Risks When Accepting Transfer of a Bankruptcy Creditor Claim

February 2014Articles New Jersey Law Journal

In certain situations, the Bankruptcy Code affords protection to good-faith transferees. Most notably, Section 363(m) ensures the validity of transfers of estate property to good-faith transferees should the transaction be appealed (provided no stay was first obtained), while Section 550(b) prohibits a trustee from recovering avoidable property from good-faith transferees that took for value and without knowledge of the voidability of the underlying transfers. However, the Third Circuit recently determined in the Chapter 11 case of In re KB Toys, 736 F.3d 247 (3d Cir. 2013), that good-faith transferees of creditor claims are not insulated from having the acquired claims disallowed under Section 502(d) to the extent that the original claimant had received an avoidable transfer of estate property.

Section 502(d) provides that:

Notwithstanding subsection (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 554 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 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.

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