Enron Creditors Recovery Corp. (“ECRC”) has filed suit seeking to hold Citigroup responsible for it’s alleged role in helping create complex structures that obscured the true state of Enron’s financial position from the capital markets and the public. ECRC v. Springfield Associates is one small part of the much larger ECRC v. Citigroup MegaClaims suit.

At the time of Enron's bankruptcy, Citigroup held billions of dollars worth of debt, or claims, related to its financial dealings with Enron. In 2002, after Enron filed its bankruptcy petition on December 2, 2001, Citigroup transferred one such claim with a face value of $5 million, to Deutsche Bank (previously known as Bankers Trust Company). Deutsche Bank then transferred that claim to Springfield Associates on May 15, 2002.

At issue is the status of claims transferred post petition—or after the date of the bankruptcy filing—in situations where the transferor (Citigroup, in this case) allegedly participated in wrongful acts, or fraudulent conduct, that contributed to the financial demise that led to the bankruptcy.

ECRC argues such transferred claims must be subject to equitable subordination and disallowance, which would insure innocent creditors' recoveries are not diminished by payments to those who engaged in fraudulent conduct. Both equitable subordination and disallowance are well established remedies in the Bankruptcy Code designed to prohibit creditors who engage in wrongful conduct from sharing in the Bankruptcy Estate on an equal basis with innocent creditors.

To hold otherwise would allow entity shown to have engaged in wrongful conduct, as is alleged with respect to Citigroup to "wash" a claim by simply transferring it to a third party. Such claim washing, if successful, would transform a tainted claim into one having the same validity and priority as claims held by innocent creditors.

Springfield has already filed suit against Citigroup alleging that, due to its conduct, Citigroup should be financially responsible for any amounts Springfield does not recover from the Enron bankruptcy estate on the claim it purchased. If ECRC is successful in subordinating or having disallowed Springfield's claim, Citigroup's potential liability would be increased. As a result, Citigroup intervened to protect its interests in the Springfield case and to protect its overall strategy to avoid the equitable subordination and disallowance of other non-Springfield debt that has a face value of approximately $5 billion.

Timeline

• In March 2006, Bankruptcy Court Judge Gonzalez rules in favor of ECRC's stance that claims of bad actors are subject to equitable subordination and disallowance despite the transfer of the claims post petition. Springfield Associates, with Citigroup, files an appeal that is assigned to United States District Judge Shira Scheindlin.
• In August 2007, Judge Scheindlin supports many of the principles of Judge Gonzalez's ruling, but mandates different treatment for certain claims sold on the open market versus those that are assigned. Judge Scheindlin remands the case to Judge Gonzalez for further findings of fact, including whether the claim in question was sold or assigned to Springfield Associates.
• In September 2007, dissatisfied with Judge Scheindlin's ruling, Springfield asks Judge Scheindlin to certify her ruling for interlocutory appeal to the Second Circuit.
• On September 27, 2007 Judge Scheindlin rules against Springfield's request for immediate appeal, clearing the way for the ECRC v. Citigroup MegaClaims suit to proceed to trial.
• Trial on these issues is scheduled to commence in April 2008.