In a case closely watched by potential investors in distressed debt, including subprime mortgages, District Court Judge Shira A. Scheindlin rendered her decision on August 27, 2007 in In re Enron Corp, 379 B.R. 425 (S.D.N.Y. 2007). Judge Scheindlin vacated the subordination and disallowance orders of the Bankruptcy Court and issued her opinion that a claim held by a transferee could be subject to equitable subordination and disallowance due solely to the conduct of the transferor of the claim if the transfer was by assignment but not by sale. The claim involved was held by investors in Enron debt which was extended by a syndicate of banks. Although it was reported that this decision somewhat lifted a cloud from the bond market, that more clarity would be needed as the decision created more confusion by ruling that investors who are "assigned" debt to not have the same rights as those who "purchase" them. The court noted that although the question involved in the case could be "simply stated, [it] is complex and of first impression in this Circuit, and will have serious ramifications well beyond the parties involved in this particular appeal." Id at page 428. Commentators and amici curiae expressed concern that the decisions of the Bankruptcy Court would wreak havoc in the distressed debt markets.
The court stated that although an assignment and a sale are both types of transfers, that they are distinguishable and can have different consequences for the transferee. Judge Scheindlin noted that an assignee stands in the shoes of the assignor and is subject to all equities against the assignor. The court noted that this principal is a corollary to the "well-established doctrine of nemo dat qui non habet: an assignor cannot give more than he has." In contrast to an assignee, the court cited New York U.C.C. Section 8-202(d) and stated that a purchaser does not stand in the shoes of a seller and can obtain more than the transferor in some circumstances. This section of the New York U.C.C. provides that all defenses of an issuer of a security with enumerated exceptions are "ineffective against a purchaser for value who has taken the security without notice of the particular defense." The court held that the distinction between an assignee and a purchaser apply to transfers of claim.
