The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

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By Topic: Claims Trading

  • From Vol. 10 No.4 (Jan. 26, 2017)

    How Claim Traders Can Pursue Reclamation and Administrative Expense Claims in Retail and Other Insolvencies

    As a result of changing consumer spending habits, numerous retailers – including Sports Authority, Pacific Sunware, Aeropostale and, most recently, American Apparel – have been forced to close down their storefronts or enter into bankruptcy. Others, such as Macy’s, Sears, J.Crew and ToysRUs, are also reaching distressed levels. While these retail bankruptcies have negative implications for landlords, tenants and other stakeholders, they may offer great opportunities for claim traders in light of two key provisions under the Bankruptcy Abuse Prevention and Customer Protection Act of 2005 (2005 Amendment), which sought to strengthen vendor-creditor rights under the federal bankruptcy law. In a guest article, Darius J. Goldman and Matthew W. Olsen, partners at Katten, along with associate Jessica P. Chue, outline how a vendor-creditor’s claim may qualify for reclamation or administrative expense priority under the 2005 Amendment. For additional insight from Goldman and Chue, see “What the LSTA’s Revised Delayed Compensation Requirements Mean for Loans Trading on Par/Near Par Documents” (Oct. 27, 2016). For more on claim trading from Goldman, see “How Hedge Fund Claim Traders Can Protect Their Interests in the Visa/MasterCard Litigation” (Jun. 14, 2016); and “What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement” (Jun. 25, 2015). 

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  • From Vol. 9 No.28 (Jul. 14, 2016)

    How Hedge Fund Claim Traders Can Protect Their Interests in the Visa/MasterCard Litigation

    On June 30, 2016, the Second Circuit Court of Appeals (Second Circuit) struck down a class action settlement (Settlement) in the case In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation (Visa/MasterCard Litigation). Although the Settlement would have resolved whether Visa, MasterCard and various other financial institutions violated antitrust laws by establishing and enforcing practices that charged merchants excessive fees for accepting Visa- and MasterCard-branded credit and debit cards while also limiting merchants’ ability to steer customers toward other forms of payment, the Second Circuit objected to the Settlement for failure to adequately represent the interests of disparate classes of plaintiffs in violation of the Federal Rules of Civil Procedure and the Due Process Clause. In a guest article, Darius J. Goldman and Cristina E. Bautista, partner and associate, respectively, at Katten, provide an overview of the reasoning behind the Second Circuit’s rejection of the Settlement and analyze issues that claims traders investing in the Visa/MasterCard Litigation should consider. For Goldman’s prior article on the subject, see “What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement” (Jun. 25, 2015). For additional insight from Katten partners, see “Insurance Products Provide Tax-Efficient Means for Investors to Access Hedge Funds” (Feb. 25, 2016); “Going Private: Mechanical Considerations When Closing a Hedge Fund to Outside Investors (Part Three of Three)” (Feb. 4, 2016); and “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors” (Mar. 13, 2014). 

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  • From Vol. 8 No.25 (Jun. 25, 2015)

    What Hedge Fund Claim Traders Need to Know About the Visa/MasterCard Settlement

    In a market environment in which hedge fund and other claim traders face a dearth of large-scale opportunities, a looming $6 billion class action settlement has captured the attention of savvy investors.  The settlement, which affects all merchants that accepted Visa and MasterCard since 2004, resolves whether various financial institutions violated antitrust laws by establishing and enforcing practices that charged merchants excessive fees for accepting Visa and MasterCard-branded credit and debit cards while also limiting merchants’ ability to steer customers toward other forms of payment.  Although the decision approving the settlement is currently facing pending appeals, merchants that are covered by the settlement have the ability to sell their claims now, thereby guaranteeing themselves a minimum fixed level of return in the class action litigation, while avoiding the risk of a delayed (and unknown) recovery.  In a guest article, Darius J. Goldman, head of the distressed debt and claims trading practice of Katten Muchin Rosenman, summarizes the key terms of the settlement as well as issues that claim traders should consider when purchasing a claim subject to the settlement.  For more insight from Katten, see “Katten Forum Identifies Best Practices for Hedge Fund Managers Regarding Best Execution, Soft Dollars, Principal Trades, Agency Cross Trades, Cross Trades and Trade Errors,” The Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014); “Katten Partner Raymond Mouhadeb Discusses the Purpose, Applicability and Implications of the August 2012 ISDA Dodd-Frank Protocol for Hedge Fund Managers, Focusing on Whether Hedge Funds Should Adhere to the Protocol,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013); and “Katten Seminar Provides Hedge Fund Managers with a Roadmap for JOBS Act Compliance,” The Hedge Fund Law Report, Vol. 6, No. 43 (Nov. 8, 2013).

