VigilantVultureBlog-Header_v02-all birds

Posts Tagged ‘refund’

When the Exclusive Remedy for Disallowance is a Rebate

The disallowance provision is probably the most distinguishing feature1 of the typical bankruptcy claim2 assignment. This provision obligates the seller of the claim to rebate buyer’s purchase price to the extent the enforceability of the claim has been impaired3, subject to certain conditions.4 The assignment also typically contains seller representations and warranties that the claim is not subject to “impairment” of any kind.5

(more…)

  1. Disallowance provisions also routinely appeared in agreements for the purchase and sale of distressed domestic bank loans until the Loan Syndications and Trading Association (“LSTA”) standardized this form in the mid-1990’s.
  2. The term “bankruptcy claims”, as are used in this post, refers to claims not arising from bank loans, notes, bonds, debentures and similar instruments.
  3. Bankruptcy claims are deemed allowed if not objected to, 11 U.S.C. § 502(a)(2011), but because there is no time limitation for objections, In re McLean Indus., Inc., 184 Bankr. 10 (Bankr. S.D.N.Y. 1995), corrected (June 20, 1995) and aff’d 196 B.R. 670 (S.D.N.Y.1996), claims frequently have not yet been allowed at the time they are assigned. Full or partial disallowance of a bankruptcy claim may result from causes ranging from a failure to credit debtor advertising allowances or delivery of non-conforming goods in the case of a vendor claim, to an unfavorable valuation, in the case of a credit-default swap termination claim. Challenges to the enforceability of distressed bank loans, by contrast, rarely involve a debate over the actual amount of the loans.
  4. These may range from the mere filing of an objection to the claim to the requirement of a final, non-appealable order disallowing it; the assignment may also obligate buyer to provide seller with written notice of a filed objection to the claim and an opportunity to resolve it.
  5. The typical “disallowance” provision likewise generally addresses not only claim disallowance per se but also subordination, setoff, recoupment and any other potential “impairments” of the subject claim.