Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.)

• Decision Date: 06 December 2018
• Docket Number: Adv. Proc. No. 10-03496 (SMB) Administratively Consolidated,Case No. 10-13164 (SMB) Jointly Administered
• Citation: 596 B.R. 275
• Parties: IN RE: FAIRFIELD SENTRY LIMITED, et al., Debtors in Foreign Proceedings. Fairfield Sentry Limited (In Liquidation), Acting by and Through the Foreign Representatives Thereof, Plaintiffs, v. Theodoor GGC Amsterdam, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

596 B.R. 275

IN RE: FAIRFIELD SENTRY LIMITED, et al., Debtors in Foreign Proceedings.Fairfield Sentry Limited (In Liquidation), Acting by and Through the Foreign Representatives Thereof, Plaintiffs,

v.Theodoor GGC Amsterdam, et al., Defendants.

Case No. 10-13164 (SMB) Jointly Administered

Adv. Proc. No. 10-03496 (SMB) Administratively Consolidated

United States Bankruptcy Court, S.D. New York.

Signed December 6, 2018

BROWN RUDNICK LLP, Seven Times Square, New York, NY 10036, David J. Molton, Esq., Marek P. Krzyzowski, Esq., Of Counsel, KELLOGG, HANSEN, TODD, FIGEL & FREDERICK, P.L.L.C., 1615 M. Street, N.W., Suite 400, Washington, D.C. 20036, Michael K. Kellogg, Esq. (admitted pro hac vice ), Aaron M. Panner, Esq. (admitted pro hac vice ), Of Counsel, Attorneys for Plaintiffs

CLEARY GOTTLIEB STEEN & HAMILTON LLP, One Liberty Plaza, New York, NY 10006, Thomas J. Moloney, Esq., Of Counsel, HOGAN LOVELLS US LLP, 875 Third Avenue, New York, NY 10022, Marc J. Gottridge, Esq., Of Counsel, MOSES & SINGER LLP, 405 Lexington Avenue, New York, NY 10174, Alan Kolod, Esq., Of Counsel, CLIFFORD CHANCE US LLP, 31 West 52nd Street, New York, NY 10019, Jeff Butler, Esq., Of Counsel, Attorneys for Defendants¹

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS AND PLAINTIFFS' MOTIONS FOR LEAVE TO AMEND

STUART M. BERNSTEIN, United States Bankruptcy Judge

Plaintiffs Kenneth M. Krys and Charlotte Caulfield (together, the "Liquidators"),² in their capacities as foreign representatives of Fairfield Sentry Limited ("Sentry"), Fairfield Sigma Limited ("Sigma"), and Fairfield Lambda Limited ("Lambda," and collectively, the "Funds") seek leave to amend their complaints, (see Memorandum Of Law in Support of Motion for Leave to Amend , dated Oct. 21, 2016 ("Liquidators Motion ") (ECF Doc. # 923) ), in 305 adversary proceedings pending in this Court in which the Liquidators seek to recover redemptions paid by the Funds to the defendants (collectively, the "U.S. Redeemer Actions").³ The defendants in the U.S. Redeemer Actions (collectively, the "Defendants") oppose the amendments and seek dismissal of the U.S. Redeemer Actions on various grounds discussed below.

In a prior decision, the Court concluded that it had subject matter jurisdiction over the U.S. Redeemer Actions, and that the execution of certain Subscription Agreements, without more, did not subject the Defendants to the personal jurisdiction of the Court. Fairfield Sentry Ltd. (In Liquidation) v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.) , Adv. Proc. No. 10-03496 (SMB), 2018 WL 3756343 (Bankr. S.D.N.Y. Aug. 6, 2018) (" Prior Decision "). The Court refrained from addressing the parties' merit-based contentions because the Prior Decision did not completely resolve the motions to dismiss for lack of personal jurisdiction. Id. at *12. The parties subsequently stipulated to be bound by the merit-based determinations of the motions without prejudice to their jurisdictional objections or the right to seek reconsideration or to appeal. (Order and Stipulation Between the Liquidators and the Defendants Listed on Appendix A , "so-ordered" on Sept. 20, 2018 (ECF Doc. # 1735).)

For the reasons set forth below, the Liquidators' motions to amend are denied and the Defendants' motions to dismiss are granted with respect to the Contract and Common Law Claims described below except to the extent the pleading or proposed amendment adequately alleges that a particular Defendant knew that the net asset value ("NAV") as calculated at the time of the redemption payment was mistaken because the Funds' investments with Bernard L. Madoff Investment Securities LLC ("BLMIS") were worthless or nearly worthless. In that situation, the Liquidators may assert a claim to impose a constructive trust on the Defendant. Separately, the motions to dismiss the BVI Avoidance Claims, also described below, are denied without prejudice to renewal on the basis that the BVI Avoidance Claims (and, possibly, all claims) are barred under 11 U.S.C. §§ 546(e) and 561(d).

BACKGROUND

The background is set forth in the Prior Decision and will be repeated or amplified only to the extent necessary to explain this decision.

The Funds were organized under the laws of the British Virgin Islands ("BVI"). Sentry sold shares to foreign investors and invested 95% of the proceeds with BLMIS. Sigma and Lambda were "funds of funds." They also sold shares to investors, but invested the proceeds with Sentry which, in turn, invested those funds with BLMIS. Thus, each of the Funds invested virtually all of their assets with BLMIS directly or indirectly, and the value of their assets derived from the value of their BLMIS investments.

