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In re Chateaugay Corp.

961 F.2d 378 (1992)

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In re Chateaugay Corp.

United States Court of Appeals for the Second Circuit

961 F.2d 378 (1992)

Facts

After experiencing financial difficulties, LTV Corporation (debtor) attempted to avoid bankruptcy by conducting a face-value exchange of old debentures for new notes. Under the exchange, LTV would give debenture holders $1,000 worth of new notes for $1,000 worth of old debentures. Despite the exchange, LTV filed for Chapter 11 bankruptcy. The indenture trustee filed claims on behalf of the holders of the old debentures and the new notes (creditors). In its claims, the trustee did not deduct any unamortized original-issue discount. LTV objected to the claims, arguing that the unamortized original-issue discount created by the exchange and transferred from the old debentures to the new notes was interest that was disallowed under 11 U.S.C. § 502(b)(2). LTV reasoned that the trustee had to deduct the unamortized original-issue discount from its claims. The bankruptcy court granted summary judgment for LTV, holding that the unamortized original-issue discount was not allowed under § 502(b)(2). In making its decision, the bankruptcy court determined that the issue price of the new notes was the fair market value of the old debentures. Because the issue price was less than the face value of the new notes, the original-issue discount of the new notes was the difference between their face value and issue price. The district court affirmed the bankruptcy court. The trustee appealed.

Rule of Law

Issue

Holding and Reasoning (Oakes, C.J.)

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