In re Fairfield Sentry Ltd.

• Decision Date: 13 October 2015
• Docket Number: Case No. 10–13164 SMB Jointly Administered
• Citation: 539 B.R. 658
• Parties: In re: Fairfield Sentry Limited, et al. Debtors in Foreign Proceedings.
• Court: U.S. Bankruptcy Court — Southern District of New York

539 B.R. 658

In re: Fairfield Sentry Limited, et al. Debtors in Foreign Proceedings.

Case No. 10–13164 SMB Jointly Administered

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

Signed October 13, 2015

BROWN RUDNICK LLP, Attorneys for Kenneth M. Krys, in his capacity as, Foreign Representative of Fairfield Sentry Limited, Seven Times Square, New York, NY 10036, David J. Molton, Esq., May Orenstein, Esq., Daniel J. Saval, Esq., Marek P. Krzyzowski, Esq., Of Counsel

QUINN EMANUEL URQUHART & SULLIVAN LLP, Attorneys for Farnum Place, LLC, 51 Madison Ave., 22nd Floor, New York, NY 10010, Robert Juman, Esq., Scott C. Shelley, Esq., Eric D. Winston, Esq., Shane McKenzie, Esq., Matthew Scheck, Esq., Of Counsel

MEMORANDUM DECISION GRANTING FOREIGN REPRESENTATIVE'S MOTION TO DISAPPROVE SALE AND DENYING FARNUM'S MOTION TO MODIFY THE RECOGNITION ORDER

STUART M. BERNSTEIN, United States Bankruptcy Judge:

This matter comes before the Court on remand from the Second Circuit Court of Appeals following its decision in Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd. ), 768 F.3d 239 (2d Cir.2014) (“Fairfield Sentry ”). In Fairfield Sentry, the Second Circuit reversed the Bankruptcy and District Courts, and held that the sale of Fairfield Sentry Ltd.'s (“Sentry”) customer claim (the “Sentry Claim”) in the Bernard L. Madoff Investment Securities LLC (“BLMIS”) liquidation to Farnum Place, LLC (“Farnum”) required review under section 363 of the Bankruptcy Code. Id. at 246–47. On remand to this Court, Kenneth Krys (the “Foreign Representative”), the foreign representative of Sentry, seeks disapproval of the sale pursuant to 11 U.S.C. §§ 363(b) and 1520(a)(2) because the value of the Sentry Claim has risen dramatically. Alternatively, the Foreign Representative seeks authority to conduct a new sale. Farnum separately moves (i) to modify the order recognizing these Chapter 15 proceedings (the “Recognition Order”)¹ to provide that 11 U.S.C. § 363 does not apply or, in the alternative, (ii) for an order confirming that 11 U.S.C. § 363 does not apply to the instant sale. For the reasons that follow, the Foreign Representative's motion to disapprove the sale is granted and Farnum's motion is denied. In addition, Farnum's related motion to compel discovery is also denied.

BACKGROUND

The background to this proceeding is detailed in In re Fairfield Sentry Ltd., 484 B.R. 615, 618–22 (Bankr.S.D.N.Y.2013), aff'd, Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd. ), No. 13 Civ. 1524(AKH) (S.D.N.Y. July 3, 2013), rev'd, 768 F.3d 239 (2d Cir.2014). The Court assumes familiarity with this decision and limits the factual discussion to what is necessary to decide the motions.

A. Sentry's Sale of its SIPA Claim to Farnum

Sentry was an investment fund formed in the British Virgin Islands (“BVI”) that invested 95% of its assets in BLMIS. Following the revelation that Madoff operated BLMIS as a Ponzi scheme, the District Court placed BLMIS into liquidation under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”), and appointed Irving Picard (“Trustee”) as the SIPA trustee.

Sentry was also placed into liquidation in July 2009 in the BVI, and Krys and Joanna Lau were appointed Joint Liquidators by the BVI Court. In June 2010, Krys filed a chapter 15 petition in this Court seeking recognition of Sentry's BVI proceeding as a “foreign main proceeding” pursuant to 11 U.S.C. § 1517. This Court granted recognition as a foreign main proceeding, and the District Court and the Second Circuit Court of Appeals affirmed.See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd. ), 714 F.3d 127, 138–39 (2d Cir.2013).

Sentry filed three customer claims in the BLMIS SIPA liquidation aggregating $6,284,321,581 which reflected amounts listed on Sentry's final BLMIS account statement. (See Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rule 2002(a)(3) and 9019(a) of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and between the Trustee and Joint Liquidators, dated May 9, 2011, at ¶ 10 (ECF Adv. P. No. 09–01239 Doc. # 69).) Under the Trustee's preferred “net investment method,” which omitted fictitious profits from the calculation of a customer's net equity, Sentry's customer claims totaled $1,192,536,342. (Id. at ¶ 11.)² The Trustee counterclaimed, commencing an adversary proceeding against Sentry and affiliated chapter 15 debtors and seeking recovery of $3,054,000,000 in transfers and the disallowance of Sentry's customer claims. (Id. at ¶ 7.)

