2nd Circ. Affirms Wide Reach For Chapter 15 Courts
By Andrew Scurria
Law360, New York (January 13, 2015, 6:03 PM ET) — The full Second Circuit on Tuesday stood behind a landmark panel decision that jeopardized a hedge fund’s purchase of a $230 million claim against the Bernard Madoff bankruptcy estate and enhanced Chapter 15 courts’ ability to unwind foreign transactions.
Without comment, the appeals court refused to grant an en banc rehearing to Baupost Group LLC, a Boston-based hedge fund fighting to preserve a well-timed agreement to buy the Securities Investor Protection Act claim once held by Fairfield Sentry Ltd., the largest of the so-called feeder funds that funneled money into Madoff’s $20 billion Ponzi scheme.
Fairfield’s foreign liquidator, Kenneth Krys, persuaded a Second Circuit panel in September to order a full review of that sale under Section 363 of the U.S. Bankruptcy Code to determine if it served the interests of Fairfield investors that lost everything in the fraud.
The decision to let Krys attack the transaction through the feeder fund’s New York bankruptcy proceeding caught the attention of bankruptcy lawyers for its aggressive stance toward the responsibility of Chapter 15 courts to review extraterritorial asset transfers.
At stake is the liquidator’s attempt to undo his imprudent sale of Fairfield’s claim against Bernard L. Madoff Investment Securities LLC, the jailed con man’s defunct firm. Looking to raise cash, Krys sold the claim, which had been negotiated in a previous settlement with BLMIS trustee Irving Picard, to Baupost for 32 cents on the dollar — more than the market thought it was worth.
Three days later, a $7 billion settlement between BLMIS trustee Irving Picard and Jeffry Picower, a primary beneficiary of the Ponzi scheme, unexpectedly sent the value of the claim through the roof.
The liquidator’s obvious course was to back out of the deal and sell the claim again, at the higher price. The British Virgin Islands court handling Fairfield’s liquidation would not let him do so, however, under English law principles that do not require asset deals to be in the best interests of creditors.
Fairfield’s Chapter 15 court and a New York federal judge likewise declined to intercede. Despite Baupost’s contention that the case was nothing more than buyer’s remorse, the Second Circuit reversed, finding that the transaction fell within the “territorial jurisdiction” of the U.S. and was therefore reviewable under Section 363, which governs the sale of assets in bankruptcy.
The panel also held that there was no reason to defer to the BVI court’s refusal to block the deal, saying that while Chapter 15 courts must align themselves to some extent with foreign insolvency rules, international comity does not require watering down the creditor protections of Section 363.
The decision was the first to apply those protections as forcefully in Chapter 15 cases as they do in Chapter 11 or Chapter 7.
The panel left it up to the bankruptcy court to decide the merits of Krys’ request but stressed the “broad discretion” of bankruptcy courts to enhance creditor recoveries. The SIPA claim’s $40 million jump in value after the Picower settlement should factor into that determination, the opinion said.
The Second Circuit later signaled a willingness to reconsider, ordering Krys to respond to Baupost’s contention, made in a rehearing petition, that there might be other reasons “that might preclude the need for a Section 363 hearing.”
Among those arguments were 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.
Barring an appeal to the U.S. Supreme Court, the matter will now return to U.S. Bankruptcy Judge Stuart Bernstein for review. If the transaction fails to pass Section 363 muster, the SIPA claim can revert to Krys.
Representatives for Baupost could not immediately be reached for comment.
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.