Fairfield Sentry Ltd. (In Liquidation) v. Citibank
| Decision Date | 24 August 2022 |
| Docket Number | 19-CV-3911 (VSB) |
| Parties | FAIRFIELD SENTRY LIMITED IN LIQUIDATION, acting by and through the Foreign Representatives thereof, and KENNETH KRYS, solely in his capacity as Foreign Representatives and Liquidator thereof, Plaintiffs/Appellants, v. CITIBANK, N.A. LONDON, Defendants/Appellees. |
| Court | U.S. District Court — Southern District of New York |
Appearances:
David Lawrence Elsberg, Caitlin Joan Halligan, Andrew Riggs Dunlap Yelena Konanova, Evan Noller Bianchi, Selendy & Gay PLLC, New York, New York, David J. Molton, Marek Patrick Krzyzowski, Brown Rudnick LLP, New York, New York Counsel for Plaintiffs-Appellants.
Jeffrey A. Rosenthal, Nowell D. Bamberger, Thomas J. Moloney Joseph Michael Kay Carmine D. Boccuzzi, Jr. Eva Pascale Smith Bibi, Cleary Gottlieb Steen & Hamilton LLP New York, New York.
Bruce Stephen Kaplan Jeffrey Carl Fourmaux Friedman Kaplan Seiler & Adelman LLP New York, New York, Andrew M. Harris Hogan Lovells U.S. LLP New York, New York, Marc Joel Gottridge, Herbert Smith Freehills New York LLP New York, New York, Counsel for Defendants-Appellees.
Alan Kolod, Mark Nelson Parry Moses & Singer LLP New York, New York, Counsel for Appellees Deutsche Bank (Cayman) Limited, Deutsche Bank (Suisse) SA, and Deutsche Bank Trust Company Americas.
This case arises from the infamous Ponzi scheme orchestrated by Bernard L. Madoff through his investment company Bernard L. Madoff Investment Securities LLC (“BLMIS”), which wreaked havoc throughout the financial industry and investment community after the scheme was exposed in 2008.[1] Plaintiffs-Appellants (“Appellants” or “Liquidators”) are liquidators of three investment funds who used to be the major feeder funds of BLMIS; they bring claims against a group of investors, or transferees of investors, who cashed out shortly before the scheme collapsed (“Defendants-Appellees” or “Appellees”). Now before me are two rounds of appeals from a series of orders issued by United States Bankruptcy Judge Stuart M. Bernstein of the Bankruptcy Court of the Southern District of New York (the “Bankruptcy Court”), which partially dismissed Appellants' claims and denied them leave to amend. Because Appellants' claims are barred by (1) lack of personal jurisdiction under the relevant choice of forum provision, (2) the safe harbor provision under the Bankruptcy Code, (3) the British Virgin Islands' Companies Act, and (4) res judicata with regard to certain constructive trust claims, the Bankruptcy Court's decision is AFFIRMED.
1. Factual Background
Fairfield Sentry Limited (“Sentry”), Fairfield Sigma Limited (“Sigma”), and Fairfield Lambda limited (“Lambda”) (collectively, the “Funds”) were British Virgin Islands (“BVI”) investment funds that heavily invested in BLMIS. (PAC ¶ 2.)[2] Sentry was the largest of all the feeder funds[3] of BLMIS, while Sigma and Lambda were indirect BLMIS feeder funds established for foreign currency investments through purchases of shares of Sentry. (Id.) The Funds operated by pooling money from investors and issuing shares in return, and investors like Defendants became members of the Funds by entering into a series of subscription agreements (the “Subscription Agreement”) for the purchase of shares in the Funds. (Id. ¶ 3.) The members' relationship with the Funds was governed by the Subscription Agreement, the Articles of Association (the “Articles” or singular “Article”), as well as certain other documents. (Id. ¶ 8; Hare Decl. ¶ 10.)[4] Article 10 sets out the procedure for members of the Funds to redeem their shares. (See Articles § 10.)[5] Upon receipt of a written redemption request from a member, the Funds were obligated to redeem or purchase the member's shares at a redemption price (“Redemption Price”) based on the Net Asset Value per share (the “NAV”) as of the close of the relevant business day. (Id. § 10(2).) Article 11 specifies how the NAV was to be calculated; it provides that:
(Id. § 11(1).)
