In re Fairfield Sentry Ltd.

• Decision Date: 10 January 2013
• Docket Number: No. 10–13164 (BRL).,10–13164 (BRL).
• Citation: 484 B.R. 615
• Parties: In re FAIRFIELD SENTRY LIMITED, et al., Debtors in Foreign Proceedings.
• Court: U.S. Bankruptcy Court — Southern District of New York

484 B.R. 615

In re FAIRFIELD SENTRY LIMITED, et al., Debtors in Foreign Proceedings.

No. 10–13164 (BRL).

United States Bankruptcy Court,

S.D. New York.

Jan. 10, 2013.

Brown Rudnick LLP, By: David J. Molton, William R. Baldiga, May Orenstein, Daniel J. Saval, New York, NY, for the Foreign Representative.

Quinn Emanuel Urquhart & Sullivan LLP, By: Scott C. Shelley, Robert Juman, New York, NY, By: Eric D. Winston, Shane McKenzie, Matthew Scheck, Los Angeles, CA, for Farnum Place, LLC.

MEMORANDUM DECISION AND ORDER DENYING RELIEF REQUESTED IN THE FOREIGN REPRESENTATIVE'S APPLICATION FOR CONSIDERATION OF SIPA CLAIM ASSIGNMENT TRANSACTION CONTEMPLATED BY TRADE CONFIRMATION PURSUANT TO SECTIONS 105(a), 363(b), 1507(a), 1520(a)(2) AND 1521(a) OF THE CODE

BURTON R. LIFLAND, Bankruptcy Judge.

This is a pure and simple case of seller's remorse. A Chapter 15 foreign representative sold his Madoff SIPA ¹ claim to the buyer, Farnum Place, LLC (“Farnum”) ² in an arms-length transaction following months of good faith negotiations (the “SIPA Claim Sale” or “Sale”). Unrelatedly, three days later, the Trustee administering the Madoff estate executed a multibillion dollar settlement, significantly bolstering the value of this SIPA claim. Disheartened by his bad luck, the foreign representative scrambled to undo the Sale by any means necessary. He turned first to the Eastern Caribbean Supreme Court in the High Court of Justice, Commercial Division, of the British Virgin Islands (the “BVI Court”), which is overseeing the liquidation of Fairfield Sentry Limited (“Fairfield Sentry” or “Sentry”), one of the debtors ³ in the above-captioned Chapter 15 case. Consequently, the BVI Court held an in-depth, three-day, evidentiary hearing involving the testimony of multiple witnesses and experts, and ultimately found that the Sale is valid. The allowed SIPA claim is presently $230 million.

The foreign representative now turns to this Court in another attempt to undo the transaction. The instant application (the “Application”) ⁴ of Kenneth Krys, the foreign representative (together with his predecessors, ⁵ the “Foreign Representative” or “BVI Liquidator”) of Fairfield Sentry seeks the disapproval of this Sale pursuant to sections 105(a), 363(b), 1507(a), 1520(a)(2) and 1521(a) of the United States Bankruptcy Code (the “Code”), asserting domestic Code section 363 concepts (best interests of the estate). However, conducting a plenary section 363 review, as urged by the Foreign Representative, is not warranted under the present circumstances because the Sale does not involve the transfer of an interest in property within the United States, as statutorily mandated by Chapter 15. Moreover, accepting such assertions would contravene the origins of Chapter 15 and the critical concept of comity embedded therein. Indeed, this Court has no further meaningful interest in the disposition of the SIPA claim, which lies at the heart of the instant Application.

Accordingly, the Foreign Representative's attempts to persuade this Court to disapprove the Sale, the bona fides of which are untainted by the slightest hint of fraud or foul play, are simply unavailing. The Foreign Representative challenged the validity of the Sale before his home court in the BVI and lost. His Hail Mary, last-ditch effort to renew that challenge before this Court is without any basis and is therefore DENIED.

BACKGROUND

1. BVI Liquidation and Recognition

Fairfield Sentry was established for the purpose of allowing mainly non-U.S. persons and certain tax-exempt United States entities to invest with Bernard L. Madoff Investment Securities (“BLMIS”). See In re Fairfield Sentry Ltd., 440 B.R. 60, 62 (Bankr.S.D.N.Y.2010). It was a customer of and feeder fund to BLMIS, where it invested 95% of its assets, see id., and maintained four direct customer accounts (nos. 1FN012, 1FN045, 1FN069, and 1FN070), Picard v. Fairfield Sentry Ltd. et al., Adv. Pro. No. 09–01239, (Dkt. No. 69) [hereinafter “Settlement Motion ⁶”], ¶ 6. On July 21, 2009, shortly after the revelation of Bernard L, Madoff's (“Madoff”) Ponzi scheme and the collapse of BLMIS,⁷ Sentry was placed into liquidation in the BVI Court. See Declaration of Kenneth Krys In Support of Application (Dkt. No. 591) [hereinafter “Krys Decl.”], ¶ 3. On June 14, 2010, the Foreign Representative filed a petition in this Court, seeking recognition of the BVI liquidation proceedings (the “BVI Proceedings”) of Sentry and its sister funds Sigma and Lambda as “foreign main proceedings” under Chapter 15.⁸See Krys Decl., ¶ 4. On July 22, 2010, this Court issued an order recognizing the BVI Proceedings as “foreign main proceedings” and granting other relief under Chapter 15 to the Foreign Representative (the “Recognition Order”). See In re Fairfield Sentry, 440 B.R. 60. The Recognition Order was affirmed in its entirety by the district court, see In re Fairfield Sentry Ltd., No. 10–CIV–7311, 2011 WL 4357421 (S.D.N.Y. Sept. 16, 2011), and is currently on appeal before the Second Circuit Court of Appeals, see Krys Decl., ¶ 4. The Recognition Order has not been stayed, see id., and remains in full force and effect, see id.

