WILMINGTON, Del. (AFX) - A U.S. district judge in New York is allowing some of Wall Street's biggest investment banks to appeal an Enron Corp. court ruling that the banks said could 'devastate' the country's $500-billion distressed-debt market.
U.S. District Judge Shira Scheindlin took the unusual step of permitting the banks to immediately appeal the ruling by U.S. Bankruptcy Judge Arthur Gonzalez, who is overseeing the Enron case.
Gonzalez ruled earlier this year that holders of claims against a bankrupt company could see those claims wiped out even if they did nothing wrong in their relationship with the company. Under his ruling, holders of bankruptcy claims could be at risk if they merely bought a claim from another creditor who may have engaged in 'inequitable conduct.'
Scheindlin gave the banks, which include Merrill Lynch & Co., Citigroup's Citibank and Barclays PLC's Barclays Bank, until Tuesday to come up with an expedited briefing schedule for the appeal. Enron has supported Gonzalez's ruling and argued in court papers that an appeal shouldn't be permitted.
Lawyers for Enron say a victory for the claims-buying banks, including hedge funds, opens the way to 'claims-washing,' or the sale of tainted debt to shake off liability.
But the claims buyers say that unless the lawsuits are derailed at an early stage, innocent purchasers of untainted bankruptcy claims are wide open to lawsuits.
Lawyers for the debt-buying banks say Enron sued them only to get leverage to use in litigation against the banks that originated the loans.
The 28-page decision granting the right to appeal at an early stage of the litigation gave little indication which way the judge will ultimately rule.
No matter which way the ruling goes, however, it will be an important one.
The dollars riding on the Enron cases are estimated to be in the hundreds of millions.
Disturbance in the distressed debt market at large could have huge ramifications not just for investors, but for companies struggling to stay afloat.
Free trading in debt means liquidity for troubled companies, and the ability to find financial backers with an appetite for risk that will let them continue in operation.
Enron says the claims-buyers it sued are experienced distressed debt traders aware that when they buy the debt of bankrupt companies, they are taking on many types of risk.
Gonzalez's ruling said they aren't entitled to defend on the basis that they bought debt in good faith, long before Enron sued the originating banks.
Investors who were sued include Bear Stearns & Co., Springfield Associates and Strategic Value Master Fund.
Banks that moved to intervene include Citibank, Barclays Bank, Merrill Lynch & Co., Credit Suisse First Boston and Fleet-Boston Financial Corp.
Enron said there was no need for an immediate appeal because settlement or decisions of the lawsuits against banks that originated the debt could end the litigation against the claims buyers.
However, Scheindlin said 'it is precisely the risk' that Gonzalez's rulings might not otherwise be reviewed that makes it important for the federal district court to take up the question now.
An estimated $300 billion in bankruptcy claims are traded each year, passing from original holders to sophisticated firms that count on being able to collect the debt.
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