Privy Council Backs Undoing Fund's $230M Madoff Claim Sale

Originally posted on Law360

The top appeals court for U.K. overseas territories has endorsed a successful U.S. appeal brought by the liquidator of an overseas Bernard L. Madoff feeder fund to undo its allegedly imprudent sale of its $230 million claim against the Ponzi schemer’s defunct firm to a hedge fund.

The Judicial Committee of the Privy Council ruled Monday that the Eastern Caribbean Court of Appeal was wrong to uphold the sale between Fairfield Sentry Ltd.’s liquidator, Kenneth Krys, and buyer Farnum Place LLC.

The Caribbean court in March 2022 had failed to take into account — or even mention in its decision — the fact that a New York federal bankruptcy judge in October 2015 granted Krys’ request to disapprove the sale, the council found. U.S. Bankruptcy Judge Stuart M. Bernstein had ruled that 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 Privy Council therefore acknowledged and approved the U.S. appeal proceedings, noting that without giving them sanction, it might be the case that the liquidator could not recoup costs from Fairfield Sentry’s estate. “That would be a perverse result in view of the very significant benefit of the U.S. appeal to the estate and the investors,” Lord David Richards wrote.

Fairfield Sentry operated as one of the largest feeder funds for Bernard L. Madoff Investment Securities LLC, or BLMIS. BLMIS was an asset management business that was uncovered in December 2008 as the largest Ponzi scheme in U.S. history.

In the wake of Madoff’s fraud unraveling, Fairfield Sentry made a claim in the liquidation of BLMIS for $230 million, conditional on Fairfield Sentry paying $70 million to BLMIS. Then in December 2010 Krys agreed to sell the claim to Farnum, a special-purpose vehicle owned by Boston-based hedge fund Baupost Group LLC.

Just days after the sale was agreed to, the claim’s value skyrocketed because a settlement was reached between the trustee of BLMIS and the estate of Jeffrey Picower, under which $5 billion would be paid to the BLMIS trustee. Based on trading prices after the settlement’s announcement, it would place a value of some $125 million on the claim, according to the judgment.

Krys contended at the U.S. Bankruptcy Court for the Southern District of New York that Fairfield Sentry was not bound to complete the sale, but in January 2013 the court held that there was no basis for disapproving the deal.

The British Virgin Islands’ High Court then found in July the same year that the U.S. proceedings were used as a device to cause the sale contract to become frustrated in order for the liquidator to escape it. The court therefore refused to sanction Krys’ appeal in the U.S. proceedings. Over seven years later, the Eastern Caribbean Court of Appeal dismissed Krys’ appeal against the BVI High Court’s decision not to give sanction.

The Privy Council found that it was in “no doubt” that the U.S. courts eventually disapproval of the sale in 2015 was a “material change in circumstances” since the BVI 2013 decision and the appeals court decision should have taken this into account.

“The decision [in the U.S.] was the outcome of the very appeal for which sanction was sought,” Lord Richards wrote. “The board finds it impossible to see how it was not at least a material factor to take into account.”

Representatives for the parties did not immediately respond to requests to comment Tuesday.

The Fairfield Sentry liquidators are represented by Andrew Westwood KC of Maitland and Alistair Abbott of Forbes Hare, instructed by Forbes Hare.

Farnum Place is represented by Sue Prevezer KC and Ben Woolgar of Brick Court Chambers and Richard Evans of 6KBW College Hill, instructed by Conyers Dill & Pearman and Sinclair Gibson LLP.

The case is Kenneth Krys (as liquidator of Fairfield Sentry Ltd. (in liquidation)) v. Farnum Place LLC, case number 0006 of 2024, in the Judicial Committee of the Privy Council.

–Editing by Rich Mills.