                                      PRECEDENTIAL

       UNITED STATES COURT OF APPEALS
            FOR THE THIRD CIRCUIT
                 _____________

                     No. 13-1197
                    _____________

              In re: KB TOYS INC., et al.,
                                       Debtors



   ASM CAPITAL, L.P.; and ASM CAPITAL II, LLP,

                                    Appellants
                ____________________

     On Appeal from the United States District Court
               for the District of Delaware
                  (D.C. No. 12-cv-00716)
        District Judge: Hon. Richard G. Andrews
                 ____________________

              Argued: September 24, 2013

Before: CHAGARES, VANASKIE, and SHWARTZ, Circuit
                    Judges.

              (Filed: November 15, 2013)
Matthew B. McGuire, Esq. [ARGUED]
Landis, Rath & Cobb
919 Market Street
Suite 1800, P.O. Box 2087
Wilmington, DE 19899

      Counsel for Appellant

Susan F. Balaschak, Esq. [ARGUED]
Akerman Senterfitt LLP
666 Fifth Avenue
20th Floor
New York, NY 10103

John H. Knight, Esq.
Andrew C. Irgens, Esq.
Richards, Layton & Finger, P.A.
One Rodney Square
920 North King Street
Wilmington, DE 19801

      Counsel for Appellee
                 ____________________

               OPINION OF THE COURT
                ____________________


SHWARTZ, Circuit Judge


                              I.




                              2
       This appeal arises out of the Chapter 11 liquidation of
KB Toys Inc. and affiliated entities (the “Debtors”). Pursuant
to 11 U.S.C. § 502(d), the Residual Trustee of the KBTI
Trust 1 sought to disallow certain trade claims that ASM
Capital, L.P., and ASM Capital II, LLP, (together, “ASM”)
obtained from some of the creditors. Under § 502(d), a
bankruptcy claim can be disallowed if a claimant receives
property that is avoidable or recoverable by the bankruptcy
estate. See 11 U.S.C. § 502(d). The issue here is whether a
trade claim that is subject to disallowance under § 502(d) in
the hands of the original claimant is similarly disallowable in
the hands of a subsequent transferee. For the reasons set
forth herein, the answer is yes and thus, we will affirm.

                              II.

                               A.
        Creditors holding claims against an entity who has
filed a Chapter 11 petition sometimes face a risky and lengthy
bankruptcy process. To avoid this risk and expense, a
creditor may look to sell its claim, a practice permitted under
the bankruptcy rules. In re Kreisler, 546 F.3d 863, 864 (7th
Cir. 2008) (citing Fed. R. Bankr. P. 3001(e)). By selling its
claim, a risk averse creditor can opt out of the bankruptcy
process and obtain an immediate, albeit discounted, payment
on the debt it is owed. See id. Claim purchasers buy these
claims and hope to receive a distribution from the debtor’s
estate in excess of the price paid. See Tally M. Wiener &
Nicholas B. Malito, On the Nature of the Transferred

       1
         The Debtors’ plan of reorganization established the
KBTI Trust. The KBTI Trust is authorized to liquidate and
collect assets for the benefit of creditors.




                              3
Bankruptcy Claim, 12 U. Pa. J. Bus. L. 35, 36 (2009) (“Some
purchasers are simply . . . investing with an eye towards
receiving a distribution on claims in cash or readily liquidated
property in excess of the purchase price.”). 2

        A trade claim is usually transferred via contract. If a
claim is transferred before a proof of claim is filed, Federal
Rule of Bankruptcy Procedure 3001(e)(1) allows a transferee
to file the proof of claim. See Fed. R. Bankr. P. 3001(e)(1).
If a claim is transferred after a proof of claim is filed, Rule
3001(e)(2) requires a claims transferee to file an “evidence of
transfer” with the bankruptcy court. See Fed. R. Bankr. P.
3001(e)(2).

