Vol 12 (2015) - Issue 3

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Chapter 15: Expect Section 363 Review of Sales of Property Located in the US

On 26 September 2014, the United States Court of Appeals for the Second Circuit (the 'Second Circuit') held that bankruptcy courts must review sales of a chapter 15 debtor’s property located within the United States ('US') pursuant to Bankruptcy Code section 363, even is such sale has already been approved by the court in the debtor’s foreign proceeding. Reversing the decisions of the lower courts, the Second Circuit ruled that a claim against a US debtor is within the territorial jurisdiction of the US, and, accordingly, the sale of such property is subject to mandatory review and approval by the US bankruptcy court in a chapter 15 proceeding.
While seemingly in contrast with previous decisions and comity, the mandatory nature of a US bankruptcy court review of sales of a foreign debtor’s property located in the US is not surprising or novel. The decision, however, teaches that foreign debtors should carefully scrutinise what property (especially intangible) is located within the jurisdictional boundaries of the US to correctly predict which sales of property require US bankruptcy court review in a chapter 15 case.

Background
Fairfield Sentry Limited ('Fairfield') was one of the largest feeder funds that invested with Barnard L. Madoff Investment Securities LLC ('BLMIS'). The collapse of BLMIS forced Fairfield into liquidation in the British Virgin Islands ('BVI'). Fairfield’s liquidator (the 'Liquidator') later filed a chapter 15 petition in the United States Bankruptcy Court for the Southern District of New York ('Bankruptcy Court') seeking recognition of the BVI liquidation, which was ultimately recognised as a foreign main proceeding. Fairfield filed claims ('SIPA Claim') in the liquidation of BLMIS under the Securities Investor Protection Act ('SIPA'), which were settled and allowed in the amount of USD 230 million, subject to a cash payment of USD 70 million to be paid by Fairfield to BLMIS. The SIPA Claim was an asset in Fairfield’s BVI liquidation. The Liquidator held an auction for the SIPA Claim, and ultimately sold it to Farnum Place, LLC ('Farnum') for about a third of the allowed amount. The Liquidator and Farnum negotiated a 'Trade Confirmation' setting forth the terms and conditions of the SIPA Claim sale, including that the transaction was subject to approval by the BVI court and the Bankruptcy Court.
Just days after the sale was finalised, the SIPA trustee announced a settlement that increased the value of the SIPA Claim from 32% to more than 75% of the USD 230 million allowed amount of the claim. In the light of this development, the Liquidator did not go forward with the sale. Farnum, however, sought a BVI court order directing the Liquidator to perform as agreed upon in the Trade Confirmation. The Liquidator asked the BVI court not to approve the sale to Farnum because of the interim increase in value of the SIPA Claim, and argued the Trade Confirmation also required the Bankruptcy Court’s approval. The BVI court held an evidentiary hearing and approved the terms of the Trade Confirmation, but deferred to the Bankruptcy Court for issues of US bankruptcy law. Importantly, the BVI court directed the Liquidator to bring the matter to the Bankruptcy Court for approval so that 'the US Bankruptcy Court is presented with a choice whether or not to approve it'.