August 28, 2007

Enron Creditors Recovery Corp. (“Enron”) yesterday received the decision of Federal District Court Judge Shira A. Scheindlin reaffirming the fundamental principal that an assignee of a claim may be subject to equitable subordination and disallowance based on the actions of the transferor, in this case Citibank.

In rendering the decision, the District Court drew a distinction between  transfers that take the form of an assignment, which are subject to equitable subordination and disallowance, and those that are regarded as sales, which the District Court said would not be unless the purchaser had notice of the inequitable conduct.  The District Court remanded this matter for further proceedings in the Bankruptcy Court to address whether the transfers that are at issue in the Enron bankruptcy are sales or assignments. 

Enron is confident that the Bankruptcy Court will determine the key claim transfers to be assignments and, in light of Citibank's actions, find them fully subject to equitable subordination and disallowance, to the benefit of the estate and the estate's innocent creditors.

“While Enron believes that the principles of equitable subordination and disallowance are much broader than stated by the District Court, we are pleased that the District Court agreed that if claims are assigned in certain circumstances—and we believe the Citibank related claims involve those circumstances—the claims can be equitably subordinated and disallowed,” said John J. Ray III, Enron’s President and Chairman of the Board. “We believe we will ultimately prevail in obtaining equity for the many innocent parties who were harmed by the conduct in which Citibank participated.”