                              B. 3

      The Debtors filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code on January 14, 2004 (the

       2
          Other claims purchasers attempt to make a profit in
more sophisticated ways. For example, in reorganizations,
some purchasers seek to purchase claims from a particular
class of claims with a view toward receiving equity interests
in the reorganized debtor. See Michelle M. Harner, Trends in
Distressed Debt Investing: An Empirical Study of Investors’
Objectives, 16 Am. Bankr. Inst. L. Rev. 69, 82 (2008)
(reporting that many claims purchasers invest in bankruptcy
cases to pursue an exchange of debt for equity). This was
not ASM’s goal.
        3
          ASM does not challenge any of the factual findings
made by either the Bankruptcy Court or the District Court.
ASM Br. at 13 (“[O]nly the legal conclusions—and not any
factual findings—of the courts below are challenged.”).




                               4
“Petition Date”) to liquidate all of their assets. On March 15,
2004, as required by 11 U.S.C. § 521(a)(1)(B)(iii), each
Debtor filed a Statement of Financial Affairs (“SOFA”).
Each SOFA required the disclosure of all payments made
within the 90 days immediately preceding the Petition Date.
Payments made during this 90-day time period are potentially
vulnerable to attack as avoidable preferences. See 11 U.S.C.
§ 547(b)(4)(A).

        Between April 7, 2004 and May 22, 2007, ASM,
which participates in the sale and purchase of bankruptcy
claims nationwide, purchased the nine claims at issue in this
appeal (the “Claims”) via Assignment Agreements. The
Claims were originally held by various trade claimants (the
“Original Claimants”) to whom the Debtors owed money.
The Assignment Agreements underlying the transfers of four
of the Claims contained a generic indemnification clause.
Five did not. Each Assignment Agreement contained specific
restitution provisions that dealt with risks particular to
bankruptcy. These provisions shift the risk of disallowance
back to the Original Claimant by requiring the Original
Claimant to pay restitution to ASM if the Claim is
disallowed. 4

      4
         The restitution provisions took one of two forms. In
one set of agreements, the restitution provisions provided:
“[i]n the event . . . the Claim . . . is avoided, disallowed,
expunged, reduced or is otherwise subordinated . . . in whole
or in part, [the Original Claimant] . . . agrees to make
immediate Restitution.” App. 132, 135, 270, 273. In the
other set of agreements, the restitution provisions provided:
“[the Original Claimant] agrees to make to [ASM] immediate
proportional restitution or repayment of the above Purchase




                              5
       Each Original Claimant was listed on a SOFA as
receiving a payment within 90 days of the Petition Date. The
Trustee brought preference actions 5 against the Original
Claimants, eventually obtaining a judgment in each case. The
judgments against the Original Claimants were uncollectable
because the Original Claimants all went out of business.
ASM purchased eight of the Claims before the Trustee
commenced the preference actions and purchased one after
the Trustee obtained a judgment.

        On July 31, 2009, the Trustee filed an objection with
the Bankruptcy Court seeking the disallowance of the Claims
pursuant to § 502(d). The Trustee did not allege that ASM
itself received an avoidable transfer. Instead, the Trustee
contended that the Claims are disallowable under § 502(d)


Price to the extent the Claim is . . . avoided, disallowed,
expunged, reduced or subordinated for any reason whatsoever
in whole or in part . . . .” App. 117, 120, 123, 126, 129.
        5
          To succeed in a preference action, a trustee must
show that a transfer: (1) was to or for the benefit of a creditor;
(2) was for or on account of an antecedent debt owed by the
debtor before such transfer was made; (3) was made while the
debtor was insolvent; (4) was on or within 90 days before the
filing of the bankruptcy petition; and (5) enabled the creditor
to receive more than it would have in a Chapter 7 liquidation.
11 U.S.C. § 547(b). Preference actions, among other things,
“facilitate the prime bankruptcy policy of equality of
distribution among creditors of the debtor. Any creditor that
received a greater payment than others of its class may be
required to disgorge the payment so that all may share
equally.” 5 Collier on Bankruptcy ¶ 547.01 (16th ed. 2010).




                                6
because each Original Claimant received a preference before
transferring its Claim to ASM.

