2nd Circ. Mulls Voiding Fairfield's Sale of $230M Madoff Claim
By Andrew Scurria
Law360, Harrisburg (May 21, 2014, 7:58 PM ET) — Attorneys for a hedge fund that wisely bought a $230 million claim in the Bernard L. Madoff liquidation urged the Second Circuit on Wednesday to uphold the transaction, saying the Chapter 15 representative of a bankrupt Madoff feeder fund can’t void the sale based on “seller’s remorse.”
Arguing for hedge fund The Baupost Group LLC, Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan LLP said that Madoff feeder Fairfield Sentry Ltd.’s foreign bankruptcy representative lacked standing to ask the appeals court to undo the fund’s 2010 sale of its Securities Investor Protection Act claim, which later skyrocketed in value.
The British Virgin Islands court overseeing Fairfield’s liquidation refused to invalidate the sale, and the case hinges on whether Chapter 15 of the U.S. Bankruptcy code allows Fairfield’s foreign representative Kenneth Krys to attack the British Virgin Islands court decision through Fairfield’s New York bankruptcy case. Baupost contends that the deal is done.
“The attempts to come to this court turn Chapter 15 on its head,” Sullivan said. “We think it would be profoundly wrong for a U.S. court to say, ‘we get to have a do-over.’”
Sullivan contended that Chapter 15 precludes Krys from “disrespecting” the foreign court and that the SIPA claim does not qualify for bankruptcy court review because it is not property within U.S. territorial jurisdiction.
The case stems from a settlement between Fairfield and Bernard L. Madoff Investment Securities LLC trustee Irving H. Picard that provided the feeder fund with an allowed $230 million SIPA claim in the BLMIS liquidation, subject to Fairfield’s payment of $70 million in cash to Picard.
In a bid to raise cash for the Fairfield estate, Krys sold the claim to a special-purpose vehicle owned by Baupost called Farnum Place LLC for about 32 cents on the dollar, slightly above the 25 cents claims were trading for at the time, according to court records. But just three days after the sale closed, Picard finalized a $7.2 billion settlement with the estate of Jeffrey Picower that brought $5 billion more into the BLMIS estate.
Prices for BLMIS claims jumped dramatically, prompting Krys to petition the British Virgin Islands’ Eastern Caribbean Supreme Court to invalidate the sale. When the court refused, Krys asked the late U.S. Bankruptcy Judge Burton R. Lifland to intercede.
Judge Lifland likewise declined, holding that because the transaction did not transfer property within the territorial jurisdiction of the U.S., it is not subject to review under Section 363 of the U.S. Bankruptcy Code, which governs the sale of assets in bankruptcy.
U.S. District Judge Alvin Hellerstein affirmed that decision, saying that it was unclear whether Section 363 applied because the transfer involved “intangible property” and that the property’s location is determined by New York state law. The judge said that even if the sale might trigger a Section 363 review, it was not plainly unreasonable so as to warrant contradicting the Virgin Islands court’s decision.
Former U.S. Solicitor General Paul Clement of Bancroft PLLC, representing Krys, questioned the lower courts’ deference, saying Wednesday that the Virgin Islands court had made it “crystal clear” that it wanted a U.S. court to make a determination on the propriety of the sale. A fear of “offending” foreign bankruptcy courts is no reason for U.S. courts to abstain altogether in evaluating asset transfers, he said.
Clement also argued that the disputed SIPA claim is property within the U.S. and that deferring to the Virgin Islands court over international comity concerns “would be a mistake” because Congress meant for Section 363 review procedures to apply as forcefully in Chapter 15 cases as in domestic bankruptcies.
Sullivan countered that Krys was never authorized by the Virgin Islands court to take any adverse rulings to the Second Circuit, and that as a creature of the Virgin Islands court, he must abide by its restrictions.
Should the panel court find he has standing, though, Sullivan argued that the SIPA claim is more akin to “a lottery ticket” than to tangible property. As such, it falls outside the territorial ambit of the U.S., according to Sullivan.
“It’s the lottery ticket that is the property here, not the Madoff money,” she said.
Krys is represented by David J. Molton, May Orenstein, Daniel J. Saval and Marek Kryzowski of Brown Rudnick LLP and Paul D. Clement of Bancroft PLLC.
Farnum is represented by Robert Craig Juman, Shane Heather McKenzie, Matthew Ryan Scheck, Scott Christopher Shelley, Kathleen M. Sullivan, Cleland B. Welton II and Eric D. Winston of Quinn Emanuel Urquhart & Sullivan LLP.
The case is In Re: Fairfield Sentry Ltd, case number 13-3000, in the U.S. Court of Appeals for the Second Circuit. –Editing by Richard McVay