District Court Judge Affirms Bankruptcy Decision Disapproving $230M Sentry Claim

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Relevant Document:

Opinion

Judge Alvin Hellerstein affirmed Judge Stuart Bernstein’s October decision in Fairfield Sentry’s now-disapproved sale of its $230 million Madoff customer claim to Baupost single-purpose entity Farnum Place. In November, Kenneth Krys, as both liquidator and foreign representative for Fairfield Sentry, filed a notice of cross-appeal to the extent that the October ruling holds that Farnum “has standing to oppose and be heard on the Foreign Representative’s Motion and to seek any affirmative relief by and through the Farnum Place Motions.” The briefing on the appeal concluded in early April.

Judge Hellerstein writes that the Second Circuit instructed the bankruptcy court to conduct a section 363 review on remand, providing some “guiding principles” from the case law. “The Court of Appeals identified an asset’s change in value as a salient factor, and explicitly directed the Bankruptcy Court to consider ‘the increase in value of the Sentry Claim between the signing of the Trade Confirmation and approval by the bankruptcy court.’” Judge Hellerstein asserts that these considerations “amply support” Judge Bernstein’s decision.

Specifically, Judge Bernstein found that the increased value of the Madoff claim was the “most important factor” and “plainly weighs against the approval of the sale.” Additionally, Judge  Hellerstein agrees with Judge Bernstein’s determination that the increased market value of the Madoff claim was of “overarching importance” (emphasis added).

The opinion then turns to Farnum’s statutory argument that because Krys was “entrusted” under section 1521(a)(5) of the Bankruptcy Code as a foreign representative, further judicial review of the sale is not warranted. First, Judge Hellerstein disagrees with Farnum and concludes that the Second Circuit’s mandate precludes this statutory argument, writing “the Second Circuit’s instructions for remand were mandatory: upon vacating the bankruptcy court’s decision, the case was remanded ‘to the district court with instructions to remand to the bankruptcy court to conduct the section 363 review.’”

Nevertheless, Judge Hellerstein writes that even if Farnum’s statutory argument were outside of the mandate it is “unpersuasive.” Delving into the text of section 1521, Judge Hellerstein agrees with Judge Bernstein that Farnum is wrong to assume that the statutory delegation of responsibility “must be unlimited or unreviewable.” The opposite is true, writes the judge, “a foreign representative can have the authority to administer the divestiture of assets even if such divestiture of US-located assets is subject to judicial review under the terms of section 1520(a)(2).” This conclusion is “confirmed by the mandatory and unequivocal language of the Second Circuit’s opinion” which “leaves little room for doubt: section 1520 applies to the transfer at issue in this case and section 363 review was properly undertaken.”

Judge Hellerstein rejects Farnum’s arguments based on legislative history since they are not reconciled with the fact that the provisions in question were adopted piecemeal from Article 21 of the United Nations Commission on International Trade’s Model Law on Cross-Border Insolvency.

The opinion concludes by affirming Judge Bernstein’s ruling and closing the appeal.