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In re Fairfield Sentry, Ltd: More Guidance for Administrators Seeking Ancillary Recognition in the US
Michael D. Good, Managing Principal, South Bay Law Firm, Torrance, California, USAA recent US District Court decision involving BVI-based Fairfield Sentry, Limited ('Sentry') provides additional texture to the growing body of US decisional law addressing what it takes to achieve ancillary recognition of a ‘main case’ under Chapter 15 of the US Bankruptcy Code. In re Fairfield Sentry, Ltd1 also provides some guidance for liquidators and other administrators considering their prospects for such recognition in the US.
The case
Sentry, a British Virgin Islands-organised entity, served as a vehicle for mainly non-U.S. persons and certain tax-exempt U.S. entities to invest with Bernard L. Madoff Investment Securities, Inc. (‘BLMIS’). Fairfield Greenwich Group ('FGG'), based on Manhattan’s Upper East Side, served as Sentry’s investment manager.
In December 2008, it became publicly known that BLMIS had for many years been operated by Bernard L. Madoff as a massive Ponzi scheme. Madoff ’s scheme affected funds held on behalf of Sentry. In the wake of this disclosure, Sentry ceased its routine operations and changed its business purpose to 'preserv[ing] and realiz[ing Sentry’s] assets for purposes of ultimate, orderly and equitable distribution, in compliance with the BVI insolvency law, to creditors and other lawful claimants.'
From December 2008 through April 2009, Sentry’s Board of Directors took a number of steps to communicate with its shareholders and protect their interests in the wake of BLMIS’s collapse. Specifically, the Board communicated with shareholders from its BVI offices. It also established a 'Litigation Committee' of independent and non-New York, non-US based directors, and which was empowered to litigate on Sentry’s behalf and which governed Sentry’s affairs until the Commencement of the BVI Proceeding. Further, Sentry began to sever its contractual relationship with FGG and related affiliates and individuals, who had long standing affiliations with Madoff. This relationship was formally terminated in May 2009.
In April 2009, ten of Sentry’s shareholders requested that the BVI court appoint a liquidator over Sentry. On 21 July 2009, the BVI court appointed Kenneth Krys and Christopher Stride, both BVI residents and BYI-licensed insolvency practitioners, as joint liquidators of Sentry (the 'Liquidators').
The dispute
On 14 June 2010, nearly a year after their appointment, the Liquidators filed a petition seeking Chapter 15 recognition of the BVI Proceeding in order to inter alia,
'(i) facilitate the Liquidators’ enhanced access to United States courts in connection with the pursuit of claims on behalf of Sentry, (ii) afford the Liquidators the right to seek discovery to identify parties that bear liability to Sentry and the claims against those parties; (iii) provide protection of the recoveries made by the Liquidators in the United States from piecemeal attack; (iv) provide a means to facilitate a consensual resolution of the BLMIS Proceeding against Sentry that would benefit the stakeholders of both Sentry and the Madoff estate; and (v) provide a means to ensure that recoveries will be distributed in an orderly and equitable manner through the BVI proceeding in accordance with BVI insolvency law.'
Two Sentry investors, who had commenced their own derivative action on Sentry’s behalf in New York Supreme Court, objected.
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