Appeals Court Ruling Offers New Hope for Madoff Investor
Jacqueline Palank, WSJ Bankruptcy Blog
September 26, 2014
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A federal appeals court on Friday ruled that a bankruptcy judge must review a bid to sell a $230 million claim in the Bernard Madoff liquidation, offering new hope to the seller’s bid to break off the deal.
The U.S. Court of Appeals for the Second Circuit on Friday ruled that a Manhattan bankruptcy judge erred in declining to review the sale of a claim held by major Madoff feeder fund Fairfield Sentry Ltd.
The bankruptcy court had concluded, and a district court affirmed, that it didn’t need to weigh in because the deal didn’t involve assets under U.S. jurisdiction. The appeals court took the opposite view, reversing the lower courts’ decision and sending the case back to the bankruptcy court.
At issue is a $230 million claim held by Fairfield Sentry, a British Virgin Islands fund that funneled nearly all of its investors’ cash to Mr. Madoff. The fund decided to sell the claim, but after reaching a deal to do so, a massive settlement with another investor dramatically changed the playing field and drove up the price such claims were fetching on the secondary market. As a result, Fairfield had second thoughts about selling the claim, leading to the resulting litigation between buyer and seller.
Prior rulings didn’t give Fairfield hope of modifying or breaking off the deal, but the Second Circuit’s decision does.
“To the extent we’re able to show the bankruptcy court that the value of the claim is in excess of the trade confirmation value, it gives us confidence that the bankruptcy court will allow us to sell to a higher bidder or even hold on to the claim and get paid out by Mr. Picard at the higher price,” Mr. Krys’s attorney, David J. Molton of Brown Rudnick, told The Wall Street Journal Friday.
In a statement, Mr. Krys said the ruling offers a “road map” to resolve the dispute and put money into the hands of creditors and investors.
After Mr. Madoff’s massive Ponzi scheme was exposed in 2008, both his investment firm and Fairfield entered liquidation proceedings. A major asset of Fairfield in its liquidation, which was filed in a British Virgin Islands court, was a claim against Mr. Madoff’s investment firm for roughly $1 billion. The trustee winding down Mr. Madoff’s firm, Irving Picard, not only objected to that claim but also said Fairfield owed Mr. Madoff’s firm several billion dollars.
Fairfield’s court-appointed liquidator, Kenneth Krys, and Mr. Picard later settled their dispute by granting Fairfield an allowed $230 million claim in the Madoff case and requiring Fairfield to pay Mr. Madoff’s firm $70 million.
Fairfield later agreed to sell its $230 million claim to Farnum Place LLC for 32.125% of the claim’s amount. Sales of such claims are common, as they help sellers get a quick payment and avoid uncertainty and allow buyers to make a bet that they’ll collect more on the claim than what they pay for it.
Shortly after the claim sale was negotiated, however, Mr. Picard announced a landmark $7 billion settlement with another of Mr. Madoff’s investors that dramatically increased the amount of money available to repay those cheated in the fraud. As a result, trading prices for claims in the Madoff proceeding soared, making the proposed sale of the Fairfield claim a potential windfall for Farnum Place but not such a good deal for Fairfield.
An attorney for Farnum Place, Eric Winston of Quinn Emanuel, said Friday that “we are disappointed in the decision, and we are considering all options at this time.”
Write to Jacqueline Palank at jacqueline.palank@wsj.com.