Fairfield Liquidator Wins New Chance to Void Madoff Deal

Jan Wolfe, The Litigation Daily

September 27, 2014

As with any great financial upheaval, the collapse of Bernard L. Madoff Investment Securities brought opportunities for fees and profit. And as with Madoff’s fraud, some suffered plain old bad luck.

Some of that bad luck fell on KRyS Global, the professional services firm tasked with unwinding the Madoff feeder fund Fairfield Sentry Ltd. In 2010, KryS Global sold claims against the BLMIS liquidation trust to the hedge fund Farnum Place, a distressed debt investor. Three days after the sale, however, the claims doubled in value due to an unrelated $7 billion recovery by BLMIS trustee Irving Picard.

KryS Global has been trying to undo the Farnum deal ever since. Its hopes improved dramatically on Friday, thanks to a come-from-behind victory at the U.S. Court of Appeals for the Second Circuit. In a 20-page ruling, the Second Circuit ruled that a bankruptcy court judge needs to scrutinize whether Fairfield Sentry’s deal with Farnum is beneficial to the Fairfield Sentry estate, an inquiry known as a Section 363 review.

Now-deceased U.S. Bankruptcy Court Judge Burton Lifland in Manhattan had refused to conduct such a review, finding that he doesn’t have jurisdiction over Fairfield Sentry’s claims because its based in the British Virgin Islands. The Second Circuit disagreed, concluding that Lifland’s reasoning was flawed.

Kenneth Krys, the head of KryS Global, said in a statement that the Second Circuit “has provided a road map which the bankruptcy court will use to bring this matter to a resolution and put money into the hands of creditors and investors.”

Krys has long been represented by a Brown Rudnick team led by David Molton. For the Second Circuit oral argument, they tapped Paul Clement of Bancroft. Another appellate powerhouse, Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan, argued for Farnum.

Fairfield Sentry was the flagship fund of Fairfield Greenwich, the investment firm run by financier Walter Noel Jr. and his sons. They established Fairfield Sentry in the British Virgin Islands in order to allow non-U.S. persons and tax-exempt U.S. entities to invest in BLMIS. The minimum investment was $100,000.

After Madoff was exposed as a Ponzi schemer, a BVI court placed Fairfield Sentry into liquidation proceedings and appointed Krys and his colleagues at KryS Global to liquidate the fund. The role is similar to the one served by Baker & Hostetler’s Irving Picard, the trustee tasked with liquidating and fairly distributing BLMIS assets in the U.S. under the Securities Investors Protection Act.

Krys and Picard’s missions weren’t exactly compatible, however. In 2009, Fairfield Sentry claimed it was entitled to $1.2 billion of the Madoff estate. Meanwhile, Picard launched an adversary proceeding in hopes of clawing back billions from Fairfield Sentry. KryS and Picard ended up reaching a settlement that entitled Fairfield Sentry to a $230 million claim (“the SIPA claim”) against the BLMIS trust.

Fairfield sold the SIPA claim at an auction to Farnum. The hedge fund paid about $74 million, just 32 percent of the allowed amount. Three days after a contract for the sale was signed, Picard announced a $7.2 billion settlement with Madoff pal Jeffry Picower. According to the Second Circuit’s ruling, the influx of cash into the BLMIS liquidation trust increased the value of the SIPA claim by $40 million.

Following unsuccessful litigation in BVI courts, KryS Global urged Lifland to undo the deal. He rejected the request in a January 2013 ruling, calling it a “pure and simple case of seller’s remorse.” Lifland’s ruled the sale didn’t involve “the transfer of an interest in property within the U.S.,” so he didn’t have jurisdiction to review it under bankruptcy laws. The first review of Lifland’s ruling fell on U.S. District Judge Alvin Hellerstein in Manhattan, who affirmed later that year.

The Second Circuit has now breathed new life into the bid to void the sale. “Because we conclude that the sale of the SIPA claims is a ‘transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States,’ and therefore the sale is subject to review under section 363…we vacate and remand,” Judge John Walker Jr. wrote on behalf of a unanimous panel.