Claim Transfer Agreements
Overview and Considerations for Crypto and Online Marketplaces
By Sam Ashuraey
The bankruptcies of crypto exchanges FTX, Celsius, BlockFi and others have led to millions of account holders becoming involuntary creditors. Many of these creditors have sold – or are considering selling – their bankruptcy claims rather than waiting for distributions through the bankruptcy cases. A claim sale is primarily governed by a claim transfer agreement between the buyer and seller. The main purpose of this agreement, in addition to executing the sale, is to allocate future risk between the parties.
This article provides an overview of bankruptcy claim transfer agreements, focusing on provisions buyers and sellers of unsecured claims scrutinize most closely. Special note will be made of customer claims in the crypto exchanges that have filed for bankruptcy, as well as differences when transacting through an online marketplace that facilitates claims transfers.
I. Background: Claims Transfer Process
1. Claim Transfer Documentation
Most often, a buyer and seller will choose to document the transfer of a claim in either one or two steps. The parties may simply negotiate the main claim transfer agreement. Other times, typically in larger or more complicated transactions, parties will first agree on a trade confirmation (or term sheet) that memorializes the main terms of their agreement before negotiating the full transfer agreement. The ideal trade confirmation only includes certain non-negotiable terms both parties agree to up-front. It also only binds parties to the extent they wish to be bound, as there are multiple terms yet to be negotiated that could result in the parties reaching an impasse.
When trading on an online marketplace, parties may be given the opportunity to execute a trade based on the assumption (or explicit agreement) that there will be little or no variation from “form” agreements. The marketplace may provide buyers and sellers with standard trade confirmation and transfer agreements to review ahead of executing a trade. When these forms are used, this can significantly cut down on the time and expense it takes for parties to finalize the trade. Nevertheless, the trade is not complete until the actual agreement is signed, and sellers in particular should be aware that some buyers may have standard provisions they will insist on including in all transfer agreements.
Whether executing a trade in one or two documents, entering into a formal agreement minimizes the risk of costly litigation down the road, and, more importantly, that a court can subsequently unwind the transaction altogether.
2. Main Types of Agreements: Recourse vs. Non-Recourse
Other than ensuring that the claim transfer is legally effective, the main objective of a claims transfer agreement is to allocate risk. This risk may be specific to the claim, such as whether it is subject to preference risk or an objection by the debtor, or to the broader case, such as when a plan will go effective or the percentage recovery general unsecured claims will receive. How parties generally choose to address these eventualities will determine the overall type of agreement the parties enter into.
Most agreements can be categorized as either recourse or non-recourse. In a recourse trade, also known as a “put back trade,” the seller agrees to repurchase the claim if certain events occur (typically defined as the “Impairment” of the claim). These events often include the disallowance, subordination or other impairment of the claim, an objection to the claim being filed or any of the seller’s representations proving to be untrue. The transfer agreement may also contain a broader catch-all that requires that the claim receive “no less favorable” treatment that other similar claims. In a non-recourse trade, the seller only agrees that the buyer will have remedies in limited circumstances, such as the seller having made a misrepresentation regarding the claim (either objectively or only if it was untrue to the seller’s knowledge). Recourse and non-recourse agreements reflect different amount of risk, which will in turn be reflected in the ultimate price.
II. Claims Transfer Agreement: Key Provisions
1. Description of the Transferred Claim and Associated Rights
The claim transfer agreement will describe the “Claim” being transferred and the associated rights that are being assigned to the buyer. Accurately describing the claim is critical for several reasons, including that various components of a claim may be priced differently. Furthermore, sellers may only be prepared to make representations and warranties regarding certain parts of the claim.
For example, the agreement may distinguish between the scheduled amount of the claim (i.e., the amount the debtor has conceded it owes) and the amount the creditor asserts. Similarly, the description may make clear the part of the claim that will (or may) be entitled to priority under the Bankruptcy Code over general unsecured claims. In crypto cases, claims sellers may have multiple accounts with the same exchange, such as “custody” and “Earn” accounts, that may receive different recoveries, and will therefore also be distinguished.
A typical agreement provides that all rights associated with the underlying claim are also being assigned to the buyer, including
- to receive all future distributions (along with an obligation that the seller send future distributions to the buyer),
- to vote on behalf of the claim,
- to bring causes of action arising out of the claim, and
- related substitution and power of attorney as it relates to the claim.
In some circumstances, such as when a seller is selling a percentage of its claim, a seller may only assign some of the rights related to the claim, and the parties’ post-sale rights and obligations (discussed below) will be carefully drafted. Similarly, if a seller wishes to retain certain contingent rights arising out of the claim, such as the right to bring a tort action, that should be clearly excluded from the description of the claim.
2. Pricing and Payment Mechanism
The price paid for the claim is typically expressed as a percentage multiplied by the amount of the claim. If the claim can be divided into multiple parts (e.g., scheduled and asserted), the percentage may be different for each part of the claim.
Parties will also agree to when and how the seller is paid. On a trading platform, the buyer may have already agreed to standard terms required by the platform, including when it must pay the seller. This significantly reduces the risk associated with payment and removes the need to negotiate payment timing. Furthermore, a platform may offer to facilitate a situation in which a seller wishes to receive payment in crypto but the buyer only provides payment in fiat.
