Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.)

• Citation: 714 F.3d 127
• Decision Date: 16 April 2013
• Docket Number: Docket No. 11–4376.
• Parties: In the Matter of FAIRFIELD SENTRY LIMITED, Debtor, Morning Mist Holdings Limited, Miguel Lomeli, Appellants, v. Kenneth Krys, Christopher Stride, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

714 F.3d 127

In the Matter of FAIRFIELD SENTRY LIMITED, Debtor,

Morning Mist Holdings Limited, Miguel Lomeli, Appellants,

v.Kenneth Krys, Christopher Stride, Appellees.

Docket No. 11–4376.

United States Court of Appeals,Second Circuit.

Argued: Nov. 19, 2012.

Decided: April 16, 2013.

Robert A. Wallner, Milberg LLP, New York, NY (Kent A. Bronson, on the brief; Stephen A. Weiss, Seeger Weiss LLP, New York, NY, on the brief), for Appellants.

David J. Molton, Brown Rudnick LLP, New York, NY (Daniel J. Saval, May Orenstein, Kerry L. Quinn, on the brief), for Appellees.

Before: JACOBS, Chief Judge, WINTER, Circuit Judge, SWAIN, District Judge.^*

DENNIS JACOBS, Chief Judge:

The question presented is where the debtor in this bankruptcy proceeding had its “center of main interests” within the meaning of Chapter 15 of the Bankruptcy Code (enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). The answer determines whether the pending foreign bankruptcy proceeding is a “foreign main proceeding,” in which event U.S. proceedings against the debtor are stayed. Morning Mist Holdings Limited and Miguel Lomeli (collectively, “Morning Mist”) appeal from the judgment of the United States District Court for the Southern District of New York (Daniels, J.), affirming the order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.), which determined that the debtor, Fairfield Sentry Limited (“Sentry”), had its “center of main interests” in BritishVirgin Islands (“BVI”), and therefore recognized Sentry's liquidation in the BVI as a “foreign main proceeding” under 11 U.S.C. § 1517. For the following reasons, we affirm.

To determine the proper “center of main interests” (“COMI,” as the term is abbreviated by the parties and other courts), we consider the relevant time period for weighing the interests, and the principles and factors for determining which jurisdiction predominates. We conclude (as did the bankruptcy court and the district court) that the relevant time period is the time of the Chapter 15 petition, subject to an inquiry into whether the process has been manipulated. The relevant principle (for which we consult foreign law, as directed by the statute) is that the COMI lies where the debtor conducts its regular business, so that the place is ascertainable by third parties. The statute includes a presumption that the COMI is where the debtor's registered office is found. Among other factors that may be considered are the location of headquarters, decision-makers, assets, creditors, and the law applicable to most disputes.

BACKGROUND

Sentry was organized in 1990 as an International Business Company under the laws of the BVI. From 1990 until Bernard Madoff's arrest on December 11, 2008, Sentry was the largest of the “feeder funds” that invested with Bernard L. Madoff Investment Securities LLC (“BLMIS”). Roughly 95% of Sentry's assets were invested with BLMIS, totaling over $7 billion.

Pursuant to its Memorandum of Association, Sentry administered its business interests from the BVI, where its registered office, registered agent, registered secretary, and corporate documents, among other things, were located. Sentry's Board of Directors oversaw the management, with day-to-day operations handled by an investment manager, Fairfield Greenwich Group (“FGG”), based in New York.¹ Sentry's three directors, Walter Noel, Jr., Jan Naess, and Peter Schmid, resided in New York, Oslo, and Geneva, respectively.

When Madoff was arrested, Sentry's two independent directors, Naess and Schmid, suspended all share redemptions. (Noel was recused from that meeting as the owner and principal of FGG, Sentry's investment manager.) Over the ensuing months, Naess and Schmid focused on winding down Sentry's business and preserving assets in anticipation of litigation and bankruptcy. From December 2008 to July 2009 (when Sentry entered liquidation in the BVI), they participated in approximately 44 teleconference board meetings initiated by Sentry's registered agent in the BVI. During this time, Naess and Schmid advised Sentry's shareholders as to measures being taken in response to the Madoff scandal. That correspondence issued from Sentry's address in the BVI, as shown on the letterhead.

In February 2009, Naess and Schmid constituted themselves as a litigation committee with the authority to (among other things) consider, commence, and settle litigation to be taken by or against Sentry. Sentry would subsequently become engulfed in lawsuits.

