Applying Federal Securities Law to Chapter 11 Claim Conversions

Many view bankruptcy as the death of an investment, but to a keen-eyed vulture investor it is the birth of opportunity. A bankruptcy filing is also among creditors' worst fears. The value of their debt and the timing and amount of repayment is uncertain. Some creditors, especially those unfamiliar with bankruptcy, are willing to sell their claims against the bankrupt debtor for pennies on the dollar. Selling claims in bankruptcy is not new; neither are the accompanying problems. When it comes to regulating claims, scholars differ on how bankruptcy claims ought to be treated. Advocates of the current system argue that creditors benefit from the ability to liquidate their claims and that current Bankruptcy laws provide adequate remedies to prevent abuse. This article discusses the application of securities laws to converted bankruptcy claims. Bankruptcy Rule 3001(e) left an opening for non-bankruptcy law to be applied to claims transfers.