Fairfield Trustee Loses Bid To Undo $230M Madoff Claim Sale - Law360 (July 2013)

Fairfield Trustee Loses Bid To Undo $230M Madoff Claim Sale – Law360 (July 2013)

A New York federal judge on Tuesday refused to allow the trustee for Fairfield Sentry Ltd., a Bernard L. Madoff feeder fund, to undo the sale of a $230 million claim in the Madoff liquidation, rejecting his appeal.

U.S. District Judge Alvin Hellerstein said he would not allow Fairfield trustee Kenneth Krys to back away from a deal in which it sold its claim against Madoff to Farnum Place LLC, an entity owned by hedge fund The Baupost Group.

Krys agreed to take about 32 cents on the dollar from Farnum for Fairfield’s Madoff claim, but tried to undo the deal after Madoff trustee Irving Picard negotiated settlements that brought more money into the estate. Had Krys not sold the claim, the Fairfield estate would have received much more money.

Judge Hellerstein, though, said that Fairfield had to honor its agreement, upholding a bankruptcy court judge’s decision.

“This deal made economic sense,” the judge said in a ruling from the bench. “It allowed the entity Fairfield Sentry … a minimum in a complicated, difficult and hard to quantify estate at the time.”

Farnum’s lawyer, Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan LLP, argued earlier that Krys should not be allowed to back out.

“He made a deal and he should abide by his judgment,” she said.

A lawyer for Krys, David J. Molton of Brown Rudnick LLP, argued that the sale should not have been considered final because it was not reviewed under Section 363 of the U.S. Bankruptcy Code, which governs the sale of assets in bankruptcy.

Judge Hellerstein’s ruling affirms a decision from U.S. Bankruptcy Judge Burton R. Lifland.

“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 Judge Lifland.

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 Jeffry Picower, $5 billion of which was to be paid to the trustee, leading to a “dramatic” jump in prices offered for BLMIS claims.

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.

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.

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 Kathleen Sullivan, 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 1:10-bk-13164, in the U.S. Bankruptcy Court for the Southern District of New York.