Vol 13 (2016) - Issue 3

Article preview

Fairfield Sentry: In the Last Chapter of the Saga, the Controversial Sale is Disapproved

After years of court battles, the foreign representative of Fairfield Sentry, one of Bernard Madoff ’s feeder funds, succeeded in unwinding the sale of a claim whose value dramatically increased just days after the sale was finalised. The United States Bankruptcy Court for the Southern District of New York ('Bankruptcy Court'), focusing primarily on the increase in the value of the claim, held that the foreign representative of Fairfield Sentry exercised appropriate business judgment and demonstrated a sound business reason for seeking disapproval of the sale.

Background
The foreign debtor, Fairfield Sentry, was one of the largest feeder funds to invest with Bernard L. Madoff Investment Securities LLC ('BLMIS'). The collapse of BLMIS forced Fairfield Sentry into liquidation in the British Virgin Islands ('BVI'). Fairfield Sentry’s foreign representative later filed a chapter 15 petition in the Bankruptcy Court seeking recognition of the BVI liquidation, which was recognised as a foreign main proceeding. Fairfield Sentry filed certain 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. The foreign representative 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 transaction was subject to approval by the BVI court and the Bankruptcy Court.
Just days after the sale was finalised, the trustee administering the BLMIS SIPA case announced a USD 5 billion settlement with a potential defendant against whom the SIPA trustee asserted claims. That settlement increased the value of the SIPA Claim from 32% to more than 50% of the USD 230 million allowed amount of the claim. Not surprisingly, Farnum sought a court order directing the foreign representative to submit the SIPA Claim sale to the BVI court for approval, while the foreign representative now asked the BVI court not to approve the transfer to Farnum because of the interim increase in value of the SIPA Claim, and argued the sale also required the Bankruptcy Court’s approval. The BVI court approved the sale, but it deferred to the Bankruptcy Court for issues of US bankruptcy law.