Fairfield Tries To Preserve Challenge Of $230M Madoff Sale

Law360, New York (November 24, 2014, 6:09 PM ET) — The liquidator for an offshore Bernard L. Madoff feeder fund on Friday urged the Second Circuit not to revisit its decision allowing a challenge to the sale of a $230 million claim against the Ponzi schemer’s defunct firm, saying a lower court has already rejected arguments to the contrary.

British Virgin Islands-based liquidator Kenneth Krys said Boston-based hedge fund Baupost Group LLC, which bought Krys’ Securities Investor Protection Act claim on the cheap days before it rose $40 million in value, is rehashing “alternative” lines of reasoning in seeking to hang on to the claim.

A Second Circuit panel in September ruled that Krys could try to reverse the ill-timed sale, reversing a decision that barred Krys, the Chapter 15 representative for Fairfield Sentry Ltd.’s British Virgin Islands liquidation, from attacking the transaction through the feeder fund’s New York bankruptcy case.

The New York bankruptcy court must now examine whether there is a “good business reason” to approve the deal. If not, the SIPA claim will return to Krys. Crucially, the appeals court held 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.

An Oct. 10 filing by the hedge fund asked the appeals court to review the decision, and the court ordered Krys to respond to the contention that there might be other reasons “that might preclude the need for a section 363 hearing” examining the sale.

The claim’s buyer, a special-purpose vehicle owned by Baupost called Farnum Place LLC, argued that application of Section 363 was discretionary, not mandatory, and that the bankruptcy court’s recognition of Fairfield’s British Virgin Islands insolvency action as the main foreign proceeding gave Krys the power to make the sale without prior court approval. The hedge fund further argued that the sale of the SIPA claims was an “ordinary course of business” transaction that doesn’t require a Section 363 hearing.

“Farnum made each of these arguments to the district court,” Krys said in his Friday filing. “And the district court rejected each of them.”

Krys said the district court during oral arguments responded to the argument that the SIPA claim transfer was in the ordinary course of business by saying “clearly it was not” and found it was unclear whether Section 363 applied in this case.

The court did not, however, find conclusively that Section 363 was inapplicable as would be expected if it were persuaded by any of Farnum’s alternative arguments, the trustee said.

“In this case, Farnum raised, briefed, and pressed its three alternative arguments before the district court, and the district court expressly rejected one of them and impliedly rejected all of them,” Krys said. “The district court has ‘already adjudicated’ these issues … and Farnum is not entitled to another bite at the apple on remand.”

Attorneys for Farnum could not be immediately reached for comment on Monday.

Before the Second Circuit’s reversal, two lower courts had refused to intercede on Krys’ behalf. In a bid to raise cash for the Fairfield estate, he had sold the SIPA claim to Farnum for $70 million, or about 32 cents on the dollar, slightly above the 25 cents that claims were trading for at the time, according to court records.

Three days after the deal closed, Bernard L. Madoff Investment Securities LLC trustee Irving Picard finalized a $7.2 billion settlement with the estate of Madoff investor Jeffrey Picower that brought in more than $5 billion. Prices for SIPA claims jumped dramatically, and Krys petitioned the BVI Eastern Caribbean Supreme Court to invalidate the sale to Farnum.

When that effort failed, Krys turned to U.S. Bankruptcy Judge Burton R. Lifland, who likewise declined to call the transaction into question. U.S. District Judge Alvin Hellerstein then affirmed that decision.

The Second Circuit left it up to the bankruptcy court to decide the merits of Krys’ request but stressed that there must be a “good business reason” to approve the sale and that it has “broad discretion” to enhance creditors’ recovery. The SIPA claim’s $40 million jump in value after the Picower settlement should factor into that determination, the panel 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.

–Additional reporting by Pete Brush and Andrew Scurria.  Editing by Brian Baresch.