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  • From Vol. 6 No.48 (Dec. 19, 2013)

    Six Implications for Bankruptcy Claims Traders, Including Hedge Funds, Arising Out of the Third Circuit’s Recent Decision Holding that Claims Subject to Disallowance under Section 502(d) Cannot Be “Washed” through Subsequent Transfers

    In a recent case related to the liquidation of KB Toys Inc. and affiliated entities, the U.S. Court of Appeals for the Third Circuit (Third Circuit) held that a trade claim disallowable under Section 502(d) of the U.S. Bankruptcy Code (Bankruptcy Code) in the hands of the original claimant is similarly disallowable in the hands of a subsequent transferee.  In other words, the Third Circuit affirmed the decision of the U.S. District Court, District of Delaware holding that disallowance risk attaches to and travels with claims.  The U.S. District Court for the Southern District of New York recently reached the opposite conclusion, holding that disallowance is a personal disability of the claimant, and not an attribute of the claim itself, unless the transferee took the claim by assignment rather than by sale.  This article summarizes the legal and factual background of the case and the Third Circuit’s analysis.  The article also highlights six implications arising out of the Third Circuit’s decision for prospective claims purchasers, including hedge funds.  For further discussion of the risks faced by hedge funds participating in claims trading, see “Two Key Levels of Risk Facing Hedge Funds That Buy or Sell Bankruptcy Claims,” The Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).  For coverage of similar best practices helpful in managing the risk of claims disallowance under Bankruptcy Code Section 502(d) based on a seller’s avoidance liability, see “Five Steps Hedge Fund Managers Should Take to Mitigate Avoidance and Disallowance Risks After Delaware Court Finds That Avoidance and Disallowance Risks Travel with Trade Claims,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    ALM’s 7th Annual Hedge Fund General Counsel Summit Addresses Strategies for Handling Government Investigations, Challenges for CCOs, Distressed Debt Investing, OTC Derivatives Reforms, Insider Trading Best Practices, the JOBS Act, AIFMD and Activist Investing (Part Two of Three)

    Hedge fund industry thought leaders recently shared their insights on legal, operational and other issues impacting hedge fund managers during the 7th Annual Hedge Fund General Counsel Summit hosted by ALM Events.  This second installment in our three-part series covering the summit discusses topics including the impact of over-the-counter derivatives reforms on fund managers (including a discussion of new mandatory trade reporting, clearing and execution requirements as well as CFTC cross border rules); opportunities and challenges associated with distressed debt investing (including a discussion of opportunities to participate in Chapter 11 proceedings, considerations in claims trading and risks of distressed debt investing); and best practices to address insider trading risks.  The first installment discussed strategies for handling government investigations and challenges facing chief compliance officers, including dual-hatting and potential supervisory liability.  The third installment will provide regulatory updates on the JOBS Act, the Alternative Investment Fund Managers Directive and new Canadian and U.S. initiatives that will impact activist investing strategies.

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  • From Vol. 6 No.5 (Feb. 1, 2013)

    What Happens to a Claims Trade If a U.S. Bankruptcy Court and a Foreign Court Disagree on the Validity of the Trade?