The NAV was calculated by the Funds' administrator, Citco Fund Services (Europe) B.V. and its delegatee Citco (Canada) Inc. (together, “Citco”). (PAC ¶ 41.) Under the Administration Agreement between the Funds and Citco, the directors of the Funds (“Directors”) delegated to Citco their authority to “redeem Shares in accordance with the provisions and procedures set out in the applicable Fund Documents,” including the Articles. (Admin. Agreement ¶ 3.4.)[6]
Relevant to this appeal, the Subscription Agreement contains a choice of forum clause, which provides:
New York Courts. Subscriber agrees that any suit, action or proceeding (“Proceeding”) with respect to this Agreement and the Fund may be brought in New York. Subscriber irrevocably submits to the jurisdiction of the New York courts with respect to any Proceeding and consents that service of process as provided by New York law may be made upon Subscriber in such Proceeding, and may not claim that a Proceeding has been brought in an inconvenient forum.
(PAC ¶ 22; see also Subscription Agreement § 19.)[7]
As early as 2000, Citco's employees started to raise concerns about BLMIS's investment. They realized that the existence of the Funds' assets at BLMIS could not be verified, and that Madoff's purported investment returns appeared too good to be true. (PAC ¶ 44.) Citco Group's[8] head of internal audit, Ruud Bodewes, raised concerns to the general counsel and manager of Citco Bank Nederland N.V. Dublin Branch (which acted as the Funds' custodian) that Citco might “be in a potential [sic] dangerous situation, since [they did] not seem to have an independent source to verify the information from BLMIS.” (Id. ¶¶ 46, 50.) Moreover, Citco's head of internal audit for its administrator entities, Ger Jan Meijer, warned Citco Group's Chief Executive Officer, Christopher Smeets, that BLMIS could be a fraud, and that Citco had “a legal obligation to obtain more assurance” of the Funds' assets. (Id. ¶¶ 47, 50-51.) Meijer later reiterated his concerns, but was told by a member of the administrator's management to “stop raising the issue.” (Id. ¶¶ 51, 55.) Nevertheless, Meijer was assured that Citco “would try to meet with Madoff to investigate.” (Id.)
On three separate occasions between May 2000 and December 2002, Citco tried to verify the existence of the Funds' assets at BLMIS, and failed each time. (Id. ¶¶ 52-61.) No further attempt was made. (Id. ¶ 61.) Nor did Citco warn the investors of its inability to verify the existence of the Funds' assets at BLMIS, withdraw from its position as the Funds' administrator, or cease to determine the NAVs for share redemption based on BLMIS's suspicious returns. (Id. ¶¶ 62-64.) In 2004, however, in an effort to protect its own assets, Citco's Directors decided to “close down all credit relationships with the Funds to decrease Citco's exposure.” (Id. ¶ 65 (internal quotation marks omitted).) Moreover, in 2006, Citco negotiated for an 800% increase in its custodian fees as a condition of continuing to do business with the Funds. The new fee was a percentage of the NAV as determined by Citco itself based on the purported returns of the Funds, which was in turn based on the purported returns of BLMIS. (Id. ¶ 68.) In other words, Citco did so despite its years of suspicion that BLMIS's returns were highly inflated and that the Funds' NAV was inflated as a result. (See generally id. ¶¶ 68-74.)
II. Procedural History
Shortly after Madoff's Ponzi scheme collapsed and the fraud was exposed, the Funds entered into liquidation proceedings before the Commercial Division of the Eastern Caribbean High Court of Justice of the BVI (the “BVI Court”), and Appellants were appointed as liquidators (i.e. “Liquidators”) responsible for protecting and distributing assets for members of the Funds.[9] (PAC ¶¶ 26, 81). The Liquidators then initiated proceedings in the BVI (the “BVI Proceedings”) against a number of members or transferees of the members of the Funds who redeemed some or all of their shares before the collapse of the scheme (the “Redeemers”) seeking to recover from these Redeemers the redemption payments from the Funds (the “Redemption Payments”), and planned to distribute the recoveries equitably among members.[10](See Open. Br. I 6.)[11] The theory of the claims made by the Liquidators was that the Redemption Payments were mistakenly calculated based on the fictitious, inflated NAVs, such that the Redeemers received much higher payments than what the redeemed shares were actually worth. See Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 596 B.R. 275, 284 (Bankr. S.D.N.Y. 2018) (“Fairfield II”). The Liquidators' theory for recovery in the BVI Proceedings was based purely on the parties' mistake of facts, and there was no allegation that Citco or the Funds were aware of Madoff's fraud or acted in bad faith. Id. at 289.
1. The BVI Court Decision
In 2011, the BVI Court issued an opinion after a trial on two “preliminary issues:”[12] (1) whether various communications sent to the Redeemers constituted “certificates” of NAV within the meaning of Article 11 and were therefore binding on the Funds (the ...
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