Claims Purchasers: Think a Trading Order Doesn’t Apply to You? Think Again…

Contributed by Damon P. Meyer
As we’ve written previously, courts have increasingly emphasized the importance for lenders to maintain adequate and accurate documentation and have denied standing to creditors who held insufficient documentation to evidence their interests. On January 20, 2011, Judge Martin Glenn, in In re Mesa Air Group, Inc., Case No. 10-10018 [Docket No. 1446], again, emphasized the importance of complying with established procedures for documenting claims transfers by holding that creditor BF Claims Holdings I LLC, which had acquired its claims in violation of the trading order that had been entered in the case, lacked standing to object to confirmation of the debtors’ plan.
Trading orders have become increasingly common in large chapter 11 cases and are used to protect debtors’ net operating losses. Net operating losses can be used to offset taxable gains, and, as such, can be valuable assets of the estate. Net operating losses, however, can be lost if there is a change-in-control of the debtor, which can be caused if a certain amount of the debtor’s equity (or claims that could be exchanged for equity pursuant to a chapter 11 plan) changes hands. Trading orders provide a safeguard against this happening by establishing notification procedures and other restrictions with regards to the trading of claims or equity in a debtor.
The trading order in Mesa Air Group required at least 30 calendar days’ notice to be given before a transaction could be effectuated.  During this time, the debtors could object to the proposed transaction.  Further, it provided that “[a]ny purchase, sale, or other transfer that fail[ed] to comply with the requirements of the trading order ‘shall be null and void ab initio as an act in violation of the automatic stay under sections 362 and 105(a) of the Bankruptcy Code.’”
There were two transfers at issue. Initially, a series of funds collectively called the “Brigade Affiliates” filed eight claims acquisition notices (presumably in accordance with the trading order) seeking to acquire certain claims. The debtors did not object to the proposed transaction and waived the 30-day notice period. However, the Brigade Affiliates subsequently transferred those claims to BF Claims Holdings without filing the required transfer notice.
After BF Claims Holdings objected to the debtors’ plan, the debtors asserted that BF Claims Holdings had acquired the claims at issue in contravention of the requirements of the trading order and Bankruptcy Rule 3001(e)(2), and, consequently, BF Claims Holdings did not validly hold those claims at the time its objection to confirmation was filed. Accordingly, the debtors asserted that BF Claims Holdings lacked standing to bring the objection.
The court agreed with the debtors and found that BF Claims Holdings had not filed the notices required by the trading order. Further, because the trading order provided for a thirty-day stay prior to the effectiveness of any transfer, the court held that the transfer was not effective and, therefore, that BF Claims Holdings did not have standing to object to confirmation.
Though the court did not allow BF Claims Holdings to “prosecute” its objection due to lack of standing, the court noted that it was still required to undertake an independent analysis of the plan to determine if it could be confirmed. Interestingly, in examining the contents of the plan, the court cited to, and considered, the arguments made by BF Claims Holdings in its objection, ultimately overruling the objection for substantive reasons and confirming the plan.
The court’s consideration of the substantive arguments made in the objection should not trivialize the fact that it found BF Claims Holdings lacked standing to pursue it. Other courts might have ended the analysis at standing and determined not to consider the merits of the objection at all. The court’s decision serves as a reminder that claims and equity traders should review whether a trading order exists in a case and make sure that any transactions are in compliance with the terms of the order. As the Mesa Air Group decision teaches, failure to do so may lead to unintended consequences for the claims trader.