Acquiring claims in bankruptcy proceedings has grown into a well-established secondary market, attracting private lenders and investment firms seeking discounted debt positions. While the potential for profit is real, the legal complexities surrounding these transactions can turn a seemingly straightforward purchase into a costly dispute. Understanding the risks before committing capital is essential for any lender considering this strategy in 2025.
Why Bankruptcy Claims Trading Exists
Creditors holding claims against a bankrupt debtor often face years of uncertainty before receiving any distribution. For many, the prospect of immediate liquidity outweighs the possibility of a full recovery down the road. This creates an active marketplace where claim holders sell their positions at a discount, transferring both the potential upside and the inherent risk to the buyer.
For purchasers, the appeal is straightforward: acquire a claim at a fraction of its face value and collect the difference when the bankruptcy estate makes distributions. Some buyers also pursue claims strategically, accumulating enough creditor voting power to influence a debtor’s reorganization plan or block unfavorable terms.
The Due Diligence Imperative
The gap between a profitable claims purchase and a total loss frequently comes down to the quality of pre-acquisition due diligence. Unlike many other asset purchases, buying a bankruptcy claim requires careful examination of several layers of legal documentation and regulatory constraints.
Anti-Assignment Provisions
One of the most common traps for claims buyers involves anti-assignment language embedded in the original loan documents. A court may refuse to recognize a transferred claim if the underlying agreement explicitly prohibits assignment without consent.
The In re Woodbridge Group of Companies, LLC decision illustrates this risk clearly. In that case, the bankruptcy court upheld anti-assignment provisions contained in the original promissory note and sustained the debtor’s objection to a proof of claim filed by the purchaser. The buyer had acquired what it believed was a valid claim, only to find the transfer blocked by contractual language it had failed to identify during its review.
State Law Restrictions on Assignability
Federal bankruptcy law does not exist in a vacuum. State law governs whether certain types of claims can be legally transferred at all. Tort-based claims, for example, are non-assignable under many state statutes regardless of what the parties agree to in a purchase contract.
The In re Caesars Entertainment Operating Co., Inc. litigation demonstrates this principle. There, the court denied claims held by an assignee of the original creditor after the debtor objected. Although the decision turned on arguments related to forfeiture and waiver, the court emphasized that the particular tort-based claims at issue were simply not assignable under applicable state law. No amount of contractual drafting could overcome that statutory prohibition.
Formation of a Valid Purchase Agreement
Even when a claim is legally assignable and free of contractual restrictions, the purchase transaction itself must satisfy basic contract formation requirements. Informal communications and preliminary negotiations do not always create binding obligations.
In In re Westinghouse Electric Co. LLC, the court examined whether a series of email exchanges between buyer and seller constituted an enforceable agreement to transfer previously filed claims. The purported buyer argued that a deal had been struck. The court disagreed, finding that the parties never reached agreement on essential terms such as pricing and transaction conditions. The original claim holder retained its position, and the buyer walked away empty-handed.
Strategic Considerations for Secured Creditors
Private lenders sometimes approach claims purchasing from a different angle, acquiring unsecured claims to strengthen their position within a bankruptcy case. The Ninth Circuit addressed this tactic in In re Fagerdala USA-Lompoc, Inc., holding that a secured creditor may purchase unsecured claims to oppose a debtor’s reorganization plan, provided the secured creditor is acting in good faith and in its own legitimate interest.
This strategy can be particularly valuable when a debtor proposes a plan that would impair a lender’s secured position. By accumulating unsecured claims, a secured creditor may gain sufficient voting power to reject an unfavorable plan or force negotiations toward more equitable terms.
Building a Sound Claims Acquisition Process
Lenders who participate in the claims trading market in 2025 should establish a structured acquisition framework that addresses each of these risk areas:
- Document review protocol: Examine the original loan agreement, promissory note, and any related instruments for anti-assignment provisions, consent requirements, and transfer restrictions before making any offer.
- State law analysis: Determine the governing law for the claim and verify that the specific type of claim is legally assignable in that jurisdiction.
- Contract execution standards: Use a formal purchase and sale agreement that clearly identifies the claim, the purchase price, representations and warranties, and indemnification provisions. Avoid relying on informal email exchanges or verbal agreements.
- Chain of title verification: Confirm that the seller has clear ownership of the claim and authority to transfer it. Review any prior assignments to ensure there are no competing interests.
- Bankruptcy court procedures: Comply with all applicable rules regarding the transfer of claims, including filing requirements under Federal Rule of Bankruptcy Procedure 3001(e).
The Bottom Line for Private Lenders
Purchasing claims in bankruptcy can generate attractive returns, but the legal landscape is unforgiving toward buyers who cut corners on due diligence. Anti-assignment provisions, state law restrictions, and contract formation defects have each proven capable of wiping out an investment entirely. Private lenders who approach claims trading with rigorous documentation review, competent legal counsel, and disciplined transaction practices position themselves to capture the upside while managing the considerable downside risk.
Protect Your Investment with Experienced Legal Counsel
Geraci LLP has extensive experience representing private lenders in bankruptcy proceedings, including claims acquisition, creditor rights enforcement, and reorganization plan negotiations. Our attorneys understand the specific challenges that private lenders face in this space and can help you build a due diligence process that protects your capital. Contact Geraci LLP today at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618 to discuss your bankruptcy claims strategy.
