Hedge Fund Takes Nix Of $230M Madoff Claim To High Court

Originally from Law360.com

By Ryan Boysen

Law360, New York (September 14, 2017, 5:35 PM EDT) — A hedge fund is asking the U.S. Supreme Court to review a Second Circuit decision that let a U.S. bankruptcy court void the sale of a $230 million claim despite the earlier approval of a foreign bankruptcy court, saying the precedent could have “destructive consequences” for multinational bankruptcy proceedings if it’s allowed to stand.
A unit of Boston-based hedge fund Baupost Group LLC bought the Securities Investor Protection Act claim in 2010 from the liquidator for Fairfield Sentry Ltd., an offshore Bernie Madoff feeder fund that entered bankruptcy proceedings in the British Virgin Islands in 2009. The claim’s value jumped to roughly $110 million just days after Baupost unit Farnum Place LLC purchased it for $70 million, thanks to a settlement that brought in billions for Madoff’s estate.

The BVI Eastern Caribbean Supreme Court rebuffed liquidator Kenneth Krys’ attempts to undo the sale, and a U.S. bankruptcy court followed suit before the Second Circuit finally sided with Krys in 2014 and remanded the issue to a New York bankruptcy court, saying it was obligated to review the sale under Section 363. On remand, the bankruptcy court voided the sale.

Fresh off a second loss in the Second Circuit, Baupost is now asking the Supreme Court to take up the case, saying the appeals court “gravely misread” Chapter 15 of the U.S. Bankruptcy Code in making its decisions. If they’re allowed to stand, Baupost says, it could throw a wrench into Chapter 15 proceedings in the very circuit that handles the most of them, at a time when multinational bankruptcies are becoming more common than ever before.

“Under the Second Circuit’s decisions, the role of ‘ancillary’ U.S. courts will not be to assist ‘foreign main’ insolvencies as Chapter 15 envisions, but rather to hinder them by interjecting U.S. review processes into foreign transactions that have already been approved by foreign courts,” Baupost says in its petition for certiorari.

“The prospect of multiple, duplicative and potentially inconsistent court approval requirements will discourage potential asset acquirers … And U.S. courts’ disregard for foreign bankruptcy judgments will invite reciprocal disregard  by foreign courts,” Baupost adds. “This court’s intervention is needed to avoid these destructive consequences.”

Fairfield’s bankruptcy in the BVI bankruptcy court consituted the “foreign main” proceedings, under the terminology of Chapter 15, while a parallel case in the Southern District of New York served as an “ancillary proceeding.”

Kathleen M. Sullivan of Quinn Emanuel Urquhart & Sullivan LLP, which represents Farnum, told Law360 that “We believe the petition presents very important questions of cross-border bankruptcy law that merit the court’s review.”

U.S. Bankruptcy Judge Burton R. Lifland made the right call in initially refusing to void the sale after the BVI bankruptcy court approved it, citing the legal principle of comity, or deference to foreign courts, Baupost says.

Judge Lifland’s decision said that Chapter 15 was “designed around this central concept of comity” and not “to permit parties to mix and match multiple countries’ laws” for their own purposes. Lifland, as Baupost is careful to point out in its brief, was one of the original drafters of Chapter 15.

The Second Circuit disagreed in its 2014 decision, saying that while U.S. bankruptcy courts are required to some extent to align their decisions with the insolvency regimes in foreign jurisdictions, comity does not require watering down Section 363 protections. Section 363 applies in Chapter 15 proceedings “to the same extent” as Chapter 11 or Chapter 7, the court said in that ruling.

Baupost says however, Chapter 11 and Chapter 7 both provide for comity to be considered as a factor in approving a 363 sale, so it makes no sense to set the bar even higher in a Chapter 15 case, where comity should be more important.

“Because a court in a Chapter 7 or Chapter 11 case could grant comity to a foreign judgment, the court in a Chapter 15 case is free to do so as well,” Baupost writes.

Baupost also says an order issued by Judge Lifland that “entrusted” Fairfield’s assets to Krys means that any subsequent sale of those assets does not require further court approval  — a position Krys himself took when asking for the order. Krys sought the order in July 2010, shortly after filing for Chapter 15 but several months before Baupost bought the SIPA claim at auction.

The Second Circuit rejected that argument in its second decision in May, saying a foreign debtor’s sale of a U.S. asset requires judicial review regardless of an “entrustment” order.

“As with its comity holding in Sentry I, the Second Circuit’s entrustment holding in Sentry II further conflicts with the overall structure and purpose of Chapter 15 [and] violates the canon of construction that the court ‘consider [Chapter 15’s] international origin,’” Baupost wrote, citing the Bankruptcy Code.

Baupost says that if the decisions stand, they could turn important aspects of Chapter 15 “on their head.”

The inevitable outcome of these holdings will be precisely the set of concerns that motivated Chapter 15’s enactment in the first place,” Baupost wrote. “Investors looking at the uncertainty … generated by the decisions in this case will be hesitant to purchase foreign debtors’ U.S. assets for fear that they may waste years in litigation only to have their deals undone by a supposedly ‘ancillary’ court.”

Representatives for Krys declined to comment on Monday, and representatives for Baupost did not respond.

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.