Claims Trading in Today's Corporate Restructuring Process
By Eric S. Kurtzman

Recent industry developments have heightened claims trading activity. As the dynamics of the claims trading process change, the restructuring industry faces the challenge of the sometimes questionable scruples of claims purchasing entities.

This marketplace can be loosely divided into two segments based on the nature of the original claims holders: (1) institutional investors or large corporate creditors (generally holding large claims) who have bankruptcy-related experience, legal counsel or an otherwise heightened level of expertise; and (2) the traditional "mom and pop" vendors (generally holding small claims) who lack familiarity with the corporate bankruptcy system. Members of the latter group, referred to herein as "Mom-n-Pop," often wish to sell their claims for reasons ranging from liquidity, cash flow and accounting concerns to general discomfort with bankruptcy proceedings.

A cottage industry of claims purchasing companies has emerged to provide a market for Mom-n-Pop. Purchasers in this industry rely on certain negotiation advantages over Mom-n-Pop. Among other developments, some pundits view the new disclosure requirements under The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as a potential catalyst to increased claims trading activity. While Mom-n-Pop will have access to this additional information, the purchasers will more likely use and understand it, thus widening the knowledge gap between market participants.

While most believe the aforementioned advantages to be a fair or even vital part of the free market, some purchasers' bargaining techniques stretch the ethical boundaries to the breaking point. Despite the confluence of sophisticated buyers, unsophisticated sellers, and a projected increase in claims trading activity, parties may assume that industry regulation and judicial oversight will curtail unethical claims trading activity; that assumption has faults.

There is no easy solution for protecting the interests of Mom-n-Pop. However, as restructuring professionals and specialists, we can take steps to mitigate illicit activities and put the fear of the court into the unethical operatives. The bankruptcy court can protect the interests of Mom-n-Pop by offering greater oversight and punishment for unethical claims trading practices. Restructuring professionals can offer education and counsel to Mom-n-Pop as these practices arise. Claims and noticing agents can take a proactive step in the process on behalf of debtors by sending a notice to Mom-n-Pop advising that the transfer has taken place.

Claims trading can be a mutually beneficial investment opportunity for sellers and purchasers alike. Economically, it can be a good fit for all participants when conducted appropriately. To preserve the integrity of claims trading, the industry should take the steps mentioned above to combat unethical practices in the corporate restructuring process.

To learn more about how KCC can help ensure your success, email or call us at 866.381.9100.