1. How Distressed Trading Works

A. The Documentation

• US: LSTA Standard Terms - Par vs Distressed. Distressed trades are on a non-recourse basis but with fundamental representations. Settlement can take months.
• UK/EU: LMA Standard Terms for Par and Distressed. Very similar but includes express unwind rights.

B. Key Difference from Par Trading:
On LSTA Distressed docs, the buyer gets recourse against seller if the claim is impaired because:

1. Seller was an Insider / Affiliate of debtor
2. Litigation pending/threatened against seller that could lead to equitable subordination or disallowance
3. Set-off rights against seller
4. Seller engaged in bad acts - e.g., received preferential transfer

This is why distressed disputes explode in bankruptcy.

2. Five Types of Distressed Debt Trading Disputes

Type 1: "Done Means Done" - Oral Trade Binding Disputes
Traders agree on Bloomberg/chat/phone: "Done $10mm at 32". One side later refuses.

Type 2: Impaired Claim / Equitable Subordination
Buyer buys debt, then bankruptcy court disallows or subordinates it because of seller's conduct.

Type 3: Unwind and Failed Settlement
LMA trades include right to unwind if conditions like borrower consent, KYC, or restructuring conditions fail within a long-stop date.

Type 4: Mistaken Payment / Discharge for Value
Agent bank pays lenders by mistake.

Type 5: Legality of Debt Trading Itself
Particularly in India.

3. Landmark Case Laws You Must Know

CASE 1: Bear Stearns Bank Plc v Forum Global Equity Ltd EWHC - The "Available Market" Rule

Facts: Forum verbally agreed to sell $8m distressed debt of a Kazakh bank at 50 to Bear Stearns. Forum then refused to deliver, claiming no binding contract because written LMA confirmation was not signed.[2009]

Held by English Commercial Court: Binding contract WAS formed orally. In distressed markets, key terms (price, amount, borrower) are enough. The market practice of confirming later does not make confirmation a condition precedent.

Principle: Oral distressed debt trades are enforceable. Measure of damages = "available market" rule. If seller fails to deliver, buyer can cover in market and claim difference. This established distressed debt as a market with a determinable price, like shares or commodities.

This was affirmed in Exotix vs. EWHC - LMA Unwind Case you saw in search results.[2017]

Facts: Exotix acted as riskless principal broker in back-to-back LMA distressed trades: Upstream Seller -> Exotix -> Downstream Buyer. Both trades had express unwind clause - if trade does not settle by long-stop date due to borrower non-consent, party can unwind.

Upstream failed. Exotix unwound with downstream. Downstream sued Exotix saying unwind was invalid.

Held: Court upheld unwind. Under LMA Distressed Terms, if settlement condition fails, unwind right is automatic and does not require fault. Riskless principal is protected if it mirrors the terms. This is now the leading English case on LMA unwind mechanics.

CASE 2: Deephaven Distressed Opportunities Trading Ltd v 3V Capital Master Fund Ltd, 600610/08 (NY Sup. Ct. 2012)

Facts: Trade of distressed claims in Sea Containers bankruptcy. Confirmation said "Allowed Claims" subject to assignment agreement. The bankruptcy court later reduced the claim amount. 3V (buyer) refused to settle, arguing it did not get an "allowed" claim.

Held: Judge Schweitzer denied claim for damages. If you trade on a basis of "Allowed Claim" and assignment agreement is still being negotiated, seller bears risk of disallowance. If claim becomes impaired due to seller's prior acts, buyer can claim damages measured by value of what was promised vs what was delivered. Establishes standard for damages in US distressed claims trading.

CASE 3: Enron Corp. v Citibank and Enron Claims Traders - Equitable Subordination Transferred

Facts: This is the trilogy that defines LSTA distressed recourse.

Enron sought to equitably subordinate and disallow Citibank's claims, alleging Citibank aided fraud. Citibank had sold portions of its Enron loan to distressed funds via assignment. Enron argued assignees should also be subordinated because they step into seller's shoes.

