Transfer Does Not Shield Claims From Section 502(d) Disallowance

A bankruptcy claim in the hands of a transferee has the same disabilities as it would in the hands of the transferring creditor, the Delaware Bankruptcy Court concluded in a recent opinion in which it disallowed, under Section 502(d) of the Bankruptcy Code, nine claims held by claims traders.

In an opinion issued May 4 inIn re KB Toys, 2012 Bankr. LEXIS 1958 (Bankr. D. Del. May 4, 2012) , U.S. Bankruptcy Judge Kevin Carey of the District of Delaware disallowed claims in the aggregate amount of $650,000 held by claim traders ASM Capital and ASM Capital II (together, ASM) in the KB Toys bankruptcy cases. The court reasoned that the plain language of Section 502(d) of the Bankruptcy Code, legislative history and recent case law support the conclusion that claims cannot be "washed" by a mere transfer. Thus, where the original creditors received preferential transfers that have not been returned to the estate, the claims of such creditors, even in the hands of a transferee, are properly disallowed under Section 502(d) of the code, the court held.