        After considering the language of § 502(d) and its
legislative history, the Bankruptcy Court disallowed the
Claims, concluding that a claims purchaser holding a trade
claim is subject to the same § 502(d) challenge as the original
claimant. Put differently, the Bankruptcy Court held that,
under § 502(d), “[d]isabilities attach to and travel with the
claim.” App. 76. The Bankruptcy Court also observed that
ASM is a sophisticated entity, well aware of the bankruptcy
process, who had access to both the SOFA and the Original
Claimants, and thus, was on “constructive notice” of the
potential preference actions and could have discovered the
potential for disallowance under § 502(d) with “very little due
diligence.” App. 88. Accordingly, the Bankruptcy Court
held that ASM was not entitled to protection as a “good faith”
purchaser.

      ASM appealed the decision to the District Court,
which affirmed the Bankruptcy Court. The District Court
noted that it believed the plain language of § 502(d) was
ambiguous but it otherwise adopted the reasoning of the
Bankruptcy Court. ASM appealed. 6

       6
         We exercise plenary review of a decision of a district
court sitting as an appellate court in a bankruptcy proceeding.
In re Mintze, 434 F.3d 222, 227 (3d Cir. 2006). We review
the Bankruptcy Court’s findings of fact under the clearly
erroneous standard, its conclusions of law under a de novo
standard, and its exercises of discretion for abuses thereof.
Id. at 227-28. The Bankruptcy Court had jurisdiction
pursuant to 28 U.S.C. §§ 157 and 1334. The District Court




                               7
                              III.

                               A.

       Section 502(d) of the Bankruptcy Code provides:
       Notwithstanding subsections (a) and (b) of this
       section, the court shall disallow any claim of
       any entity from which property is recoverable
       under section 542, 543, 550, or 553 of this title
       or that is a transferee of a transfer avoidable
       under section 522(f), 522(h), 544, 545, 547,
       548, 549, or 724(a) of this title, unless such
       entity or transferee has paid the amount, or
       turned over any such property, for which such
       entity or transferee is liable under section
       522(i), 542, 543, 550, or 553 of this title.

11 U.S.C. § 502(d) (emphasis added). The issue in this case,
which only concerns trade claims, turns on the interpretation
of the phrase “any claim of any entity.”

        The Court’s analysis begins with the text of the statute.
If the text is clear and unambiguous, this Court must simply
apply it. Roth v. Norfalco L.L.C., 651 F.3d 367, 379 (3d Cir.
2011) (“When the meaning of statutory text is plain, our
inquiry is at an end.”). Yet courts must be mindful,
particularly when examining the Bankruptcy Code, that
statutory interpretation is “a holistic endeavor.” Official


had appellate jurisdiction under 28 U.S.C. §§ 158(a)(1) and
1334. We have appellate jurisdiction pursuant to 28 U.S.C.
§§ 158(d) and 1291.




                               8
Comm. of Unsecured Creditors of Cybergenics Corp. ex rel.
Cybergenics Corp. v. Chinery, 330 F.3d 548, 559 (3d Cir.
2003) (en banc) (quotation and citation omitted).
Consequently, courts “must not be guided by a single
sentence or member of a sentence, but look to the provisions
of the whole law, and to its object and policy.” Id. (quotation
and citation omitted). If the statutory text is ambiguous, a
court may look to the legislative history. Blum v. Stenson,
465 U.S. 886, 896 (1984).

        The language of § 502(d) states that “any claim of any
entity” who received an avoidable transfer 7 shall be
disallowed. Thus, the statute operates to render a category of
claims disallowable—those that belonged to an entity who
had received an avoidable transfer. Further, the statute
provides that such claims cannot be allowed until the entity
who received the avoidable transfer, or the transferee, returns
it to the estate. 11 U.S.C. § 502(d) (stating that the trustee
shall disallow such claims “unless such entity or transferee
has paid the amount, or turned over any such property, for
which such entity or transferee is liable . . .”). Accordingly,
“any claim” falling into this category of claims is
disallowable until the avoidable transfer is returned. Because
the statute focuses on claims—and not claimants—claims that
are disallowable under § 502(d) must be disallowed no matter
who holds them.


