By: Brian P. Campbell Jr.
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
Section 502(d) of title 11 of the United States Code (the “Bankruptcy Code”) empowers courts to disallow a proof of claim where the estate could have recovered properties conveyed as avoidable preferences and fraudulent transfers from the holder of the claim. United States Bankruptcy Judge Sean H. Lane in In re Firestar Diamond, Inc. disallowed creditors’ bankruptcy claims bought from entities that had benefitted from a Debtor’s avoidable preferences and fraudulent transfers. Firestar Diamond, Inc. and certain affiliates filed voluntary petitions under Chapter 11 of the Bankruptcy Code following the discovery of massive bank fraud. Thereafter, the bankruptcy court appointed a trustee to administer the Chapter 11 case. Under the compulsion of a deadline to file proofs of claim, several banks based in India filed claims in the Chapter 11 cases. The banks’ claims were premised on amounts that the Debtors owed certain non-debtor affiliates. The banks had the right to assert such claims because the non-debtor affiliates had pledged to the banks the underlying receivables from the Debtors. The Chapter 11 trustee objected to the banks’ claims, arguing that the non-debtor affiliates were the recipients of “millions of dollars in fraudulent transfers and preferences from the Debtors that ha[d] not been repaid.” Accordingly, such claims should be disallowed. In response, the banks argued that their claims should be allowed notwithstanding that the trustee held fraudulent transfer and preference claims against the non-debtor entities. According to the banks, the pledge or sale of the receivables to the banks “washed [them] clean.” Judge Lane agreed with the Trustee and held that the banks’ claims should be disallowed.
Courts are authorized under Section 502(d) of the Bankruptcy Code to disallow claims based on avoidable preferences and fraudulent transfers if the estate could have recovered the properties. According to Judge Lane, because the claims would be subject to disallowance had the non-debtor entities filed the claims themselves, the claims should be disallowed. In coming to his ruling, Judge Lane disagreed with the court’s decision in In re Enron Corp. (“Enron II”), where the district court held “that disallowance is a personal disability of a claimant, not an attribute of the claim.” There, the United States District Court for the Southern District of New York had held that the nature of the transfer dictates the disallowance under Bankruptcy Code Section 502(d). A transferee’s claim would be allowed if from a sale, and disallowed if from an assignment. Instead, Judge Lane was persuaded by the United States Court of Appeals for the Third Circuit’s decision in In re KB Toys Inc. (“KB Toys II”). The Third Circuit had concluded that Enron II’s “assignment” and “sale” distinction was “problematic,” was never distinguished as such under the Bankruptcy Code, and “would contravene the aims of 502(d), the first of which is to ensure equality of distribution of estate assets.”
Judge Lane broke new ground for his District by following the Third Circuit, scholarly consensus, and considerations of equity. While joining many other jurisdictions, Judge Lane noted that his rejection of Enron II is not binding on other judges in the Southern District. Until there is binding precedent from the United States Court of Appeals for the Second Circuit or the Supreme Court of the United States, transferees appearing before the Southern District’s Bankruptcy Courts may still find it beneficial to describe their claim acquisitions as “sales” and themselves as “purchaser[s] not subject to any personal disabilities of the transferor”—but should prepare for appeals.
 See 11 U.S.C. § 502(d) (“Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 553 of this title.”).
 See In re Firestar Diamond, Inc., 615 B.R. 161, 170 (Bankr. S.D.N.Y. 2020) (“the Court does not need to decide whether the transactions underlying these claims are ‘sales’ or ‘assignments.’”).
 See id. at 163 (Here, a wholesale jeweler working with “Costco, J.C. Penney, Macy's, Zales, Kay's, and Jared's, among others . . . used fraudulently obtained Letters of Understanding (‘LOUs’),” a financial instrument used in India, to pilfer nearly four billion dollars, perpetrating India’s largest bank fraud).
 See id. at 164 (“These events prompted the U.S. Trustee and PNB to seek the appointment of a Chapter 11 Trustee.”).
