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In re KB Toys Inc.

United States Court of Appeals for the Third Circuit

September 24, 2013, Argued; November 15, 2013, Filed

No. 13-1197



SHWARTZ, Circuit Judge

This appeal arises out of the Chapter 11 liquidation of KB Toys Inc. and affiliated entities (the "Debtors"). Pursuant to 11 U.S.C. § 502(d), the Residual Trustee of the KBTI Trust1 sought to disallow certain trade claims that ASM Capital, L.P., and ASM Capital II, LLP, (together, "ASM") obtained from some of the creditors. ] Under § 502(d), a bankruptcy claim can be disallowed if a claimant receives property that is avoidable or recoverable by the bankruptcy estate. See 11 U.S.C. § 502(d). The issue here is whether a trade claim that is subject to disallowance under § 502(d) in the hands of the original claimant is similarly disallowable in the hands of a subsequent  [**2] transferee. For the reasons set forth herein, the answer is yes and thus, we will affirm.

] Creditors holding claims against an entity who has filed a Chapter 11 petition sometimes face a risky and lengthy bankruptcy process. To avoid this risk and expense, a creditor may look to sell its claim, a practice permitted under the bankruptcy rules. In re Kreisler, 546 F.3d 863, 864 (7th Cir. 2008) (citing Fed. R. Bankr. P. 3001(e)). By selling its claim, a risk averse creditor can opt out of the bankruptcy process and obtain an immediate, albeit discounted, payment on the debt it is owed. See id. Claim purchasers buy these claims and hope to receive a distribution from the debtor's estate in excess of the price paid. See Tally M. Wiener & Nicholas B. Malito, On the Nature of the Transferred Bankruptcy Claim, 12 U. Pa. J. Bus. L. 35, 36 (2009) ("Some purchasers are simply . . . investing with an eye towards receiving a distribution on claims in cash or readily liquidated property in excess of the purchase price.").2

] A trade claim is usually transferred via contract. If a claim is transferred before a proof of claim is filed, Federal Rule of Bankruptcy Procedure 3001(e)(1) allows a transferee to file the proof of claim. See Fed. R. Bankr. P. 3001(e)(1). If a claim is transferred after a proof of claim is filed, Rule 3001(e)(2) requires a claims transferee to file an "evidence of transfer" with the bankruptcy court. See Fed. R. Bankr. P. 3001(e)(2).

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736 F.3d 247 *; 2013 U.S. App. LEXIS 23083 **; Bankr. L. Rep. (CCH) P82,547; 58 Bankr. Ct. Dec. 199; 2013 WL 6038248

In re: KB TOYS INC., et al., Debtors, ASM CAPITAL, L.P.; and ASM CAPITAL II, LLP, Appellants

Prior History:  [**1] On Appeal from the United States District Court for the District of Delaware. (D.C. No. 12-cv-00716). District Judge: Hon. Richard G. Andrews.

In re KB Toys, Inc., 470 B.R. 331, 2012 Bankr. LEXIS 1958 (Bankr. D. Del., 2012)


original claimant, disallowance, entity, bankruptcy court, transferred, purchaser, good faith, provisions, claimant, risks

Bankruptcy Law, Bankruptcy, Claims, Allowance of Claims, Proof of Claim, Content, Evidence & Form, Judicial Review, Standards of Review, Abuse of Discretion, Clear Error Review, De Novo Standard of Review, Governments, Legislation, Interpretation, General Overview, Prepetition Transfers, Voidable Transfers, Estate Property, Avoidance, Transferee Liabilities & Rights, Contents of Estate