       7
        A transfer of property can be avoided under one of the
various avoidance sections. For example, a trustee or a
debtor in possession may avoid preferential transfers under 11
U.S.C. § 547 and fraudulent transfers under 11 U.S.C. § 548.




                              9
       To hold otherwise would contravene the aims of §
502(d), the first of which is to ensure equality of distribution
of estate assets. Enron Corp. v. Springfield Assocs., L.L.C.
(In re Enron Corp.) (Enron II), 379 B.R. 425, 434 (S.D.N.Y.
2007); see also Cybergenics, 330 F.3d at 559 (noting that
courts must look to a law’s “object and policy” when
interpreting the law). If a transferred claim was protected
from disallowance, an original claimant who received an
avoidable transfer would have an incentive to sell its claim
and “wash” the claim of any disability. After all, if the
original claimant did not transfer its claim, the claim would
be disallowed pursuant to § 502(d). If the original claimant
could transfer the claim for value to a transferee, the original
claimant would receive value for a claim that would
otherwise be disallowed and the transferee, who would
receive the claim “washed” of its disability, could then share
in the distribution of estate assets. In short, the original
claimant would have an incentive to sell its claim—so it
could receive some value for an otherwise valueless claim—
and the transferee would have an incentive to buy the claim—
because once the claim is in its hands, the claim is eligible to
receive a distribution.

       Allowing such a result would negatively impact the
other creditors in two ways. First, because the original
claimant has not returned the avoidable transfer, the estate has
less money and the other creditors would receive smaller
amounts from the estate because it would not include the
unreturned preference payment or conveyance. Second, the
estate would pay on a claim that would have been otherwise
disallowed.




                              10
        This result would also undermine the second of §
502(d)’s aims, coercing compliance with judicial orders.
Enron II, 379 B.R. at 434. Section 502(d) can be used to
compel an original claimant to comply with a judgment and
return the preferential payment as a condition of collecting on
its claim. Failure to satisfy this condition provides a basis for
the trustee to ask the bankruptcy court to disallow the claim.
After the claim is sold, the original claimant no longer has a
claim that the trustee can leverage to obtain the disgorgement
of the preference payment. To allow the sale to wash the
claim entirely of the cloud would deprive the trustee of one of
the tools the Bankruptcy Code gives trustees to collect
assets—asking the bankruptcy court to disallow problematic
claims. Accordingly, interpreting § 502(d) to permit this type
of “claim washing” would undermine the twin aims of §
502(d). 8 For all of these reasons, the statute’s language is

       8
         At oral argument before our Court and the District
Court, an important policy consideration was raised, which
further supports this interpretation: who should bear the risk
that avoidable transfers are not returned? The answer must be
the claim purchaser for two reasons. First, claim purchasers
voluntarily choose to take part in the bankruptcy process.
Claim purchasers, who are typically sophisticated entities,
“are aware of, or should be aware of, the risks and
uncertainties” in the bankruptcy process. Enron Corp. v.
Avenue Special Situations Fund II, LP (In re Enron Corp.)
(Enron I), 340 B.R. 180, 202 (Bankr. S.D.N.Y. 2006), vacated
and remanded by Enron II, 379 B.R. 425, 434 (S.D.N.Y.
2007). Because they choose to voluntarily take part in this
risky process, it is only fair to require them to bear the risk
that the original claimant will not return an avoidable transfer.
Second, claim purchasers are in a position to mitigate




                               11
properly interpreted to mean that the potential disallowance
runs with the claim.

       Moreover, the legislative history supports this
conclusion. The legislative history provides that § 502(d) is
“derived from present law,” which, as the Bankruptcy Court
noted, was section 57(g) of the Bankruptcy Act of 1898. 9
H.R. Rep. 95-595, at 354 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6310. Section 57(g) provided:



