Fairfield Sentry Can't Undo Sale of $230M Madoff Claim

Maria Chutchian (www.Law360.com)–A New York bankruptcy judge on Thursday refused to allow the trustee for Bernard L. Madoff feeder fund Fairfield Sentry Ltd. to invalidate the sale of a $230 million claim in the Madoff liquidation that later spiked in value.

In his decision, U.S. Bankruptcy Judge Burton R. Lifland blasted Sentry trustee Kenneth Krys’ “Hail Mary” attempt to undo the sale to Farnum Place LLC following a multibillion settlement in the Bernard L. Madoff Investment Securities LLC liquidation just three days after the sale was executed, causing the claim to be worth much more than it was sold for.

“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,” Judge Lifland said in the decision.

Under a settlement with Madoff trustee Irving H. Picard, Fairfield became entitled to an allowed Securities Investor Protection Act Claim in the BLMIS proceedings for $230 million, subject to Krys’ payment of $70 million of Sentry’s cash to Picard.

In 2010, Fairfield began looking for a buyer of the claim, despite “many publicly available facts suggesting that the trustee could obtain substantial returns for the BLMIS customer funds,” according to the decision.

But in early December, Krys accepted Farnum’s offer to purchase the claim for 32.1 percent of its ultimate allowed amount — about on par with other BLMIS customer claims trading at that time — saying it was in the best interest of the Fairfield estate.

Three days later, Picard announced a $7.2 billion settlement agreement with the estate of Jeffrey Picower, $5 billion of which was to be paid to the trustee, leading to a “dramatic” jump in prices offered for BLMIS claims, according to the decision.

Krys initially attempted to undo the sale in the Eastern Caribbean Supreme Court in the High Court of Justice, Commercial Division, of the British Virgin Islands, which is overseeing the liquidation of Fairfield, but was unsuccessful, the decision says.

Judge Lifland held that because the sale did not involve a transfer within the territorial jurisdiction of the U.S., it is not subject to review under Section 363 of the U.S. Bankruptcy Code.

The judge also called Krys’ efforts to invalidate the sale “a pure and simple case of seller’s remorse.”

In June 2010, the court approved Fairfield’s request for Chapter 15 bankruptcy in the U.S., granting U.S. recognition to the Fairfield bankruptcy underway in the British Virgin Islands.

Counsel for Krys could not be immediately reached for comment Thursday.

Krys is represented by David J. Molton, William R. Baldiga, May Orenstein and Daniel J. Saval of Brown Rudnick LLP.

Farnum Place is represented by Eric D. Winston, Shane McKenzie and Matthew Scheck of Quinn Emanuel Urquhart & Sullivan LLP.

The case is In re: Fairfield Sentry Ltd. et al., case number 10-13164, in the
U.S. Bankruptcy Court for the Southern District of New York.