    Hedge funds that purchase bankruptcy claims assume numerous risks, including uncertainty relating to the timing and amount of distributions to be received in bankruptcy proceedings.  In particular, claims purchasers run the risk that the purchased claim will be disallowed, reduced, or subordinated altogether.  See “Five Steps Hedge Fund Managers Should Take to Mitigate Avoidance and Disallowance Risks After Delaware Court Finds that Avoidance and Disallowance Risks Travel with Trade Claims,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012).  A recent bankruptcy court opinion highlights another risk associated with bankruptcy claims trading – a risk relating to seller’s remorse where a seller “forum shops” among courts in different jurisdictions in an attempt to undo a trade.  In this case, the seller’s representative brought the matter to the U.S. Bankruptcy Court (U.S. Court) following an adverse decision in a “foreign main proceeding” in which a foreign court upheld a bankruptcy claim transaction entered into with a hedge fund purchaser.  In evaluating whether it would contravene the foreign court’s judgment, the U.S. Court considered: whether it was appropriate for the U.S. Court to conduct a plenary review under Section 363 of the U.S Bankruptcy Code (Code) to determine whether the transaction involved a transfer of property in the U.S., as mandated by Chapter 15 of the Code; and whether undoing the foreign court’s ruling would offend the principle of comity integral to Chapter 15 of the Code.  This article summarizes the factual background, legal analysis and decision in the case, including a discussion of the mechanics of Section 363; the requirement under Chapter 15 of a transfer of interest in property within the U.S.; and the doctrine of comity as applied in bankruptcy situations.

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  • From Vol. 5 No.43 (Nov. 15, 2012)

    Tribune Bankruptcy Highlights the Importance of Close Reading of Indenture Agreements by Hedge Funds That Trade Bankruptcy Claims or Distressed Debt

    The interpretation of language contained in indenture agreements that are often entered into years prior to a bankruptcy filing of the borrower will significantly impact the ultimate recovery by noteholders – as demonstrated by the ongoing saga involving the Tribune Company.  In a guest article, Richard J. Corbi of Lowenstein Sandler PC provides an analysis of developments in the Tribune bankruptcy relevant to hedge funds that invest in distressed debt, bankruptcy claims and related instruments.

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  • From Vol. 5 No.28 (Jul. 19, 2012)

    When Is a Distressed Debt Trade Considered Consummated?

    Trades in distressed debt or bankruptcy claims are often characterized by cursory, and sometimes oral, agreements to enter into a trade, followed by months during which remaining terms are negotiated prior to settlement of the trade.  However, during the period between the initial agreement and the settlement of the trade, the value of the subject assets can fluctuate, sometimes significantly.  This may create certain disincentives for one party to complete the trade, which can lead to litigation.

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  • From Vol. 5 No.24 (Jun. 14, 2012)

    Five Steps Hedge Fund Managers Should Take to Mitigate Avoidance and Disallowance Risks After Delaware Court Finds That Avoidance and Disallowance Risks Travel with Trade Claims

    Distressed investors, such as hedge fund managers, purchasing trade claims against a debtor in the secondary market must now face the fact that certain disabilities may attach to and travel with claims following a May 4, 2012 decision by Judge Kevin J. Carey of the United States Bankruptcy Court for the District of Delaware (Court) in the KB Toys bankruptcy proceeding.  The Court held that a purchaser of a trade claim against a debtor takes such claim subject to the risk of disallowance of the claim under Bankruptcy Code Section 502(d) based on the original claimholder’s receipt of (and failure to pay) an avoidable transfer.  While Judge Carey specified that the decision was limited solely to trade claims purchased from the original holders of such claims, the Court’s reasoning could be extended to other circumstances, such as bank loans traded in the secondary market.  Therefore, it is essential that distressed investors perform the necessary diligence and negotiate sufficient protections in agreements to purchase distressed debt.  In a guest article, Steven F. Wasserman and Howard S. Steel, both Partners at Brown Rudnick, and Laura F. Weiss, an Associate at Brown Rudnick, provide an overview of the KB Toys decision and recommend five best practices to minimize risks to recoveries in light of this important decision.