disallowance risk, whereas the other creditors are not. A
claim purchaser can perform due diligence on the original
claimant and estimate the risk of disallowance. The claim
purchaser can then account for this risk when determining the
price to pay for a claim. Additionally, a claim purchaser may
shift the risk of disallowance back to the original claimant
through an indemnity clause in the transfer agreement.
        9
          Even if the legislative history were not so clear, we
would still consider section 57(g) because courts are
“reluctant to accept arguments that would interpret the
[Bankruptcy] Code, however vague the particular language
under consideration might be, to effect a major change in pre-
Code practice that is not the subject of at least some
discussion in the legislative history.” Dewsnup v. Timm, 502
U.S. 410, 419 (1992). Indeed, other courts have recognized
that section 57(g) is relevant to the interpretation of § 502(d).
See In re LaRoche Indus., Inc., 284 B.R. 406, 409 (Bankr. D.
Del. 2002) (examining a case interpreting section 57(g) when
faced with an issue arising under § 502(d)); In re America’s
Shopping Channel, Inc., 110 B.R. 5, 7-8 (Bankr. S.D. Cal.
1990) (same); In re Mid Atl. Fund, Inc., 60 B.R. 604, 610
(Bankr. S.D.N.Y. 1986) (same).




                               12
       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.

Katchen v. Landy, 382 U.S. 323, 473 n.5 (1966) (quoting
section 57(g)).

       In Swarts v. Siegel, 117 F. 13 (8th Cir. 1902), the
Court of Appeals for the Eighth Circuit interpreted section
57(g) as it applied to a claimant who purchased promissory
notes from a bank that received a preference. 117 F. at 14.
The Swarts court held that the “[t]he disqualification of a
claim for allowance created by a preference inheres in and
follows every part of the claim, whether retained by the
original creditor or transferred to another, until the preference
is surrendered.” Id. at 15. Thus, the case law interpreting
section 57(g) is consistent with our interpretation of §
502(d). 10

       10
          In an attempt to distinguish Swarts, ASM cites to In
re Wood & Locker, Inc., 1988 U.S. Dist. LEXIS 19501 (W.D.
Tex. June 17, 1988). The Wood & Locker court held that
Swarts was only applicable to cases where the original
claimant or a transferee received “provable and traceable
direct benefits by the payment of the preferences.” Id. at *8.
ASM contends that since it did not receive a provable and
traceable direct benefit from the preference payment, it
should not be saddled with paying the preference. Appellant
Br. at 22. Neither ASM nor the Wood & Locker court,




                               13
       Finally, because ASM included provisions in the
Assignment Agreements that directly deal with risks
particular to bankruptcy, it is evident that ASM was aware
that disallowance could potentially attach to, and travel with,
the Claims. Thus, ASM’s conduct when negotiating and
entering into the Assignment Agreements is consistent with
our interpretation of § 502(d).

       In short, because § 502(d) permits the disallowance of
a claim that was originally owned by a person or entity who
received a voidable preference that remains unreturned, the
cloud on the claim continues until the preference payment is
returned, regardless of whether the person or entity holding
the claim received the preference payment. 11


however, explain why § 502(d) requires proof of a traceable
direct benefit to the entity who possesses the claim. Instead,
they both make this assertion without analysis of the statutory
text. Once the text is analyzed, it is clear that the plain
language of § 502(d) does not require proof of a benefit from
the avoidable transfer. Thus, ASM’s lack of a benefit from
the preferences is irrelevant to the question before the Court.
        11
           In addition to the Bankruptcy Court in this case, two
other bankruptcy courts have reached the same conclusion:
Enron I, 340 B.R. at 199 (holding that a claim in the hands of
a transferee “should be disallowed to the same extent that
such claim would be subject to disallowance in the hands of
the transferor”), and In re Metiom, Inc., 301 B.R. 634, 642-43
(Bankr. S.D.N.Y. 2003) (holding that because § 502(d)
“disallows the claim . . . [t]he claim and the defense to the
claim under [§] 502(d) cannot be altered by the claimant’s
subsequent assignment of the claim to another entity . . . that
has not received an avoidable transfer.”).




