more cost-effective way to enforce this policy rather than limiting its use only after a fully adjudicated adversary proceeding.
Competing interpretations of the “plain language” of Section 502(d) backed up by rival policy considerations have led to confusion in the application of these two approaches. While not addressing the precise circuit split at issue between the Fifth and the Eighth Circuits on the one hand and the Ninth and Sixth Circuits on the other hand, the Third Circuit, in In re KB Toys Inc., 736 F.3d 247, 252 (3d Cir. 2013), cited to both the policy considerations of “equality of distribution of estate assets” and “coercing compliance with judicial orders” to support its conclusion that claims subject to disallowance under Section 502(d) in the hands of the original claimant remain subject to disallowance in the hands of a subsequent claimant. The Third Circuit reasoned that “[b]ecause the statute focuses on claims—and not claimants—claims that are disallowable under Section 502(d) must be disallowed no matter who holds them.” Id. Interestingly, while the Third Circuit did not stake out its position on the meaning of “avoidable,” “recoverable,” or “liable” in Section 502(d) or on the preeminent policy behind the use of these words, it did note that this statutory section’s legislative history reflects it was “derived from” Section 57(g) of the Bankruptcy Act of 1898. Section 57(g) provided:
The claims of creditors who have received or acquired preferences, liens, conveyances, transfers, assignments, or encumbrances, void or voidable under this title, shall not be allowed unless such creditors shall surrender such preferences, liens, conveyances, transfers, assignments or encumbrances. (Emphasis added.)
The Third Circuit then stated that “the case law interpreting Section 57(g) is consistent with our interpretation of Section 502(d).” Id. at 253. While focused on the issue of the claim remaining subject to disallowance in the hands of a subsequent holder, this reference to the continued applicability of prior case law under Section 57(g) perhaps previews the adoption by this Circuit of the reasoning of cases decided under Section 57(g) of the Bankruptcy Act that appear to support the defensive use of Section 502(d) even when an affirmative avoidance action is time barred.
In sum, if Congress said what it meant and meant what it said in Section 502(d), circuit courts are still trying to figure out exactly what was either said or meant. Even peeling back the words as skin to expose the underlying policy objective and context of the statute hasn’t led to any consensus to date. J. Homes v. D. Seuss remains a draw!
23