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  • From Vol. 5 No.20 (May 17, 2012)

    Navigating the Insider Trading Risks in Distressed Debt Trading

    The past two years have seen a dramatic increase in the number and visibility of insider trading cases brought by regulatory and enforcement authorities and private plaintiffs.  If the first few months of 2012 are any indication, this trend will continue.  Indeed, not only are enforcement authorities becoming more active in bringing such actions, they are also becoming more aggressive in their interpretation of the scope of actions which may constitute insider trading.  Thus, insider trading cases have been brought against a “tippee” who found a copy of a presentation about a buyout that a banker mistakenly left behind and against a director who is not even alleged to have traded or otherwise profited from the alleged misconduct.  To date, however, there have been relatively few attempts to pursue insider trading charges or civil claims in the context of bankruptcy claims trading, and those cases that have been brought have been largely limited to situations involving creditors’ committee members.  There are good reasons that such actions should be limited to the context of a creditors’ committee.  However, in light of the increasing activity in this area, it is worth reviewing the complexities involved in the application of insider trading laws to distressed debt trading.  In a guest article, Daniel H.R. Laguardia and K. Mallory Tosch, Partner and Associate, respectively, at Shearman & Sterling LLP, provide a comprehensive analysis of insider trading law as it applies to hedge funds that invest in distressed debt, bankruptcy claims and similar assets.

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  • From Vol. 5 No.1 (Jan. 5, 2012)

    Madoff Feeder Fund Kingate Sues Deutsche Bank to Enforce Commitment to Purchase Madoff Bankruptcy Claims

    Plaintiffs Kingate Global Fund Ltd. and Kingate Euro Fund Ltd. (Funds) were two feeder funds that invested substantially all of the money they raised with Bernard L. Madoff Investment Securities (Madoff).  In August 2011, the Funds and defendant Deutsche Bank Securities Inc. (Deutsche Bank) signed a “confirmation letter” that contemplated the purchase of $1.6 billion of the Funds’ claims against Madoff for 66 cents on the dollar.  The parties negotiated through the fall, but never signed a formal purchase agreement.  In December 2011, the Funds commenced this action against Deutsche Bank seeking to enforce the confirmation letter.  This article summarizes the Funds’ allegations, which are relevant to hedge funds that trade Madoff exposure or other bankruptcy claims.  See also “Two Key Levels of Risk Facing Hedge Funds That Buy or Sell Bankruptcy Claims,” The Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).

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  • From Vol. 4 No.39 (Nov. 3, 2011)

    Bondholders of Bankrupt Icelandic Bank Kaupthing Singer and Friedlander Battle with Other Bank Creditors over Competing Claims

    This case pits the creditors of failed bank Kaupthing Singer and Friedlander Limited (KSF) against holders of bonds issued by KSF subsidiary Singer & Friedlander Funding plc (Funding).  Both of those entities are now in administration (bankruptcy) in the UK.  KSF had guaranteed Funding’s bonds and sought to use a claim for indemnification from Funding under that guarantee to offset other amounts it owed to Funding.  The UK Supreme Court ruled on whether the rule against double proof takes precedence over a conflicting equitable principle.  We summarize the Supreme Court’s decision.  For a deep discussion of the chief regulatory, tax, documentation, insider trading and other legal and business issues impacting hedge funds’ trade risk in European secondary loans, see Part One and Part Two of the two-part article series recently published in the HFLR by attorneys at Schulte Roth & Zabel LLP.

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  • From Vol. 4 No.34 (Sep. 29, 2011)

    Two Recent Federal Court Decisions Clarify the Differing Treatment under SIPA of Returned Principal and Fictitious Profits

    Two recent federal court decisions – one at the circuit level and the other at the district court level, and both arising out of the Madoff Ponzi scheme – offer further clarification on the differing legal status of returns to investors in a fraud of invested principal versus returns of fictitious profits.  In turn, the differing legal status of these two categories of returns impacts the extent to which the trustee can claw back money from investors and the extent to which investors can make valid claims on the estate.  See “Two Key Levels of Risk Facing Hedge Funds That Buy or Sell Bankruptcy Claims,” The Hedge Fund Law Report, Vol. 4, No. 27 (Aug. 12, 2011).  For hedge fund managers that trade Madoff claims or other bankruptcy claims, these legal decisions will impact the investment calculus.  The circuit court decision also offers important insight on the complex process of calculating “net equity” under SIPA – an issue that many hedge fund managers first encountered when trying (often with limited success) to get money out of Lehman’s failed U.S. prime brokerage business, and an issue that continues to impact the value of Madoff claims.  See generally “Recent Bayou Judgments Highlight a Direct Conflict between Bankruptcy Law and Hedge Fund Due Diligence Best Practices,” The Hedge Fund Law Report, Vol. 4, No. 25 (Jul. 27, 2011).

