Privy Council unwinds Madoff claim sale deal

September 24, 2025

Originally posted on GRR

After nearly 15 years of appeals, the liquidator of a Madoff feeder fund has finally been allowed to undo a sale of claims against Bernie Madoff’s investment vehicle to a US hedge fund, after the Judicial Committee of the Privy Council found a British Virgin Islands appellate court had failed to consider material developments in the US.

On 22 September, a three-judge panel in the Privy Council allowed an appeal brought by Fairfield Sentry’s liquidator seeking to overturn a March 2022 judgment issued by the BVI Court of Appeal upholding the sale of three settled claims against Bernard L Madoff Investment Securities (BLMIS) to Boston-based hedge fund Baupost Group subsidiary Farnum Place.

Fairfield Sentry was an investment fund that invested 95% of its assets in BLMIS – the chief investment vehicle Madoff used to perpetrate his infamous US$20 billion Ponzi scheme. It entered liquidation in the BVI in 2009, with the court appointing Krys Global executive chairman and founder Kenneth Krys in the Cayman Islands as liquidator.

The BVI appeals court had failed to consider or even mention in its decision the fact that a New York bankruptcy court had in October 2015 granted Krys’ request to disapprove the sale, or that in May 2017 the US Second Circuit affirmed the
judgment, the Privy Council said. Judge Stuart Bernstein in US Bankruptcy Court for the Southern District of New York held in 2015 that the fact the claims had increased in value before any court had approved the sale was a “sound business reason” for disapproval.

The Privy Council acknowledged and approved the US appeal proceedings, noting that without giving them sanction, the liquidator might not be able to 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,” said Lord David Richards, who penned the Privy Council’s judgment.

Across the US and BVI courts
The dispute stems from three claims in BLMIS’ liquidation under the US Securities Investor Protection Act (SIPA). The SIPA trustee negotiated a settlement with Fairfield Sentry for US$230 million.

Krys secured Chapter 15 recognition of his appointment in July 2010 and in December sold the SIPA claims to Farnum for what the Privy Council called a “good price” as the rate given by the hedge fund was 32 cents in the dollar when BLMIS claims traded between 20 and 30 cents at the time. Fairfield Sentry would receive a net benefit from the sale of US$4 million, after paying sums owed to BLMIS.

But four days after the sale agreement was signed, the Madoff estate’s trustee, Baker Hostetler partner Irving Picard in New York, entered into a US$5 billion settlement agreement with a third party, which saw Fairfield’s SIPA claims skyrocket to US$50 million.

Due to the increase in value, Krys did not seek the BVI court’s approval of the trade confirmation, which was a condition precedent, prompting Farnum to apply to the BVI High Court in October 2011 seeking an order requiring the liquidator to obtain approval for the sale and take steps to fulfil the conditions. Krys objected on the basis that the sale was not in the best interests of the Fairfield estate.

The BVI court approved the claim sale in March 2012 and directed the liquidator to apply to the US bankruptcy court for approval or non-approval of the sale.

The liquidator complied, and the US court held in January 2013 that the sale was not subject to Section 363 review, as it did not involve property within the US jurisdiction, and that comity required deference to the BVI court’s approval.

The BVI High Court then found in July the same year that the US proceeding was used as a device to cause the sale contract to become frustrated in order for the liquidator to escape it. As such it refused to sanction Krys’ appeal in the US proceeding.

But Krys received permission from the BVI Court of Appeal to appeal the US judgment, after the lower court declined his initial motion.

The US appeal was ultimately successful before the Second Circuit, which in September 2014 held the sale was subject to section 363 review and that comity did not require deference to the BVI court’s order. Krys subsequently applied for a section 363 review, which succeeded and the sale was disapproved by the US court in a decision that was upheld by Second Circuit in May 2017. The US Supreme Court denied certiorari in October 2017.

Over seven years after hearing the appeal, the BVI Court of Appeal dismissed Krys’ appeal against the High Court’s decision not to give sanction in 2022.

In its judgment, the BVI Court of Appeal made no reference to the liquidator’s success in the US proceedings or the interim orders that had authorised those proceedings. Its analysis focussed on the propriety of the lower court’s discretionary decision, characterising the appeal as challenging the exercise of discretion entrusted to the first instance court.

The court of appeal concluded that the proper approach was not to presume the liquidator’s appeal should succeed unless bad faith was established, but rather to consider all relevant circumstances and factors with appropriate weight.

It held after “all material factors” had been considered with appropriate weight, the lower court decision could not be characterised as plainly wrong, and that appellate intervention was not warranted.

Material change
Before the Privy Council, Krys argued that the Second Circuit’s decision represented a clear material change in circumstances that the BVI Court of Appeal should have considered.

Farnum countered that reference to the US success would have made no difference given the BVI High Court’s reasoning and the discretionary nature of the decision.

But the Privy Council found the Second Circuit decision constituted a material change in circumstances. Lord Richards said the decision represented “the outcome of the very appeal for which sanction was sought”.

“The Board finds it impossible to see how it was not at least a material factor to take into account,” he wrote.

The original High Court judgment’s concern about indeterminate delay became irrelevant once the Second Circuit ruled in September 2014, followed by the US bankruptcy court’s 2015 judgment disapproving the sale, the Privy Council said.

The lower court’s central arguments about contractual frustration and breach of good faith were contradictory and unsupported by evidence, he said.

The Privy Council concluded that there were no arguable grounds for refusing sanction once the outcome of the US appeal was known.

Farnum’s arguments that the appeal was a nullity or that the liquidator lacked authority were unsupported by US law and irrelevant given the Second Circuit’s decision, it said. The Privy Council also rejected Farnum’s suggestion that it had a breach of contract claim against Fairfield Sentry, finding it unclear and immaterial.

Lord Richards said the claim sale agreement required a “final order” from the US bankruptcy court and “expressly contemplated” appeals. Pursuing the appeals was not a breach of contract, he added.

Regarding the good faith argument, he explained that the High Court judgment cited no evidence of New York contract law supporting the conclusion that bringing an appeal would breach the obligation. He also said a breach was never argued by Farnum in the US proceedings.

The Privy Council granted retrospective sanction for the US appeal, saying that refusing to do so would be perverse given the significant benefit the US proceedings had delivered to the Fairfield Sentry estate.

In the Judicial Committee of the Privy Council

  • Lord Sales
  • Lady Rose
  • Lord Richards

Counsel to Fairfield Sentry’s liquidator

  • Andrew Westwood KC (of Maitland Chambers)
  • Forbes Hare

Partner Alistair Abbott in London

Counsel to Farnum Place

  • Sue Prevezer KC (of Brick Court Chambers)
  • Richard Evans (of 6KBW College Hill)
  • Ben Woolgar (of Brick Court Chambers)
  • Conyers Dill & Pearman
  • Sinclair Gibson