Negotiations led to a May 2011 settlement (the “Settlement”). Among other things, the Trustee allowed Sentry's customer claim in the sum of $230 million (i.e., the Sentry Claim). This Court granted the Trustee's motion to approve the Settlement in the SIPA proceeding, and the BVI Court granted the Foreign Representative's motion to approve the Settlement in the BVI proceeding. The Foreign Representative did not also seek approval of the Settlement in the chapter 15 case.

B. Approval of the Trade Confirmation by BVI, Bankruptcy, and District Courts

Prior to the Settlement, the Joint Liquidators had commenced an auction process in the BVI to sell Sentry's rights in the Sentry Claim during the summer of 2010. Farnum won the auction with an offer to purchase the Sentry Claim for 32.125% of its allowed amount, which was then in dispute. Farnum and the Foreign Representative entered into a trade confirmation (“Trade Confirmation”)³ memorializing the sale on December 14, 2010. The Trade Confirmation stated that the Sentry Claim was worth as much as $2 billion if calculated under the Net Investment Method and $10,539,420,000 under the Last Statement Method. (Trade Confirmation at 2.) The Trade Confirmation stated that it was subject to approval by the U.S. Bankruptcy Court and the BVI Court. (Id. at 1.)

Three days after the Trade Confirmation was signed, the Trustee announced a significant settlement with the estate of Jeffry Picower and related entities under which the BLMIS estate would receive $5 billion. As a result, the market value of a BLMIS customer claim rose to over 50% of the claim's face value. In terms of the Sentry Claim, an increase from 32.125% to 50% equated to roughly a $40 million increase in value.

As a result of the Picower settlement, the proposed sale no longer made economic sense, and the Joint Liquidators balked at seeking the BVI Court's approval of the transaction. Consequently, in October 2011, Farnum moved in the BVI Court to compel the Joint Liquidators to approve the Trade Confirmation. The BVI Court conducted several days of hearings, approved the terms of the Trade Confirmation and directed the Foreign Representative to seek the approval or disapproval of the Trade Confirmation in this Court. The BVI Court expressed no views “on the issues that will arise for determination by the U.S. Bankruptcy Court” and made “clear that ... the U.S. Bankruptcy Court is presented with a choice whether or not to approve [the Trade Confirmation].” Fairfield Sentry, 768 F.3d at 242–43.

In April 2012, the Foreign Representative filed an application in this Court seeking disapproval of the Trade Confirmation pursuant to 11 U.S.C. § 363(b). This Court denied the Foreign Representative's request characterizing it as “seller's remorse” and a “last-ditch effort” to avoid the terms of the Trade Confirmation. In re Fairfield Sentry Ltd., 484 B.R. at 617, 618. The District Court affirmed the Bankruptcy Court.

C. Second Circuit's Reversal and Denial of Rehearing Petition

The Second Circuit reversed the lower courts. The Court of Appeals held that the sale of the Sentry Claim pursuant to the Trade Confirmation constituted a transfer of Sentry's property located within the territorial jurisdiction of the United States that was subject to review pursuant to Bankruptcy Code §§ 363 and 1520(a)(2). Fairfield Sentry, 768 F.3d at 245. Furthermore, the Bankruptcy Court was not required to give deference to the BVI Court's prior approval of the sale under principles of comity. Id. at 245–46.

After the Second Circuit issued its decision, Farnum petitioned for panel rehearing or rehearing en banc. (Pet. for Panel Reh'g or Reh'g En Banc, Krys v. Farnum Place LLC , No. 13–3000 (2d Cir. Oct. 10, 2014) (“Rehearing Petition ”), ECF Doc. # 96.) The majority of the Rehearing Petition argued that the Circuit Court's decision was wrong, but also requested that the Court amend its opinion to clarify, among other things, that Farnum's alternative arguments were not foreclosed on remand. (Rehearing Petition at 14–15.) The Rehearing Petition did not list those arguments, and instead, cited to a portion of Farnum's prior appellate brief at which it argued that (i) the application of 11 U.S.C. § 363 was not mandatory because 11 U.S.C. § 1520(a)(3) provided that a foreign representative may exercise the rights and powers under section 363, (ii) the entrustment power granted under 11 U.S.C. § 1521(a)(5) allowed the Foreign Representative to administer and realize Sentry's U.S. assets without Court approval (the “Entrustment Argument”), and (iii) the sale of the Sentry Claim was an ordinary course transaction for which section 363 approval was not required (the “Ordinary Course Argument”). (Br. for Appellee at 47–49, Krys v. Farnum Place LLC , No. 13–3000 (2d Cir. Feb. 14, 2014), (“Br. for Appellee ”) ECF Doc. # 48.)

By order dated November 3, 2014, the Second Circuit requested that the Foreign Representative respond but only to Farnum's “contention that the Court's opinion should be modified to permit the District Court⁴ , on remand, to consider any issues not already adjudicated that might preclude the need for a section 363 hearing.” (Order, Krys v. Farnum Place LLC , No. 13–3000 (2d Cir. Nov. 3, 2014), ECF Doc. # 98.) In his response, the Foreign Representative disputed Farnum's contention that the lower courts had failed to address Farnum's alternative theories and also responded to...