The Limits of <I>Enron</I> : Counterparty Risk in Bankruptcy Claims Trading

Creditors have long understood that any claims they submit for repayment in a bankruptcy might be valid, but subject to subordination in the order of payment of the bankruptcy estate's limited funds if the creditor behaved inequitably as the debtor failed. Enron's on-going bankruptcy raised many instances of inequitable conduct, but a recent opinion by the bankruptcy court expands the practice of equitable subordination far beyond its traditional reach. According to the court, buyers of bankruptcy claims are now subject to subordination, not just for their own conduct, but also for conduct of previous owners of the claims, regardless of whether the conduct was connected to the claims.In a world of active bankruptcy claims trading, lt;igt;Enronlt;/igt; raises powerful policy questions that may affect both the doctrinal development of bankruptcy law and the survival of a market that has provided liquidity for creditors with claims against bankrupt debtors. This article argues that lt;igt;Enronlt;/igt; was based on questionable legal authority and that it does not present the best policy solution for redressing the problems of inequitable behavior by creditors