                              14
        Two district courts have reached opposite conclusions.
In Enron II, the District Court viewed the language of §
502(d) as focusing “on the claimant as opposed to the claim”
and this led it to “conclu[de] that disallowance is a personal
disability of a claimant, not an attribute of the claim.” 379
B.R. at 443. It then proceeded to rely on state law to
determine the impact of this “personal disability” and
concluded that whether a claim suffered a disability depended
upon how it was conveyed to the transferee. Specifically, the
District Court held that disallowance under § 502(d) is a
personal disability of particular claimants and not an attribute
of a claim, unless the transferee took the claim by assignment,
as opposed to by sale. Enron II, 379 B.R. at 439-45. The
District Court stated that an assignee “stands in the shoes of
the assignor” and therefore takes the claim with “whatever
limitations it had in the hands of the assignor,” id. at 435-36
(citations and internal quotations omitted), but a purchaser of
the same claim is not subject to any personal disabilities of
the transferor. Id. at 436.
        Enron II’s reliance on this supposed state law
distinction may also be problematic for several reasons. First,
the state law on which it relies does not provide a distinction
between assignments and sales. Second, resort to state law in
a bankruptcy case must be done with care. See Int’l Shoe Co.
v. Pinkus, 278 U.S. 261, 265 (1929) (“The power of Congress
to establish uniform laws on the subject of bankruptcies
throughout the United States is unrestricted and paramount.”);
In re Boston Reg’l Med. Ctr., Inc., 291 F.3d 111, 126 (1st Cir.
2002) (observing that if a state law dictated a result
inconsistent with federal bankruptcy law, then it would be
“preempted”).




                              15
                             B.
       ASM also argues that the claims should not be
disallowed because it purchased its claims in “good faith” and
is therefore entitled to the protections of a good faith
purchaser under 11 U.S.C. § 550(b).            Section 550(b)
provides:

       The trustee may not recover under section (a)(2)
       of this section from--
       (1) a transferee that takes for value, including
       satisfaction or securing of a present or
       antecedent debt, in good faith, and without
       knowledge of the voidability of the transfer
       avoided; or
       (2) any immediate or mediate good faith
       transferee of such transferee.

11 U.S.C. § 550(b). An application of the plain language of
the statue to the facts of this case shows that ASM is not
entitled to a defense under § 550(b).

       First, § 550(b) is not applicable to ASM. Section
550(b) protects a good faith transferee who purchases
property of the estate that is avoidable under the various
avoidance sections. 11 U.S.C. § 550(a), (b); see Wasserman
v. Bressman, 327 F.3d 229, 235 (3d Cir. 2003). ASM did not
purchase property of the estate. ASM purchased claims
against the Debtors’ estates. A claim against an estate is not
property of that estate. Enron I, 340 B.R. at 206 (“[A] claim
as defined under [§] 101(5), is not, and has never been,
considered property of the estate (it is being asserted against)
under [§] 541 of the Bankruptcy Code.”). Thus, on its face, §
550(b) is inapplicable to ASM.




                              16
       Second, there is no reason or precedent to extend the
“principles” of § 550(b) to protect ASM. Claim purchasers
are entities who knowingly and voluntarily enter the
bankruptcy process. Thus, a purchaser should know that it is
taking on the risks and uncertainties attendant to the
bankruptcy process. Indeed, if the bankruptcy process were
not risky and uncertain, claimants might be less likely to sell
their claims to a claim purchaser. Put differently, a claim
purchaser’s opportunity to profit is partly created by the risks
inherent in bankruptcy. Disallowance of a claim pursuant to
§ 502(d) is among these risks.

        Relatedly, while ASM claims it lacked knowledge of
the avoidablity of the transfers, ASM could have protected
itself from the risk of disallowance by reviewing the Debtors’
publicly available SOFAs, which would have put it on notice
of the Claims’ vulnerability to preference attacks, and
performing due diligence on the Original Claimants. At
bottom, ASM voluntarily exposed itself to a risk that it had
the ability to investigate before acquiring the claims.
Conscious of this risk, it included indemnity and restitution
provisions in the Assignment Agreements. ASM is in a better
position than the estate to protect itself against the Original
Claimants going out of business by factoring this possibility
in to the price of the claim. Accordingly, in this case,
extending § 550(b)’s “principles” beyond the plain statutory
language is inappropriate.

                              IV.

       For all of these reasons, we will affirm.




                              17
