2nd Circ. Cracks Door After Foreign Madoff Fund Sale Ruling

Law360, New York (November 04, 2014, 5:06 PM ET) By Pete Brush — The Second Circuit on Monday ordered the liquidator of an offshore Madoff feeder fund, who is seeking to undo the imprudent sale of a $230 million claim against the con man’s defunct securities firm, to show why other arguments can’t be considered to sink his bid in U.S. courts to undo the deal.

After making waves in September with a ruling that British Virgin Islands-based liquidator Kenneth Krys — who sold his Securities Investor Protection Act claim to Boston-based hedge fund Baupost Group LLC on the cheap days before it rose in value — could pursue redress in New York bankruptcy court, the new order suggested the Second Circuit was willing to reconsider.

An Oct. 10 filing by the hedge fund had asked the court for review of the decision and the appellate court, in a two-page missive, ordered Krys to respond to the contention that there might be other reasons “that might preclude the need for a section 363 hearing.”

Critically, the appeals court held Sept. 26 that the transaction fell within the “territorial jurisdiction” of the United States and was therefore reviewable under Section 363 of the U.S. Bankruptcy Code, which governs the sale of assets in bankruptcy.

But the hedge fund’s Oct. 10 petition said the ruling “is in error, and will affect virtually every transnational insolvency case with a U.S. arm.” The filing added that the decision “will force courts into needless conflict.”

The petition said the Second Circuit ruled without addressing the “alternative arguments” of Farnum Place LLC, the special-purpose vehicle owned by Baupost named in the litigation.

Among those arguments are that U.S. bankruptcy judges have the discretionary power to conduct such reviews and that Krys’ bid for a review of his sale was correctly rejected since he only asked for it after the sale of the claim had become binding.

In addition, the sale was fully within Krys’ “entrustment power” over all assets of the feeder fund — Fairfield Sentry Ltd. — regardless of where they were located, the hedge fund argued.

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.

–Additional reporting by Andrew Scurria. Editing by Kelly Duncan.