3. Representations and Warranties
A claims transfer agreement will include several representations by the seller regarding the claim, which can be heavily negotiated and depend on the type(s) of claim being sold. Some notable representations that are often included are the following:
- the claim is valid, liquidated, enforceable, non-contingent and/or undisputed;
- the seller owns the claim free and clear of any liens or other encumbrances;
- the seller has provided the seller with all relevant documentation regarding the claim; and
- the seller has never been an insider of the debtor.
Transfer agreements may also includes representations by the buyer. These are typically far more limited than the seller’s representations, such as the buyer’s authority to enter into the agreement and compliance with applicable law.
4. Post-Sale Rights and Obligations / Preference Risk
Many agreements provide for ongoing rights and obligations after the sale has closed. Most notably, as discussed above, in a recourse trade the buyer will have the right to sell the claim back to the purchaser if certain events occur.
The buyer and seller may also agree to other continuing obligations. For example, the parties’ rights in the event of an objection by the debtor is often address. The seller may negotiate a provision that gives it the right to resolve any objection before the buyer’s rights against the seller are triggered. In a recourse trade, the agreement may also provide that only that portion of the claim that is objected to (or otherwise impaired) may be sold back to the seller. If the buyer responds to the objection, the agreement may require some level of responsiveness from the seller in connection with its response. In some circumstances, including when the seller retains some rights or a percentage of its entire claim, the parties may negotiate a form of a power sharing after the sale and/or a “right of first refusal” if the seller decides to sell the remaining rights or amounts of its claim.
One issue that is often central to the parties’ post sale rights and obligations is how to address the seller’s “preference risk”: the risk the debtor asserts an action to claw back amounts transferred to a creditor in the 90 days before the bankruptcy filing (or one year in the case of insiders). If the seller is the recipient of a preferential transfer that has not been resolved, the debtor may seek to disallow the seller’s claim under section 502(d) of the Bankruptcy Code if and until the preference is paid. Moreover, a debtor may also disallow a claim transferred to the buyer because the seller remains liable for the preference. The parties often agree that such disallowance (or attempt to disallow) will trigger the buyer’s put-back right in a recourse trade and/or constitute a breach of the seller’s representations.
However, in crypto claims trading, it has become common for buyers to exclude the seller’s preference risk from the seller’s put-back or other remedies. Moreover, the agreement may also provide that the buyer will agree to defend against any preference actions against the seller and assume any resulting liability. This allows sellers to achieve a clean break from the bankruptcy. This is a highly desirable outcome for account holders who became involuntary creditors in the crytpo exchange bankruptcies – in some cases as a result of fraud – and for whom preference actions are only salt on the wound.
5. Underlying Documentation
Buyers will almost always require the seller to provide all documents underlying the claim, along with a representation that the seller has provided all such documentation in its possession. The buyer’s due diligence of these documents will be central to the terms of the agreement it is prepared to enter into, or if it wants to proceed with the transfer at all. On a trading platform, sellers will provide the key documents when they list their claim and buyers will have an opportunity to review the documents before making an offer. This makes it far more likely that the trade will close since buyers are unlikely to encounter any surprises in the course of their due diligence.
6. Notice of Claims Transfer
After the parties have executed the trade, a notice of claim transfer may need to be filed with the bankruptcy court (the transfer agreements themselves are almost never filed publicly and are subject to confidentiality). This is necessary under Bankruptcy Rule 3001(e) if a proof of claim has been filed, but parties may choose to file a notice regardless. The agreement often specifies which party will file the notice. When transacting on a marketplace, the marketplace itself may file the notice, removing the need for the parties to ensure compliance with this Bankruptcy Rule is addressed in the agreement.
Online bankruptcy claim marketplaces have the potential to streamline and minimize legal and due diligence costs associated with claims trading. This has become especially valuable in light of the crypto bankruptcies, which have resulted in millions of creditors with claims that are substantially similar. This has already allowed for a far greater amount of standardization than has historically been possible, as well as the development of certain “market” terms and prices. Nevertheless, the nature of bankruptcy claims makes it impossible to completely standardize claims transfer agreements, and buyers and sellers will want to ensure that the terms of the agreement accomplish their individual goals and are in line with their appetites for risk.
 If trades are not formally documented, courts have found that the trade was not binding under applicable nonbankruptcy law. In re Westinghouse Elec. Co. LLC, 588 B.R. 347 (Bankr. S.D.N.Y. 2018).
 Two less common forms of trades are as-is and escrowed trades. As-is trades involve minimal representations by the seller and remedies for the buyer, usually for a lower price than would otherwise be available. Escrowed trades usually achieve the opposite objective and minimal risk to the buyer, with the purchase price being held in escrow and released to the seller only when the claim is allowed or some other future event occurs.
 E.g., In re KB Toys Inc., 736 F.3d 247 (3d Cir. 2013); In re Firestar Diamond, Inc., 627 B.R. 804 (S.D.N.Y. 2021).
This publication is intended for general informational purposes only. It does not constitute legal advice, is not meant to be a substitute for advice of counsel, and its distribution does not create an attorney-client relationship. While every effort has been made to ensure the accurateness of this publication, its contents is not guaranteed to be correct, complete or up-to-date, and may contain inaccuracies and/or typographical errors. No party, including Ashuraey Law PLLC or the author, assumes any liability in connection with this publication. Any opinions contained herein do not necessarily reflect the opinions of Ashuraey Law PLLC or any of its clients or employees. Please feel free out to reach to Sam Ashuraey if you have any questions about this publication. The contents of this publication may not be quoted or attributed without the express consent of Ashuraey Law PLLC.