Bankruptcy Judge Nixes Fund's Buy Of $230M Madoff Claim
Published in Law360, October 15, 2015
By Kurt Orzeck
A New York federal bankruptcy judge has granted a request by the liquidator for an offshore Bernard L. Madoff feeder fund to undo its allegedly imprudent sale of a $230 million claim against the Ponzi schemer’s defunct firm to a hedge fund.
U.S. Bankruptcy Judge Stuart M. Bernstein on Tuesday granted a motion by the Chapter 15 representative for Fairfield Sentry Ltd.’s British Virgin Islands liquidation to disapprove the sale, ruling the liquidator should be permitted to hold the claim and receive recoveries for the fund’s creditors, or sell it at a much higher price.
The liquidator, Kenneth Krys, sold the Securities Investor Protection Act claim to Boston-based hedge fund Baupost Group LLC days before it skyrocketed in value. A spokeswoman for Brown Rudnick LLP, which is representing Krys, said in a Thursday statement that the Fairfield Sentry estate stood to lose $90 million if Krys had been forced to complete the sale.
The Second Circuit in September 2014 revered a lower court decision that barred Krys from attacking the transaction through the feeder fund’s New York bankruptcy case, ruling it was subject to U.S. court review. Judge Bernstein decided on Thursday that Krys had had shown a sufficient business reason for seeking disapproval after the claim rose in value.
“The sale price of the Sentry claim … is disproportionately low in light of its increased value, and the alternative to the sale to Farnum, under which [Krys] will hold the claim and receive his distribution or sell it to someone else at a much higher price, is in the best interest of the Sentry estate,” the ruling said.
The case stems from a settlement between Fairfield and Picard, which provided the fund with an allowed $230 million SIPA claim subject to a $70 million cash payment to the BLMIS estate.
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 a special-purpose vehicle owned by Baupost called Farnum Place LLC for 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, BLMIS 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, prompting Krys to petition the BVI Eastern Caribbean Supreme Court to invalidate the sale.
The appeals court in September 2014 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. The panel also held that there was no reason to defer to the BVI bankruptcy court’s refusal to block the deal.
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.
Brown Rudnick attorney David Molton said in Thursday’s statement that they were very pleased with the judge’s decision.
“The liquidators are now free to obtain the full value of this substantial claim for the benefit of its stakeholders,” he said.
Eric D. Winston of Quinn Emanuel Urquhart & Sullivan LLP, which is representing Farnum Place, told Law360 on Thursday that they are reviewing the decision.
Krys is represented by David J. Molton, May Orenstein, Daniel J. Saval and Marek P. Krzyzowski of Brown Rudnick LLP.
Farnum Place LLC is represented by Scott C. Shelley, Eric D. Winston and Matthew Scheck of Quinn Emanuel Urquhart & Sullivan LLP.
The case is In Re: Fairfield Sentry Ltd. et al., case number 1:10-bk-13164, in the U.S. Bankruptcy Court for the Southern District of New York.