KRyS Global secures a landmark decision in US Bankruptcy Court
October 15, 2015
Kenneth Krys and Charlotte Caulfield of KRyS Global, the British Virgin Islands Joint Liquidators of Fairfield Sentry Limited, secured a significant decision yesterday (October 13, 2015) when US Bankruptcy Judge, Stuart M. Bernstein handed down his decision granting their motion to disapprove the sale of their $230 million allowed SIPA claim in the Bernard L Madoff Investment Securities Inc. liquidation, to Farnum Place (a Baupost special purpose entity) and US hedge fund.
The decision means that foreign representatives, appointed under Chapter 15 of the US Bankruptcy Code, must now seek approval of the US Bankruptcy Court in relation to any proposed US-based asset sales, other than those in the ordinary course of business per the provisions of s363 of the Code. Such sales will only be given approval where the proposed sale is in the interests of the debtor estate, assessed at the time of the approval being sought, rather than at the date of the sales negotiation. Foreign representatives must demonstrate to the Bankruptcy Court a sound business decision in reaching their conclusion to seek the Court’s approval or disapproval of the sale.
Kenneth Krys commented: “I am delighted with the decision as it will ultimately be the victims in Fairfield who will benefit from the recoveries on the SIPA claim. The Bankruptcy Court has reiterated the duty of foreign representatives to get the best value for their estates and ensured that this duty can be safeguarded by the s363 approval process.”
David J. Molton and Dan Saval of Brown Rudnick LLP acted as counsel for the Liquidators in this matter.
Judge Revokes Sale of Firm’s Bernard Madoff Claim
Fairfield Sentry backed in efforts to annul undervalued sale to Farnum Place
Published in The Wall Street Journal October 15, 2015
By Jacqueline Palank
A bankruptcy judge agreed to undo the sale of a $230 million claim against Bernard Madoff’s liquidating investment firm, offering hopes of a higher recovery to certain Madoff investors.
Judge Stuart Bernstein of the U.S. Bankruptcy Court in Manhattan this week said he’d break off the sale of the claim, currently held by major Madoff feeder fund Fairfield Sentry Ltd.
Fairfield, a British Virgin Islands fund that funneled nearly all of its investors’ cash to Mr. Madoff, had sought to undo a pending sale of the claim after a massive settlement with another of Mr. Madoff’s investors dramatically changed the playing field and drove up the price such claims were fetching on the secondary market.
In the litigation that arose over Fairfield’s bid to break off the deal with proposed buyer Farnum Place LLC, early rulings didn’t give Fairfield hope—that is, until the U.S. Second Circuit Court of Appeals weighed in. In an opinion issued last fall, the Second Circuit found that lower courts erred in declining to reconsider the sale and directed the bankruptcy court to do so.
Fairfield was granted a $230 million claim against Mr. Madoff’s investment firm, Bernard L. Madoff Investment Securities LLC, in connection with the losses its investors suffered when Mr. Madoff’s massive Ponzi scheme came to light in 2008. Both Mr. Madoff’s firm and Fairfield went into liquidation after the fraud’s exposure.
Fairfield later agreed to sell that claim to Farnum Place for nearly $74 million, court papers show. Sales of such claims are common, as they help sellers get a quick payment and allow buyers to make a bet that they’ll collect more on the claim than what they pay for it.
Shortly after the claim sale was negotiated, however, a landmark $7 billion settlement with another of Mr. Madoff’s investors was reached that dramatically increased the amount of money available to repay those cheated in the fraud. As a result, trading prices for claims against Mr. Madoff’s firm soared, making the proposed sale of the Fairfield claim a potential windfall for Farnum Place but not such a good deal for Fairfield.
Farnum had opposed Fairfield’s bid to have the sale thrown out, arguing the importance of the claim’s increase in value was overemphasized while other factors, such as the integrity of the process by which the claim was put up for sale, weren’t given enough weight, according to court papers.
However, in an opinion handed down Tuesday, Judge Bernstein found that Fairfield’s liquidator “demonstrated a sound business reason” for breaking off the sale given the change in value as well as the chances that the claim’s value could rise even further. Fairfield’s liquidator should be allowed to sell the claim at a higher price or hang onto the claim and reap the recoveries for the fund’s creditors, the judge concluded.
“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 [Fairfield’s liquidator] 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,” Judge Bernstein wrote.
Quinn Emanuel Urquhart & Sullivan attorney Eric Winston, representing Farnum Place, said Thursday that “we are reviewing the ruling” and declined further comment.
“We’re extraordinarily happy that the claim has been returned to the liquidator to realize its full value for the benefit of the Fairfield stakeholders,” said David Molton, the Brown Rudnick attorney representing Fairfield’s liquidator.