Third Circuit Holds That Claim Disabilities Travel With Trade Claims in KB Toys

The U.S. Court of Appeals for the Third Circuit in In re KB Toys Inc., No. 13-1197, 2013 WL 6038248 (3d Cir. Nov. 15, 2013), held that trade claims that are subject to disallowance under § 502(d) of the Bankruptcy Code in the hands of original claimants are similarly disallowable in the hands of a subsequent transferee of such claims. The court also held that subsequent transferees cannot assert as a defense to disallowance their status as a transferee that takes for value and in good faith under § 550(b) of the Bankruptcy Code. The court’s opinion underscores the importance of evaluating bankruptcy-specific risk factors when trading claims, including disallowance, avoidance, and equitable subordination risks. This opinion, if applied broadly, could have significant implications in the distressed trading markets.