of a claim. Second, the Court concludes that the transfer of a claim subject to a section 502(d) disallowance in the hands of the transferor remains subject to disallowance in the hands of a transferee. A claim in the hands of a transferee, either as an initial transferee or a subsequent transferee, remains subject to a section 502(d) disallowance defense, just as if such claim was still held by the transferor. The claim and the section 502(d) disallowance defense are linked, and such relationship is not severed by a transfer.

In addition, the Court concludes that the "good faith" defense contained in section 550(b) of the Bankruptcy Code, which provides a transferee of property of the estate with a defense to any attempt to recover such property or its value, cannot be extended, either directly or by analogy, to a section 502(d) disallowance action where the transferee purchased claims against a bankruptcy estate. The "good faith" defense cannot be applied directly because property of the estate was not transferred to the transferee; instead, it was a claim against the estate that was transferred. In addition, it cannot be applied by analogy because, inter alia, the exemption under section 550(b) only applies to a transferee who received a transfer from an initial transferee for value, in good faith, without knowledge of the voidability of the transfer. A transferee of a claim against a bankruptcy estate cannot establish such "good faith" defense when it purchased claims with knowledge of a debtor's bankruptcy status and the attendant process. Moreover, there is no dispute that such risks are routinely protected against in transfer documents for claim trading. However, whether the purchaser of a claim protects itself is not an issue with which the Court need be involved. To the extent that a potential purchaser may not be able to adequately protect itself, it can decide not to purchase or demand a price at a level that reflects the perceived risks. In any event, any specialized protection for claim transferees is left to Congress.

Enron's cause of action based on disallowance under section 502(d) of the Bankruptcy Code is sufficient to withstand a motion to dismiss. Therefore, Defendants' motion to dismiss based upon the alleged inapplicability of section 502(d) to the bank-loan claims in the hands of a transferee is denied.

FACTS

Commencing on December 2, 2001 (the "Petition Date"), and from time to time continuing thereafter, Enron Corporation ("Enron") and certain of its affiliated entities, (collectively, the "Debtors"), filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). On July 15, 2004, the Court entered an Order confirming the Debtors' Supplemental Modified Fifth Amended Joint Plan of Affiliated Debtors (the "Plan") in these cases. The Plan became effective on November 17, 2004.

As a borrower, Enron entered into a $1,750,000,000 364-day Revolving Credit Agreement (the "Short-Term Credit Agreement"), dated May 14, 2001, and a $1,250,000,000 Long-Term Revolving Credit Agreement (the "Long-Term Credit Agreement"), dated May 18, 2000, (collectively, the "Credit Agreements") with certain participating banks (the "Banks"), among them, Citibank, N.A. ("Citibank") as paying agent, and Citibank and Chase Manhattan Bank ("Chase") as co-administrative agents. Fleet National Bank ("Fleet") loaned Enron $53,666,666.67 as one of the Banks participating in the Short-Term Credit Agreement.

On October 15, 2002, the Court authorized Citibank to file two proofs of claim (Claim Nos. 14179 and 14196) in its capacity as paying agent on behalf of certain creditors, including Fleet, under the Credit Agreements. Citibank sought a consolidated secured claim in the amount of $1,754,024,000, plus unliquidated amounts for the principal and unpaid interest under the Short-Term Credit Agreement and a consolidated secured claim in the amount of $1,253,196,000, plus unliquidated amounts for the principal and unpaid interest under the Long-Term Credit Agreement.

As of the Petition Date, Fleet was the original holder of the claims asserted in the instant action (the "Claims"). The Claims were ultimately transferred to Avenue Special Situations Fund II, LP ("Avenue"), DK Acquisition Partners, LP ("DK"), RCG Carpathia Master Fund Ltd. ("RCG"), Rushmore Capital-I, L.L.C. ("Rushmore I") and Rushmore Capital-II, L.L.C. ("Rushmore II") (collectively, the "Defendants").

On August 22, 2002, Fleet sold to Avenue $10 million of the principal amount of the Claims under the Short-Term Credit Agreement. On October 24, 2002, Fleet sold to Credit Suisse First Boston ("CSFB") $29.5 million of principal amount of the Claims under the Short-Term Credit Agreement. On March 12, 2002, Rushmore I acquired from Goldman Sachs Credit Partners $10 million of principal amount of the Claims originally held by Fleet under the Short-Term Credit Agreement. On May 25, 2002, Rushmore II acquired from Chase $2.75 million of principal amount of the Claims originally held by Fleet under the Long-Term Credit Agreement.

On November 27, 2002, CSFB sold to RCG $5 million of principal amount of the Claims under the Short-Term Credit Agreement. On December 3, 2002, CSFB sold to Avenue $10 million of principal amount of the Claims under the Short-Term Credit Agreement. On March 12, 2003, CSFB sold to DK $14.5 million of principal amount of the Claims under the Short-Term Credit Agreement.

On September 23, 2003, Enron commenced an adversary proceeding (the "Megacomplaint Proceeding," Docket No. 03-09266) against the Banks. On December 1, 2003, April 30, 2004, June 14, 2004 and January 10, 2005, Enron filed the first, second, third and fourth amended complaints in the Megacomplaint Proceeding,...