The Funds were governed by their respective Articles of Association ("Articles," and each provision within the Articles, an "Article").⁴ The Directors of each Fund (referred to in the Articles as the "Company") were vested with the authority to manage the Fund. (Article 52.) Article 9 described the process for the subscription of shares and Article 10 addressed the redemption of shares. With certain exceptions and conditions that are not relevant, Article 10(1) provided that upon written request specifying the number and class of Shares to be redeemed, "the Company ... shall redeem or purchase all or any portion of the Shares registered in the Applicant's name." The redemption payment was due on the Dealing Day which was generally thirty days after the receipt of the redemption request. (Article 10(1)(c).)

The redemption price was determined in accordance with Article 11 as of the Dealing Day. (Article 10(2).) The subscription price for investors buying into the Fund was also determined under Article 11. (Article 9(2).) Under Article 11, the Directors determined the NAV per share by dividing the value of the Fund's net assets by the number of outstanding shares. (Article 11(1)(a), (b).)⁵ "Any certificate as to the Net Asset Value per Share or as to the Subscription Price or the Redemption Price therefor given in good faith by or on behalf of the Directors shall be binding on the parties." (Article 11(1)(c) (emphasis added).) The Funds delegated the duty to compute the NAV to Citco Fund Services (Europe) BV ("Citco") pursuant to a separate agreement. See Fairfield Sentry Ltd. (In Liquidation ) v. Migani , [2014] UKPC 9 ("Migani "), ¶ 14.⁶

Prior to December 2008, the Directors certified the NAV for each subscription and redemption in the belief that Sentry's investment with BLMIS had substantial value. In December 2008, however, Madoff admitted to operating the investment advisory business of BLMIS as a Ponzi scheme, and BLMIS was placed into a liquidation proceeding pursuant to section 78eee of the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa, et seq. In hindsight, the Funds had overpaid the earlier redemptions based on an erroneous view of the value of Sentry's BLMIS investments. Shortly after Madoff's arrest and the collapse of BLMIS, the Funds became the subjects of liquidation proceedings in the BVI. The British Virgin Island Court ("BVI Court") appointed the Liquidators, the Liquidators commenced ancillary proceedings in this Court under Chapter 15 of the Bankruptcy Code to obtain recognition of the BVI liquidation proceedings as "foreign main proceedings," and the Court granted the Liquidators' applications on July 22, 2010.

A. BVI Redeemer Actions

In or about March 2010, the Liquidators commenced proceedings in the BVI (the "BVI Redeemer Actions") in the name of Sentry to recover redemption payments made in 2004. (See Statement of Claim in Fairfield Sentry Ltd. (In Liquidation ) v. Bank Julius Baer & Co. Ltd., dated Mar. 12, 2010 ("Statement of Claim ").)⁷ Sentry's theory was straightforward. It invested 95% of its assets with BLMIS, (Statement of Claim ¶ 4), the BVI defendants (the "Redeemers") requested redemptions in March 2004, (id. ¶ 6), and Sentry computed the NAV in accordance with the Articles in the aggregate amount of $135,405,694.70. (Id. ¶¶ 7, 8.) Because BLMIS operated as a Ponzi scheme and Sentry's investments were worthless, the actual NAV was nil or nominal at the time of the redemptions. (Id. ¶¶ 9, 10.) Accordingly, the NAV was calculated under a mistake of fact by Sentry (unilateral mistake), and the Redeemers were unjustly enriched and liable to make restitution in the full amount or the difference between the redemption price and the actual, nominal amount of the redeemed shares. (Id. ¶¶ 9, 11.) Alternatively, Sentry was entitled to set aside the redemptions on the ground of mutual mistake. (Id. ¶ 12.)

1. The Preliminary Issues Proceeding

In early 2011, certain Redeemers filed applications requesting that the BVI Court hold a trial to determine "preliminary issues." (See Hare Declaration , Ex. C.) A preliminary issues trial is a mechanism for deciding specific issues that are likely to resolve the case. (Hare Declaration ¶ 23; Declaration of Phillip Kite in Opposition to Plaintiffs' Motion for Leave to Amend and in Support of Defendants' Motion to Dismiss , signed Jan. 12, 2017 ("Kite Declaration "), at ¶ 9 (ECF Doc. # 963).) The Redeemers identified two preliminary issues; the first concerned the calculation of the NAV (the "Certification Issue"). They argued that if the NAV was calculated in accordance with Article 11(1) and "certified," Sentry could not recalculate the NAV after redemption. (Hare Declaration, Ex. G, ¶¶ 17-19.) Referring to Article 11(1)(c), (id. ¶ 16), the Redeemers further argued that Sentry's good faith was irrelevant on the Certification Issue. Even if the certificates were issue in bad faith, Sentry could not rely on its own bad faith to defeat the binding nature of the certificates. (Id. ¶¶ 21(1), 22.)

The second, proposed preliminary issue addressed the consideration given by the Redeemers for the redemption payments (the "Good Consideration Issue"). They maintained that regardless of the NAV per share, they gave good...