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In re Fairfield Sentry Ltd.

United States Court of Appeals, Second Circuit

September 26, 2014

IN RE: FAIRFIELD SENTRY LIMITED, Debtor. KENNETH KRYS, in his capacity as the duly appointed liquidator and foreign representative of Fairfield Sentry Limited, Appellant,
v.
FARNUM PLACE, LLC, Appellee

Argued May 21, 2014

Page 240

Appeal from the July 3, 2013 order of the United States District Court for the Southern District of New York (Hellerstein, J.) affirming the January 10, 2013 order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.) declining to conduct, in a Chapter 15 ancillary bankruptcy proceeding, a section 363 review of a sale of the claims of Fairfield Sentry Limited (" Sentry" ), a British Virgin Islands investment fund, in the liquidation of Bernard L. Madoff Investment Securities LLC (" BLMIS" ) under the Securities Investor Protection Act (" SIPA" ) because: (1) the sale does not involve a section 1520(a)(2) transfer; and (2) comity dictates deference to a British Virgin Islands Court's judgment approving the sale. Because we conclude that the sale of the SIPA claims is a " transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States," 11 U.S.C. § 1520(a)(2), and therefore the sale is subject to review under section 363, and comity is not warranted, we vacate and remand.

PAUL D. CLEMENT, Bancroft PLLC, Washington, DC, (David J. Molton, May Orenstein, Daniel J. Saval, Marek Krzyzowski, Brown Rudnik LLP, New York, NY, on the brief) for Appellant.

KATHLEEN M. SULLIVAN (Robert C. Juman, Scott C. Shelley, Cleland B. Welton II, Eric D. Winston, Shane McKenzie, Matthew Scheck, on the brief), Quinn Emanuel Urquhart & Sullivan, LLP, New York, N.Y. for Appellee.

Before: NEWMAN, WALKER, CABRANES, Circuit Judges.

OPINION

Page 241

John M. Walker, Jr., Circuit Judge :

Appeal from the July 3, 2013 order of the United States District Court for the Southern District of New York (Hellerstein, J.) affirming the January 10, 2013 order of the United States Bankruptcy Court for the Southern District of New York (Lifland, J.) declining to conduct, in a Chapter 15 ancillary bankruptcy proceeding, a section 363 review of a sale of the claims of Fairfield Sentry Limited (" Sentry" ), a British Virgin Islands investment fund, in the liquidation of Bernard L. Madoff Investment Securities LLC (" BLMIS" ) under the Securities Investor Protection Act (" SIPA" ) because: (1) the sale does not involve a section 1520(a)(2) transfer; and (2) comity dictates deference to a British Virgin Islands Court's judgment approving the sale. Because we conclude that the sale of the SIPA claims is a " transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States," 11 U.S.C. § 1520(a)(2), and therefore the sale is subject to review under section 363, and comity is not warranted, we vacate and remand.

BACKGROUND

Sentry is a British Virgin Islands (" BVI" ) investment fund that invested approximately 95% of its assets with BLMIS, a limited liability company wholly owned by Bernard Madoff. In December 2008, Madoff, who is now in prison, revealed that he used customer funds to perpetuate a massive Ponzi scheme. Consequently, BLMIS collapsed and was placed into liquidation by the U.S. bankruptcy court under SIPA. Irving Picard was appointed trustee of BLMIS and charged with the task of overseeing the BLMIS liquidation and recovering stolen assets in this fraud.

Sentry filed three customer claims in the SIPA liquidation (collectively, the " SIPA Claim" ), to which BLMIS objected. The BLMIS trustee countered with its own claims. Although Sentry's net losses in BLMIS were approximately $960 million, negotiations between Sentry and the BLMIS Trustee resulted in a settlement that allowed Sentry's SIPA Claim in the BLMIS liquidation in the amount of $230 million, subject to a cash payment of $70 million to be paid by Sentry to the BLMIS Trustee.

In July 2009, Sentry itself was placed into liquidation in the BVI (the " BVI Liquidation" ), and the High Court of Justice of the Eastern Caribbean Supreme Court (the " BVI Court" ) appointed appellant Kenneth Krys liquidator. On June 14, 2010, Krys filed a petition in the U.S. bankruptcy court seeking recognition of the BVI Liquidation as a " foreign main proceeding" under Chapter 15, 11 U.S.C. § 1517. On July 22, 2010, the bankruptcy court entered an order granting recognition. Upon recognition of the BVI Liquidation as a foreign main proceeding, an

Page 242

automatic stay was imposed on all proceedings against Sentry in the United States, including a derivative action brought by Morning Mist, a Sentry shareholder. The order of recognition was affirmed by the district court and subsequently by this Court. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013).

Among Sentry's assets in the BVI Liquidation is the SIPA Claim. During the summer of 2010, an auction process to sell the SIPA Claim commenced. Appellee Farnum Place, LLC (" Farnum" ), a limited liability corporation organized under the laws of Delaware, offered to purchase the SIPA claim for 32.125% of the claim's allowed amount. Farnum's bid was several percentage points higher than the other bids, and Krys accepted ...


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