In May 2009, Morning Mist, a Sentry shareholder, filed a derivative action in New York state court, claiming that Sentry's directors, management, and service providers breached duties to Sentry (the “derivative action”).²

Back in the BVI, ten of Sentry's shareholders applied for the appointment of a liquidator. On July 21, 2009, the High Court of Justice of the Eastern Caribbean Supreme Court (the “BVI court”) entered an order which commenced Sentry's liquidation proceedings under the Virgin Islands Insolvency Act of 2003. The order appointed Kenneth Krys and Christopher Stride (from the BVI liquidation firm of Krys and Associates) as liquidator,³ and gave the liquidator “custody and control of all the assets of the Company.”

On June 14, 2010, pursuant to an order of the BVI court, the liquidator petitioned the United States Bankruptcy Court in the Southern District of New York (Lifland, J.) for recognition of the BVI liquidation proceedings under Chapter 15 of the Bankruptcy Code (the “Chapter 15 petition”).⁴

As of that date, Sentry's liquid assets consisted of approximately $73 million in Ireland, $22 million in the United Kingdom, and $17 million in the BVI. Its other assets were claims and causes of action, including claims for approximately: $6 billion in customer funds under the Securities Investor Protection Act; $3 billion from Madoff customers who profited from redemptions in New York; and $150 million in similar redemption claims in the BVI. Other proceedings were commenced in the Netherlands and Ireland. The litigations were undertaken under the supervision of the BVI court and with the assistance of the liquidator's BVI-based counsel.

On July 22, 2010, the bankruptcy court granted the liquidator's Chapter 15 recognition petition. In determining Sentry's COMI for purposes of Chapter 15, the bankruptcy court examined the period between December 2008, when Sentry stopped doing business, and June 2010, when the Chapter 15 petition was filed. The bankruptcy court determined that Sentry's “COMI for the purpose of recognition as a main proceeding is in the BVI, and not elsewhere,” and therefore recognized the BVI liquidation as a “foreign main proceeding” under 11 U.S.C. § 1517(b)(1). Modified Bench Mem. & Order Granting Chapter 15 Petitions of Fairfield Sentry Ltd., Fairfield Sigma Ltd. & Fairfield Lambda Ltd. for Recognition of Foreign Proceedings, In re Fairfield Sentry Ltd., No. 10–13164(BRL), at 6 (Bankr. S.D.N.Y. July 30, 2010) (hereinafter “Bankr. Order”).

Pursuant to 11 U.S.C. § 1520, recognition of the BVI liquidation as a foreign main proceeding imposed an automatic stay on any other proceedings against Sentry in the United States—including the derivative action brought by Morning Mist. Id. at 9 (recognizing automatic stay); see also11 U.S.C. § 1520(a)(1) (imposing automatic stay from 11 U.S.C. § 362). The bankruptcy court concluded in the alternative that even if the BVI liquidation was a “nonmain” proceeding (in which a stay would not be automatic), a stay of the derivative action was appropriate under 11 U.S.C. § 1521, which allows for such relief. Bankr. Order at 9–11.

Morning Mist appealed the bankruptcy court's order to the district court. On September 16, 2011, the United States District Court for the Southern District of New York (Daniels, J.) affirmed, holding that the bankruptcy court properly considered Sentry's administrative activities in its COMI analysis, and correctly considered Sentry's COMI as of the filing of the Chapter 15 petition (not over its 18 year operational history). Mem. Decision & Order, In re Fairfield Sentry Ltd., No. 10 Civ. 7311(GBD), at 7–12 (S.D.N.Y. Sept. 16, 2011). Morning Mist had argued there (as it argues here) that recognition of the BVI liquidation would be manifestly contrary to U.S. public policy, and was therefore barred by 11 U.S.C. § 1506, because the court records in the BVI liquidation were sealed. The argument was rejected on the ground that the right of public access to court records is not absolute. Id. at 14–17.

Imposition of the automatic stay was affirmed, including the stay of Morning Mist's derivative action against Sentry. Id. at 18. Morning Mist timely appealed.

DISCUSSION

We review an appeal from a district court's affirmance of a bankruptcy court decision “independently,” accepting the bankruptcy court's factual findings unless clearly erroneous, and reviewing the bankruptcy court's legal conclusions de novo. In re Enron Corp., 419 F.3d 115, 124 (2d Cir.2005) (quoting In re AroChem Corp., 176 F.3d 610, 620 (2d Cir.1999)).

I

Chapter 15 of the Bankruptcy Code was enacted in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, 119 Stat. 23 (codified at 11 U.S.C. §§ 1501–1532). Its goal “is to incorporate the Model Law on Cross–Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency,” while promoting international cooperation, legal certainty, fair and efficient administration of cross-border insolvencies, protection and maximization of debtors' assets, and the rescue of financially troubled businesses. 11 U.S.C. § 1501(a).

Chapter 15 is derived from the Model Law promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”), and it instructs that “[i]n interpreting [Chapter 15], the court shall consider its international origin, and the...