The Limits of Enron: Counterparty Risk Bankruptcy Claims Trading

Adam J. Levitin, Georgetown University Law Center

Abstract

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 ongoing bankruptcy has 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.