 See id. (“Bank of India (Bharat Diamond Bourse Branch) (‘BOI-B’), Union Bank of India (UK) Ltd. (‘UBI’), Firestar Diamond BVBA's (‘BVBA’), Receivers on behalf of Bank of India (Antwerp Branch) (‘BOI-A’), and Bank of India (London Branch) (‘BOI-L,’ and together with BOI-B, UBI, and BOI-A, the ‘Banks.’”).
 See id. at 164 n.3.
 See id.
 See id. at 164.
 See id.
 See id. at 165, 169 (citing to In re Enron Corp., 379 B.R. 425, 428-29, 443 (S.D.N.Y. 2007) ("Enron II")) (Citibank’s $5 million of exposure to Enron’s syndicated $1.8 billion short-term credit liability was transferred through two sales to an entity that ultimately sued to enforce this indemnity despite Enron’s assertion of 502(d) disallowances).
 See id. at 165-66, 170 (the four banks emphasized that “they acquired rights to payment from the Debtors through a ‘sale’ rather than an ‘assignment’” where Enron II holds that “an assignee ‘stands in the shoes of the assignor’ and takes the claim with ‘whatever limitations it had in the hands of the assignor,’ . . . but a purchaser of the same claim is not subject to any personal disabilities of the transferor.”).
 See id. at 171.
 See 11 U.S.C. § 502(d) (“[T]he court shall disallow any claim of any entity from which property is recoverable . . . or that is a transferee of a transfer avoidable . . . unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable . . . .”); see also In re Firestar Diamond, Inc., 615 B.R. at 165 (block quoting 11 U.S.C. § 502(d)).
 See In re Firestar Diamond, Inc., 615 B.R. at 169.
 See 379 B.R. 425, 443 (S.D.N.Y. 2007).
 See id. at 443-45.
 See id.
 In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013) (“KB Toys II”); see id. at 167 (referencing the cases that KB Toys II relied on as well as a SDNY and District of Delaware bankruptcy); id. at 167–68 n.6 (reconsidering a pre-Enron II bankruptcy case from the Southern District, In re Metiom, Inc., 301 B.R. 634 (Bankr. S.D.N.Y. 2003), that had explored Section 502(d)’s 1898 antecedent “support[ing] the interpretation that disabilities travel with claims.”); see also id. at 166–67 (rejecting its own prior ruling: “[n]otwithstanding the views of the court in Enron II, the Court nonetheless finds more persuasive the analysis of courts that have reached the opposite result.”).
 See KB Toys II, 736 F.3d at 252, 254 n.11; see also In re Firestar Diamond, Inc., 615 B.R. at 167 (citing to In re KB Toys, Inc., 470 B.R. 331, 340 (Bankr. D. Del. 2012) (“KB Toys I”)).
 See infra notes 18-19 and accompanying text.
 See In re Firestar Diamond, Inc., 615 B.R. at 168–69 n.7 (Bankr. S.D.N.Y. 2020) (referencing KB Toys I, 470 B.R. at 341 n.12).
 See infra notes 18-19 and accompanying text. See generally, In re Firestar Diamond, Inc., 615 B.R. at 170–71 (questioning whether the claims should be disallowed even under an Enron II analysis since they may be secured transactions or governed by Belgian law treating them as assignments and thus subject to defenses).
 See In re Firestar Diamond, Inc., 615 B.R. at 166 n.4 (citing to In re Jamesway Corp., 235 B.R. 329, 336 n.1 (Bankr. S.D.N.Y. 1999)) (explicitly rejecting the stare decisis arguments of the four banks).
 See id. at 166 (citing to In re Enron Corp., 379 B.R. 425, 436 (S.D.N.Y. 2007) ("Enron II")).
 See id. (While “[a] bankruptcy court in a multi-judge district is not bound by stare decisis to the decision of a single district judge in that district,” they are not immune from the dictates of higher courts).