Regulating Bankruptcy Claims and Claim-Participations Trading under the Federal Securities Laws
By Thomas Donegan *
Emory Bankruptcy Developments Journal | 1998
Emory University School of Law
* J.D., Emory University School of Law, 1998; B.A., with honors, University of Florida, 1994. The author wishes to thank Professor William Carney for his guidance, and his wife and family for their love and support.
Text: 19,829 words
… In the 1990s, the federal bench has seen a marked increase by individuals and corporations filing petitions for bankruptcy protection. … Purchase and sale of claims, so long as the purchaser is not the debtor, an affiliate of the debtor, or an insider, simply substitutes one creditor for another . . . . The right to make those decisions and the risks inherent in bankruptcy proceedings are merely shifted to another who stands in the shoes of the original claimant. … A claim seller is typically motivated by its own self-interest rather than the debtor’s interest, while the investor is seeking to ultimately gain value from the instrument greater than his cash outlay, and not a short-term, fixed interest rate. … However, the peculiar nature of postpetition claims trading compels the federal securities laws to focus more on protection of the typically unsophisticated claim seller than the “bottom-feeding investor.” …
n23 T. Rowe Price Prepares $ 125 [Million] Distressed Fund, BUYOUTS, Dec. 4, 1995 (interviewing Todd Ruppert, partner). The attraction of bankruptcy claims as potential profit-generators is understandable. For example, Harvard University tripled its original investment of $ 129 million in distressed companies last year, while other clients are similarly seeking returns which can average more than 22% per year. See Alyssa A. Lappen, “The Greenhaus Effect” (Vulture Investor Shelley Greenhaus), INSTITUTIONAL INVESTOR, Oct. 1, 1995, at 317.
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