2nd Circ. OKs Nixing Of Fund's $230M Madoff Claim Sale

Originally posted on Law360

By Ryan Boysen

Law360, New York (May 22, 2017, 4:24 PM EDT) — A New York bankruptcy court was right to scrap the sale of a $230 million claim by the liquidator for an offshore Bernard L. Madoff feeder fund to a hedge fund, the Second Circuit affirmed on Monday, saying offshore Chapter 15 sales are still subject to U.S. court review.

The liquidator for Fairfield Sentry Ltd., Kenneth Krys, sold the fund’s Securities Investor Protection Act claim against the Ponzi schemer’s defunct firm to an affiliate of Boston-based hedge fund Baupost Group LLC in 2010, just days before it skyrocketed in value after a settlement that brought in billions for Madoff’s estate.

Krys’s efforts to undo the sale, executed in the course of Fairfield’s British Virgin Islands liquidation, were rebuffed by the BVI Eastern Caribbean Supreme Court, a U.S. bankruptcy court and a U.S. district court before the Second Circuit finally sided with him in 2014 and remanded the issue to a New York bankruptcy court, saying it was obligated to review the sale under Section 363.

That court found that a 363 review led it to cancel the sale, since there was no “sound business reason” to approve it. In Monday’s unpublished opinion, a unanimous Second Circuit panel agreed, despite Baupost’s objections that the principle of comity should have led the U.S. bankruptcy court to defer to the BVI court’s earlier decision approving the sale.

“Even assuming that comity can be considered in [a 363 review, Baupost] has not demonstrated that it obviously compels a result contrary to that reached” in the Second Circuit’s 2014 ruling, the court wrote. “The post-sale increase in the value of debtor’s claim against [Bernard L. Madoff Investment Securities] still provides a ‘good business reason’ to disapprove the transaction … that is not clearly outweighed by comity.”

The court added that the BVI court had said in its own ruling that it did not “expect or desire deference” to its approval of the sale, and fully expected the U.S. bankruptcy court to complete its own, separate review.

In a statement, Krys called Baupost unit Farnum Place LLC’s argument a hail mary, and said he’d hoped the court would “dispense of [it] … without too much difficulty. However, the speed at which they produced the summary decision … surprised even us,” adding that he’s “very pleased” with the decision.

The SIPA claim’s jump in value occurred just after the sale was agreed to by the parties, but before it was approved by the BVI court or the U.S. bankruptcy court. Krys said in an earlier statement that if it had been approved, it would’ve caused Fairfield, the largest Madoff feeder fund, to miss out on roughly $90 million that could’ve gone to its creditors. The Second Circuit also rejected Baupost’s argument that a 2010 order “entrusting the administration or realization of all or part of [Fairfield’s] assets within the territorial jurisdiction of the United States to the” BVI court prevented it from reviewing and canceling the sale.

The Second Circuit said both that argument and the comity argument were made irrelevant by the mandate it gave the U.S. bankruptcy court on remand, which specifically instructed it to review the sale under Section 363 and only approve it if there was a “good business reason” to do so.

“On remand, the bankruptcy court conducted a [363 review] and disapproved the sale based upon the post-sale increase in value of debtors’ claim against BLMIS,” the court wrote. “In reaching its conclusion, it suggested that both the entrustment and comity arguments were foreclosed by [the earlier decision’s] mandate. This was correct.”

Neither party responded to requests for comment on Monday.

Krys is represented by Jeffrey A. Lamken of MoloLamken LLP, and David J. Molton, May Orenstein, Daniel J. Saval and Marek P. Krzyzowski of Brown Rudnick LLP.

Farnum Place LLC, a Baupost unit, is represented by Kathleen M. Sullivan, Cleland B. Welton II and Eric D. Winston of Quinn Emanuel Urquhart & Sullivan LLP.

The case is Farnum Place LLC v. Kenneth M. Krys, case number 16-2127-bk, in the United States Court of Appeals for the Second Circuit.

–Additional reporting by Andrew Scurria and Maria Chutchian. Editing by Joe Phalon.