In addition to adjudication of business restructurings or sales of businesses or assets, the administration of bankruptcy cases involves two substantial undertakings: the allowance and fixing of claims against the debtor and the recovery, or “avoidance,” of prepetition transfers such as fraudulent transfers and preferences for the benefit of the estate. A powerful provision of the Bankruptcy Code not well known except to bankruptcy specialists connects claim administration and transfer avoidance by providing that the holder of a claim against the debtor is not allowed to participate in any distribution if the holder of the claim has not returned the preference or other avoidable transfer to the estate, even if the amount of the claim far exceeds the amount of the preference.
This provision Section 502(d) of the Bankruptcy Code was examined recently by the U.S. Bankruptcy Court for the District of Delaware in the context of the trading of claims in bankruptcy cases, and reaffirmed the effect of Section 502(d) on allowance and distribution must be considered by all holders of claims in bankruptcy cases.
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