Vol 12 (2015) - Issue 5

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Second Circuit Constrains Doctrine of Comity: Krys v Farnum Place, LLC (In re Fairfield Sentry Limited), 768 F.3d 239 (2d Cir. 2014))

Introduction
On 26 September 2014, the United States Court of Appeals for the Second Circuit (the 'Court of Appeals') issued its ruling in Krys v Farnum Place, LLC (In re Fairfield Sentry Limited), and held that the liquidator of Fairfield Sentry Limited, a failed British Virgin Islands ('BVI') investment fund, was not bound by the terms of a duly executed trade confirmation to transfer the fund’s claim against the estate of Madoff Securities (the 'SIPA Claim') – despite that the court overseeing the fund’s BVI liquidation (the 'BVI Court') had previously ruled the trade confirmation enforceable. The liquidator, who acted as the foreign representative of the fund in its US chapter 15 bankruptcy proceeding (a proceeding ancillary to the fund’s liquidation in a main proceeding in the BVI), had unsuccessfully sought rulings from both the BVI court and the US Bankruptcy Court for the Southern District of New York (the 'Bankruptcy Court') that the trade confirmation was not enforceable.
Reversing a ruling by the US District Court for the Southern District of New York, which had affirmed the judgment of the Bankruptcy Court, the Court of Appeals held that the transaction at issue involved a transfer of property within the territorial jurisdiction of the United States, mandating review of the transfer under section 363 of Title 11 of the US Code (the 'Bankruptcy Code') to determine whether the transaction was supported by a sound business purpose. The Court of Appeals further ruled that because the plain language of Bankruptcy Code section 1520(a) (2) required the Bankruptcy Court to conduct a section 363 review of a transfer of an interest in property within the United States, the Bankruptcy Court had erred in deferring to the prior ruling of the BVI Court based on the doctrine of comity. The Court of Appeals thus reversed and remanded, with instructions for the Bankruptcy Court to conduct a section 363 review.
The ruling in Krys v Farnum Place, LLC has garnered significant attention from commentators, who have questioned certain aspects of the decision. First, the decision appears inconsistent with the Court’s prior decision In re Maxwell Communication Corp., 93 F.3d 1036 (2d Cir. 1996), which held that comity could be applied even if application of a provision of the Bankruptcy Code was 'automatic.' Although the parties’ appellate briefs in Krys v Farnum Place, LLC contained extensive discussion of Maxwell, the Court of Appeals did not address it.
Second, in applying the ‘plain language’ of Bankruptcy Code section 1520(a)(2), the Court did not consider the entire provision. Specifically, in holding that application of section 363 was mandatory with respect to any 'transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States', the Court of Appeals did not address the ensuing language in the statute, which states that section 363 applies only 'to the same extent that such section[] would apply to property of an estate.' The Court of Appeals did not explain why comity would not apply to a transaction involving property of the estate, particularly where, as in Maxwell, the non-US court has a far greater interest in the matter in question than the US court.