The Loan Syndications and Trading Association is considering filing a second amicus brief related to a recent ruling in the Enron court case that could render some Enron bankruptcy claims worthless. The most recent ruling would disallow bankruptcy claims held by investors who bought loans led by banks that Enron claims defrauded its creditors. Beyond Enron, market players warn the ruling could have a detrimental effect on distressed debt investors that buy bankruptcy claims.
Ted Zink, attorney at law firm Chadbourne & Parke, said that if the ruling is upheld it would increase the burden on distressed debt investors to do extra due diligence on sellers of distressed debt. "Generally speaking, it will have a chilling effect on distressed debt claims," said Zink. "It will require some distressed trading desks to redouble their due diligence efforts."
Judge Arthur Gonzalez, presiding over the Enron case in the United States Bankruptcy Court for the Southern District of New York, ruled March 31 that the bankruptcy claims, amounting to $55 million, could be disallowed because they were bought from banks that Enron alleges committed fraud on transactions that are unrelated to the loans. Fleet National Bank is the lead bank on the original loan that was sold to the investors. Enron alleges Fleet and several other banks committed fraud on previous, unrelated transactions with the company. Because of this allegation, Enron asserts the bankruptcy claims should be disallowed unless Fleet pays back money it received as part of these alleged fraudulent transactions.
Elliot Ganz, general counsel for the LSTA, said the association is in talks with a bank that is considering appealing the latest ruling. Ganz said he has not received a formal request to file an amicus brief, but said that it is likely to happen in May, when the defendants are likely to appeal.
Defendants in the case are Avenue Special Situations Fund, DK Acquisition Partners, RCG Carpathia Master Fund and Rushmore Capital. They claim the loans should not be subject to disallowance because the allegations of fraud against Fleet and other banks that are alleged to have committed fraud are related to transactions that are not directly linked to the loans they bought after Enron filed for bankruptcy. The defendants bought the loans before Enron filed a lawsuit against these banks in 2003. Enron filed for bankruptcy in 2000. The loans were sold to distressed debt investors in 2001 and 2002. Ganz said the investors bought these claims when they had no idea that they would be subject to disallowance. "It is not a risk they would have considered when they bought the loans," said Ganz.
This is the second ruling by Judge Gonzalez that threatens to render Enron bankruptcy claims worthless. In November, the judge ruled that because of alleged misconduct by Fleet and other banks, bankruptcy claims sold by these banks may be subject to equitable subordination. The most recent ruling goes a step further by disallowing the claims in their entirety if the banks are found to have committed fraud. The LSTA filed an amicus brief earlier this year in support of defendants that dispute the equitable subordination ruling. That decision is on appeal. Calls to Enron and Fleet officials were not returned.