2. The Settlement and SIPA Claim

Prior to July 2, 2009, the bar date for filing claims in the substantively consolidated SIPA liquidation of BLMIS (the “SIPA Liquidation”), Fairfield Sentry filed three customer claims (assigned claim numbers 008037, 007898 and 11251, collectively, the “SIPA Claim”) in the SIPA Liquidation. See Settlement Motion, ¶ 10. The SIPA Claim at the time of the filing, if allowed in full, amounted to approximately $1.2 billion under the Trustee's “net equity” method for determining customer claims, as set out in this Court's Net Equity Decision. See id.⁹

On or about May 18, 2009, Irving H. Picard (the “Trustee”), trustee for the SIPA Liquidation, commenced an adversary proceeding (the “Adversary Proceeding”) against the Chapter 15 Debtors and other defendants in this Court seeking recovery of $3.054 billion under various provisions of the Code, SIPA, and New York Debtor and Creditor Law. See Amended Complaint, Picard v. Fairfield Sentry Ltd., Adv. Pro. No. 09–1239 (Dkt. No. 23). The Trustee also asserted claims for turnover and accounting, and for disallowance of the claims filed by the Chapter 15 Debtors, as well as threatened to seek equitable subordination of the SIPA Claim pursuant to section 510(c) of the Code. See id.

The Foreign Representative, on behalf of the Chapter 15 Debtors, engaged in negotiations with the Trustee during 2010 and 2011 to resolve the Adversary Proceeding. See Krys Decl., ¶ 6. In May 2011, the Foreign Representative and the Trustee reached a global settlement (the “Settlement”). See id. at ¶ 7; Settlement Motion, ¶ 19. Subsequently, the Court entered an order approving this Settlement on June 10, 2011, followed by the BVI Court that approved the same on June 24, 2011. See Krys Decl., ¶ 7. Pursuant to its terms, Sentry is entitled to an allowed SIPA Claim in the BLMIS Proceedings in the amount of $230 million, subject to the Foreign Representative's payment of $70 million of Sentry's cash to the Trustee. See Settlement Motion, ¶ 22. Prior to November 2012, the Foreign Representative had paid $24 million to the Trustee, resulting in an allowed SIPA Claim in the interim amount of $78 million. See id; Settlement Motion, Ex. A (Dkt. No. 69, Attachment 3) [hereinafter “Settlement Agreement ¹⁰”], ¶ 2. The remaining $46 million due to the Trustee was paid in full, and the Sentry SIPA Claim is allowed in its full amount of $230 million.

The SIPA Claim is presently one of Sentry's primary assets. Apart from the SIPA Claim, Sentry's liquid, non-contingent assets total approximately $115 million in value, comprised of (i) approximately $71 million in cash in an account at Citco Bank Nederland N.V. Dublin branch, which is currently unavailable to Sentry and subject to an order of attachment from a Netherlands court; (ii) approximately $6.7 million in non-BLIMS investments; and (iii) approximately $36.7 million in other cash. See Krys Decl., ¶ 9.

3. The SIPA Claim Sale

During the final four months of 2010, the Foreign Representative conducted a competitive auction for the SIPA Claim. See id., ¶ 10. At that time, there were many publicly available facts suggesting that the Trustee could obtain substantial returns for the BLMIS Customer Funds. See Declaration of Patrick M. McKee in Support of Farnum Place LLC's Objection to Foreign Representative's Application (Dkt. No. 658), ¶ 17. For example, the Trustee had already brought many adversary proceedings, including the one against the Picower defendants seeking more than $7 billion. See Declaration of Scott C. Shelley (Dkt. No. 657) [hereinafter “Shelley Decl.”], Ex. 19. On December 7, 2010, the Trustee announced a $550 million settlement with the family of Carl Shapiro. See id. On December 2, 2010, the Trustee and his counsel filed a lawsuit against JP Morgan Chase, Madoff's primary banker, and related entities, seeking more than $6.5 billion in fees, profits, avoidable transfers and damages. See id.

The Foreign Representative elected to accept Farnum's offer to purchase the SIPA Claim for 32.125% of its ultimate allowed amount. See Krys Decl., ¶ 11. The Foreign Representative indicated that Farnum's bid was “in the best interest of the estate of Sentry.” See Shelley Decl., Ex. 18 (Forbes Hare Letter to Conyers, Dill & Pearman, dated December 6, 2011, Concerning the BVI Applications).

Accordingly, in early December 2010, the parties negotiated, documented and signed, with representation by U.S. counsel, a trade confirmation (the “Trade Confirmation”) setting forth the material terms and conditions of the SIPA Claim Sale for 32.125% of its ultimate allowed amount. See Declaration of James F. Mooney in Support of Farnum Place LLC's Objection (Dkt. No. 659), ¶ ¶ 9–11.

At the heart of the Trade Confirmation was a mutual assumption of risk:...