US Bankruptcy Court to Handle Foreign Madoff Feeder Fund Suits
New York Law Journal–Foreign Liquidators of the Fairfield group of investment funds, which were created to feed overseas investments into Bernard L. Madoff Investment Securities, can pursue a slew of lawsuits aiming to recover nearly $6 billion for investors in U.S. Bankruptcy Court rather than in the state Supreme Court’s Commercial Division, a bankruptcy judge has ruled. Southern District Bankruptcy Judge Burton R. Lifland said that it would be most efficient for him to handle the suits because of his familiarity with the extensive litigation surrounding the Madoff funds, which turned out to be a massive Ponzi scheme.
Judge Lifland said in In re: Fairfield Sentry ltd, 10-13164, the liquidation for the British Virgin Islands
based funds-Fairfield Sentry Ltd., Fairfield Sigma Ltd. and Fairfield Lambda Ltd-could go ahead with 209 adversary proceedings seeking recovery in the Bankruptcy Court. He denied motions by defendants in 42 of those proceedings to remand their cases to the state court’s Commercial Division.
The Fairfield funds originally initiated insolvency proceedings in the Eastern Caribbean High Court of Justice, British Virgin Islands, shortly after Mr. Madoff’s fraud was uncovered in 2008. They also began filing lawsuits in the Commercial Division against parties they believed had earned fictitious profits through investments in the Fairfield funds at the same time they sought bankruptcy protection in the United States under Chapter 15, which covers cross border bankruptcies.
The lawsuits were intended to preserve the funds’ claims under the statute of limitations until they obtained Chapter 15 status. Once they obtained that status last year, they removed the cases from the Commercial Division to the Bankruptcy Court and filed further suits seeking recovery as adversary proceedings. The defendants In the New York suits had agreements with the Fairfield funds agreeing to New York jurisdiction; the liquidators are pursuing claims against other beneficiaries of the fraud not bound by such agreements in their home jurisdictions.
Defendants in 42 of the New York actions, including HSBC Bank USA, Citigroup AG, BGL BNP Paribas, Robinson & Co., Caceis Bank Luxembourg, Safra National Bank of New York and others, asked Judge Lifland to remand the cases to the Commercial Division on the grounds that they did not implicate bankruptcy law, but rather involved the common law claims asserted in state court and the insolvency law of the British Virgin Islands.
They also sought to remove the reference to the Bankruptcy Court and have the Southern District Court decide the remand motion, but Judge Loretta A. Preska denied that motion in November.
In denying the defendants’ motion to remand the cases to state court, Judge Lifland said that the litigation did not fall outside the scope of U.S. Bankruptcy Law simply because the original suits asserted claims under common and British Virgin Islands law.. In fact, he noted, the British Virgin Islands court explicitly authorized the liquidators to pursue claims in the United States.
“Consideration of the Common Law Claims and BVI Avoidance Claims in no way conflict with BVI law, as the BVI Court expressly empowered the Foreign Representatives to broadly pursue actions on behalf of the Debtors in the United States, ‘including without limitation, the United States Bankruptcy Court of the Southern District of New York’ and specifically authorized the assertion of the BVI Avoidance Claims,” he wrote.
The judge said the cases involved one of the circumstances for which Chapter 15 was created-a complex, cross border bankruptcy requiring the cooperation of multiple countries’ courts.
“This Court…finds that, under the circumstances here, subject matter jurisdiction over the Actions as a whole is consistent with Chapter 15, the tenor of which is to provide deference to the laws and policies of the foreign main proceeding in the interests of comity,” he wrote.
Judge Lifland said that, for this reason, the cases were “core proceedings” under the Bankruptcy Code, and that he could not decline to exercise jurisdiction over a core proceeding even if he wanted to.
He also said that the defendants would not be harmed by having their claims adjudicated In Bankruptcy Court.
“{T}he Court can conceive of no prejudice to the Movants in having the Actions proceed in this Court, rather than the State Court,” he said. “Conversely, bifurcating the Actions by remanding Common Law Claims, which are the only claims touching upon New York state law, would dramatically prejudice the BVI estate and the Foreign Representatives.”
David J. Molton of Brown Rudnick, who represented the liquidators, said he was “pleased” with the decision but declined to com ment further.
Robinson B. Lacy of Sullivan & Cromwell, who represented Safra National Banlc, could not immediately be reached for comment.
Thomas J. Moloney of Cleary Gottlieb Steen & Hamilton, who represented the other defendants, declined to comment.