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  • From Vol. 4 No.27 (Aug. 12, 2011)

    Two Key Levels of Risk Facing Hedge Funds That Buy or Sell Bankruptcy Claims

    The bankruptcy claims trading market is growing at a rapid clip.  By one estimate, the global bankruptcy claims trading market grew by five times, from $8 billion in 2009 to $40 billion in 2010.  According to our sources, even with significant cash on corporate balance sheets, sovereign credit concerns are likely to lead, directly or indirectly, to corporate defaults – particularly in Europe – which will only increase the size of the claims trading opportunity set.  Claims trading is complex, interdisciplinary, obscure, laborious and largely unregulated.  In short, it is the sort of investment activity for which certain hedge funds are ideally structured and staffed; and, not surprisingly, trading by hedge funds has been a significant driver of the growth in claims trading.  See “Treatment of a Hedge Fund’s Claims Against and Other Exposures To a Covered Financial Company Under the Orderly Liquidation Authority Created by the Dodd-Frank Act,” The Hedge Fund Law Report, Vol. 4, No. 15 (May 6, 2011).  As hedge fund managers that participate in claims trading know, and as managers that consider entry into the claims trading market quickly find out, investment outcomes when trading claims are powerfully influenced by legal considerations.  See “Second Circuit Adopts Broad Interpretation of Bankruptcy Code § 546(e) Safe Harbor for Securities ‘Settlement Payments,’ Ruling that Safe Harbor Applies to Enron’s Redemptions of Its Own Commercial Paper Prior to Maturity,” The Hedge Fund Law Report, Vol. 4, No. 24 (Jul. 14, 2011).  And legal considerations typically apply to claims trades at two levels – the estate level and the trade level.  The chief risk at the estate level is that the ultimate value of the estate will depart significantly from the expected value of the estate at the time of purchase of a claim.  The chief risks at the trade level are that the claim will be disallowed, reduced or subordinated, or that the seller of the claim itself will become insolvent.  This article analyzes the two levels of legal risk in claims trading by examining two different sources.  First, with respect to “estate risk,” this article provides a comprehensive analysis of a recent decision by Judge Rakoff in the Madoff liquidation.  That decision generally held that the Trustee does not have standing to bring common law claims against third parties on behalf of creditors of the Madoff estate or the estate itself.  While one typically thinks of spreadsheets rather than standing when thinking about hedge fund returns, this decision may have a material impact on the value of Madoff claims, in which a robust market has developed.  (As of immediately prior to the Rakoff decision, Madoff claims were trading for 65 to 70 cents on the dollar.)  The common law claims that Judge Rakoff did not permit to proceed sought approximately $8.6 billion from deep-pocketed defendants.  Further, a significant portion of the expected value of the Madoff estate consisted (at least prior to this decision) of anticipated proceeds from similar common law claims against similarly situated defendants, i.e., large financial institutions that served as “conduits” for investments into the Madoff operation.  Moreover, Rakoff’s decision was stern, unambiguous and forcefully reasoned.  According to our sources, the decision is unlikely to be reversed or revised on appeal.  Second, with respect to trade risk, this article outlines an insightful recent article authored by Lawrence V. Gelber, David J. Karp, and Jamie Powell Schwartz, Partner, Special Counsel and Associate, respectively, at Schulte Roth & Zabel LLP.  In particular, this article outlines the relevant points from the Schulte article regarding “notional amount risk,” “counterparty credit risk” and how to mitigate both categories of risk in claim trade documentation.  In short, any hedge fund manager considering the purchase of a bankruptcy claim must ask two questions in order to assess whether to purchase and at what price: How big is the pie?  And how secure will my access to the pie be?  The purpose of this article is to highlight issues that are relevant in answering these two questions.

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