Brad Sandler is a partner of Pachulski Stang Ziehl &
Jones and resides in the firm’s Wilmington, Delaware,
office. He recently successfully represented the
creditors’ committees in the Chapter 11 cases of Ashley
Stewart (New Jersey), Groeb Farms (Detroit) and
Johnny Carino's restaurants (Austin, Texas), among
many other. In addition to committee representations,
he regularly represents debtors, acquirers, and
other significant parties in interest in complex
reorganizations and financially distressed situations,
both in and out of court, in numerous industries
throughout the United States. Sandler can be
contacted at email@example.com or 302-778-6424.
Sandler wishes to acknowledge and thank his
colleagues Jonathan Kim and Michael Seidl of Pachulski
Stang Ziehl & Jones for their contributions to this article.
passive or active, however, it is critical
for a distressed debt investor not only
to conduct thorough diligence but
also to negotiate away as many risks as
possible in the purchase agreement. J
1 To flip a claim, a party tries to buy low
and sell high, taking advantage of market
fluctuations prior to plan confirmation.
Because the claim flipper is usually involved
for a shorter time period, its negotiation and
other expenses are less and it can profit from
a relatively moderate increase in the price.
2 See, e.g., Fisher & Buck, Hedge Funds and
the Changing Face of Corporate Bankruptcy
Practice, 25-10 ABIJ 24 (Dec. 2006 / Jan.
2007). In this article, the authors explain:
[B]ecause of its “short” position, Alpha Partners
[hypothetical hedge fund] is not motivated to
pursue the overall maximization of value for all
constituencies of DebtorCo’s bankruptcy estate.
Rather, Alpha Partners is interested only in the
fate of its particular holdings and is adverse to
the interests of equityholders. Indeed, Alpha
Partners hits a grand slam on its investment if
DebtorCo recovers enough value to pay off its
bank, unsecured and trade debt, but does not
recover enough money to provide a return to
equityholders. Thus, unlike a more traditional
creditor who might be indifferent to the fate
of equityholders, Alpha Partners actually
profits from poor returns for equityholders.
3 See, e.g., Enron Corp. v. Springfield Assocs.,
LLC (In re Enron Corp.), 379 B.R. 425 (S.D.N. Y.
2007). In Enron, the court reasoned that claims
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that have been assigned (as opposed to sold)
may potentially be equitably subordinated
based on the transferor’s conduct under Code
§ 510(c) because, in the court’s view, equitable
subordination is an attribute of the original
claimant that does not inhere in the claim itself,
and under a pure assignment of a claim, the
assignee steps in the shoes of the assignor.
4 See, e.g., In re KB Toys Inc., 736 F.3d 247
(3d Cir. 2013); In re Metiom, Inc., 301 B.R.
634, 642-43 (Bankr. S. D. N. Y. 2003).
5 The buyer pays $250 on a $1,000 claim, or 25
percent, expecting a gross return of $400, or
40 percent, on the original $250 investment,
for a gross return on investment of 60 percent,
excluding the time value of money.
6 In re Marin Town Center, 142 B.R. 374
(N.D. Cal. 1992). See also, e.g., In re Figter,
Ltd., 118 F.3d 635 (9th Cir. 1997).
7 In re Allegheny, 118 B.R. 282 (Bankr. W.D.
Pa. 1990). See also, e.g., DISH Network
Corp. v. DBSD N. Am., Inc. (In re DBSD N.
Am., Inc.), 634 F.3d 79 (2d Cir. 2010).