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Do the Distressed Debt Traders Know About This?

posted by Stephen Lubben

N.C. Gen. Stat. § 23-46:  

It shall be unlawful for any individual, corporation, or firm or other association of persons, to solicit of any creditor any claim of such creditor in order that such individual, corporation, firm or association may represent such creditor or present or vote such claim, in any bankruptcy or insolvency proceeding, or in any action or proceeding for or growing out of the appointment of a receiver, or in any matter involving an assignment for the benefit of creditors.


Preempted? And who has a right of action on this?

This seems a bit like Ohio defining "security" to include trade receivables, such that a simple trade in a trade claim is subject to Ohio's Blue Skies law.

As to your first question, I don't think debtor's attorneys in North Carolina knew about this- I certainly didn't.

As to pre-emption, assuming that debt trading is pre-empted by the Bankrupty Code, is that pre-emption only binding while there is a bankruptcy? For example, assume a debt is sold during a Ch. 13 to represent the original creditor, but then the case is dismissed (maybe even for this purpose). Does that become un-pre-empted and now unlawful? Creditors always assert that the dismissal returns everything to the status quo ante, so this would seem an unwinding that hoists debt buyers on their own petard.

§ 23-47. Violation of preceding section a misdemeanor. Any individual, corporation, or firm or other association of persons violating any provision of G.S. 23-46 shall be guilty of a Class 1 misdemeanor. (1931, c. 208, s. 3; 1993, c. 539, s. 399; 1994, Ex. Sess., c. 24, s. 14(c).)

Does it matter that this statute doesn’t just apply to debt buyint in bankruptcy, but all insolvency proceedings?

By its terms this provision seems to apply globally, or at least nationwide. That surely can't be right. And I think there is a real question about whether a state can make something that happens in federal court a criminal act. That said, trading that occurs pre-bankrkutpcy, with NC connections, would seem to be at risk.

The Bankruptcy Code would certainly preempt this. However, many small businesses do not use the Code, but use state receivership law. (It's far cheaper, in most states.). I think that the NC law would apply here. And I don't think that, in this context, it is a particularly bad law, either. Remember that debtors pick their creditor,not only for the legal terms of the loan, but also for their propensity to be reasonable if things go south. This is why syndications, for example, often restrict assignments of workout rights.

Would the Bankruptcy Code certainly be pre-empted? Following Butner v U.S., 440 U.S. 48, 99 S. Ct. 914 (1979), bankruptcy courts must look to state law for determination of property rights. Arguably, this statute defines when and whether the ownership of a property right, viz. the debt, can be transferred.

§ 84-9. Unlawful for anyone except attorney to appear for creditor in insolvency and certain other proceedings

It shall be unlawful for any corporation, or any firm or other association of persons other than a law firm, or for any individual other than an attorney duly licensed to practice law, to appear for another in any bankruptcy or insolvency proceeding, or in any action or proceeding for or growing out of the appointment of a receiver, or in any matter involving an assignment for the benefit of creditors, or to present or vote any claim of another, whether under an assignment or transfer of such claim or in any other manner, in any of the actions, proceedings or matters hereinabove set out.

That seems less problematic, except that the Code allows for corporate creditors to appear at 341 meetings, so is that partial preemption?

From the 1931 North Carolina law review of laws enacted that year:
The other act (Ch. 208) prohibits any person or corporation from soliciting from any creditor the representation of any claim in bankruptcy, insolvency, or receivership proceedings or in connection with assignments for the benefit of creditors, and also forbids any person not an attorney to appear on behalf of another in any such proceedings.

It would seem that as applied to claims and proceedings in bankruptcy (which cover the great majority of claims and proceedings involving insolvent estates) the prohibition is ineffectual and unconstitutional as being an attempt on the part of the State to regulate the prosecution of claims in courts of the United States.

First Union tried to use this in the LeNature transaction --The bankruptcy court went right around it,,,

Besides the preemption response, it is evident that the N C statute does not bar purchasing a claim, just a disparity between a holder of a claim and the person voting or representing it.

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