In Enron v. Avenue Special Situations Fund II (2005) and Enron v. Springfield Associates (2007), bankruptcy court held:

• Claim disallowance under 502(d) and equitable subordination under 510(c) ARE personal disabilities that do travel with the claim if buyer knew? Actually court split.
  Final rule settled: If seller committed misconduct that would lead to disallowance/equitable subordination, that taint travels to buyer, BUT buyer then has recourse against seller under LSTA distressed terms.

Other related cases: KB Toys (In re KB Toys) and ASM Capital v. Enron (Bankr. S.D.N.Y) - ASM bought claim that was later disallowed due to seller's preference receipt. ASM sued seller for breach of rep. Court said buyer on distressed docs has indemnity.

Principle for Banking: When you sell distressed debt, you are warranting you are not the reason the debt is impaired.

CASE 4: Citibank, N.A. as Agent v Brigade, HPS, Symphony - The $900M Revlon Blunder (S.D.N.Y. 2021) - In re Citibank August 11, 2020 Wire Transfers

Facts: On Aug 11, 2020, Citibank as administrative agent for Revlon's 2016 Term Loan intended to send $7.8M interest payment to 10 lenders. Due to Flexcube system error, it wired ∼$900M - full principal - from its OWN money.

Citibank sued to recover under unjust enrichment. Lenders like Brigade, HPS, Symphony refused to return ∼$500M, arguing discharge-for-value defense.

Held (Judge Furman, Feb 2021, affirmed 2nd Cir 2022): Lenders could KEEP the money. Discharge-for-value doctrine applies if:

1. Beneficiary received money in good faith
2. To discharge a valid debt
3. Had no knowledge of mistake

Court found Revlon lenders believed Revlon had prepaid (Revlon was doing distressed roll-up). No duty to inquire.

Impact on Capital Markets: This created the "Revlon Clause". Now every LSTA/LMA credit agreement includes:

"If Agent makes erroneous payment, Lender must return it, and waives discharge-for-value defense. Agent can set-off."

This is mandatory in all new syndicated loans since 2021. Citibank】 lost $500M and is pursuing Revlon for subrogation.

CASE 5: Kotak Mahindra Bank Ltd & Ors v APS Star Industries Ltd - India Supreme Court Debt Trading Legality

Facts: Gujarat High Court in 2016 held that banks trading NPAs/loan portfolios via assignment was "illegal" and not a permitted banking activity under Banking Regulation Act, 1949.

Held - Supreme Court of India (2022) stayed and reversed logic: Assignment of debt/loans is a valid banking activity. RBI's 2021 Master Direction on Transfer of Loan Exposures now codifies it. Banks can trade NPAs to ARCs and other banks, but must follow 90% hold, MHP, etc.

This settled Indian distressed market.

CASE 6: Highland Capital Management v Bank of America - Is Oral "Subject to Documentation" Binding?

BofA trader said "subject to docs, done $5m at 85". Highland claimed binding trade. BofA refused.

NY courts held: Under LSTA market, "subject to" refers to standard LSTA confirmation mechanics, NOT a condition precedent to formation. If price, size, asset agreed, trade is binding even without signed confirmation. This aligns with English Bear Stearns principle.

4. How to Argue a Distressed Debt Dispute - Checklist for Banking Lawyers

1. What docs? LSTA Par, LSTA Distressed, or LMA Distressed? If distressed, check Section 6 representations - does seller warrant no insider status, no pending litigation?
2. When was "Done"? Get Bloomberg chat, recorded line. Under Bear Stearns/Highland, done is done.
3. Is claim impaired? Check 502(d) preference, 510(c) equitable subordination, 510(b) recharacterization. If yes, does impairment arise from seller's act before trade date? Then seller liable.
4. LMA Unwind? Was long-stop date triggered? Did riskless principal give proper unwind notice within 2 business days?
5. Revlon risk? Did credit agreement have Revlon clawback clause?

If you are preparing a memo, structure it as: Transaction chronology -> Documentation applicable -> Breach/Impairment -> Case law mapping (Bear Stearns for formation, Enron/ASM for recourse, Exotix for unwind, Revlon for mistaken payment).

Do you want me to draft this as a full legal memo with citations in Bluebook format for a specific fact pattern - e.g., a buyer who bought distressed steel company debt and now faces equitable subordination?